Question 1

The common stock of Industrial Technologies has an expected return of 12.4 percent.The market return is 9.2 percent and the risk-free return is 3.87 percent.What is the stock's beta?

Accepted Answer

A)  0.42
B)  1.00
C)  1.32
D)  1.42
E)  1.60 E

Question 2

Which one of the following is the type of risk that affects a large number of assets?

Accepted Answer

A)  unique
B)  systematic
C)  asset-specific
D)  unsystematic
E)  firm-specific B

Question 3

Which one of the following terms is another name for systematic risk?

Accepted Answer

A)  unique risk
B)  firm risk
C)  market risk
D)  asset-specific risk
E)  diversifiable risk C

Question 4

Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money,the reward for bearing systematic risk,and the amount of systematic risk?

Accepted Answer

A)  reward-to-risk theory
B)  capital asset pricing model
C)  risk premium proposal
D)  market slope hypothesis
E)  security market line proposition

Question 5

What is the beta of a risk-free security?

Accepted Answer

A)  .00
B)  .50
C)  1.00
D)  1.50
E)  2.00

Question 6

A portfolio beta is computed as which one of the following?

Accepted Answer

A)  weighted average
B)  arithmetic average
C)  geometric average
D)  correlated value
E)  covariance value

Question 7

The slope of the security market line is equal to the:

Accepted Answer

A)  market risk premium.
B)  risk-free rate of return.
C)  market rate of return.
D)  market rate of return multiplied by any security's beta, given an inefficient market.
E)  market rate of return multiplied by the risk-free rate.

Question 8

Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases.

Accepted Answer

A)  large market capitalization and high book-to-market ratio
B)  large market capitalization and low book-to-market ratio
C)  small market capitalization and high book-to-market ratio
D)  small market capitalization and a book-to-market ratio of 1.0
E)  small market capitalization and a low book-to-market ratio

Question 9

The following portfolio has an expected return of _____ percent and a beta of _____.

Accepted Answer

A)  12.45; 1.38
B)  12.84; 1.39
C)  13.39; 1.23
D)  13.39; 1.40
E)  13.45; 1.32

Question 10

A portfolio is comprised of two stocks.Stock A comprises 65 percent of the portfolio and has a beta of 1.31.Stock B has a beta of .98.What is the portfolio beta?

Accepted Answer

A)  .98
B)  1.03
C)  1.08
D)  1.19
E)  1.22

Question 11

A stock has a beta of 1.58 and an expected return of 16.2 percent.The risk-free rate is 3.8 percent.What is the market risk premium?

Accepted Answer

A)  7.85 percent
B)  10.01 percent
C)  11.72 percent
D)  12.50 percent
E)  13.40 percent

Question 12

Stocks D,E,and F have actual reward-to-risk ratios of 7.1,6.8,and 7.4,respectively.Given this,you know for certain that:

Accepted Answer

A)   stock E is preferable to stock F.
B)   stock D has a higher beta than stock F.
C)   the market risk premium is greater than 6.8 and less than 7.4.
D)   stock F is riskier than stock D.
E)   at least two of the securities are mispriced.

Question 13

Which one of the following is the best example of unsystematic risk?

Accepted Answer

A)  decrease in company sales
B)  increase in market interest rates
C)  change in corporate tax rates
D)  increase in inflation
E)  This risk is related to expected portfolio returns

Question 14

Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent.The risk-free rate is 2.6 percent and the market risk premium is 6 percent.This stock is _____ because the CAPM return for the stock is _____ percent.

Accepted Answer

A)  undervalued; 7.34
B)  undervalued; 7.49
C)  undervalued; 7.64
D)  overvalued; 7.34
E)  overvalued; 7.49

Question 15

Explain the relationship between the security market line and market efficiency.

Accepted Answer

The answer of Explain the relationship between the security market...

Question 16

Western Exports stock has a standard deviation of 15.6 percent and a covariance with the market of .0150.The market has a standard deviation of 13.7 percent.What is the correlation of this stock with the market?

Accepted Answer

A)  .58
B)  .61
C)  .68
D)  .70
E)  .77

Question 17

The security market line depicts the graphical relationship between which two of the following?
I.expected return
II.surprise return
III.systematic risk
IV.unsystematic risk

Accepted Answer

A)  I and III
B)  I and IV
C)  II and III
D)  II and IV
E)  none of these

Question 18

Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month.This announcement will cause the firm's stock price to:

Accepted Answer

A)  increase.
B)  either increase or remain constant.
C)  remain constant.
D)  decrease.
E)  either increase, decrease, or remain constant.

Question 19

Dinner Foods stock has a beta of 1.45 and an expected return of 13.43 percent.Edwards' Meals stock has a beta of .95 and an expected return of 10.27 percent.Assume that both stocks are correctly priced.Given this,the risk-free rate is _____ percent and the market rate of return is _____ percent.

Accepted Answer

A)  4.02; 11.53
B)  4.09; 12.35
C)  4.10; 11.53
D)  4.27; 10.59
E)  4.41; 10.25

Question 20

Which one of the following statements is true?

Accepted Answer

A)  Risk and return are inversely related.
B)  Investors are compensated only for diversifiable risk.
C)  The beta of a portfolio may be lower than the lowest beta of any individual security held within the portfolio.
D)  How a security affects the risk of a portfolio is less important than the actual risk of the security itself.
E)  Investing has two dimensions: risk and return.

Exam 12: Return, Risk, and the Security Market Line