Question 1

Which two of the following determine how sensitive a security is relative to movements in the overall market?
I.the standard deviation of the security
II.correlation between the security's return and the market return
III.the volatility of the security relative to the market
IV.the amount of unsystematic risk inherent in the security

Accepted Answer

A) I and III only 
B) I and IV only 
C) II and III only 
D) II and IV only 
E) III and IV only

Question 2

Which one of the following betas represents the greatest level of systematic risk?

Accepted Answer

A) .05 
B) .68 
C) 1.00 
D) 1.19 
E) 1.27

Question 3

What is the covariance of security A to the market given the following information?

Accepted Answer

A) 507.9 
B) 514.1 
C) 517.5 
D) 523.5

Question 4

What is the beta of an average asset?

Accepted Answer

A) 0 
B) > 0 but  1

Question 5

Which one of the following has the highest expected risk premium?

Accepted Answer

A) stock portfolio with a beta of 1.06 
B) U.S. Treasury bill 
C) individual stock with a beta of 1.46 
D) a stock mutual fund with a beta of .89 
E) individual stock with a beta of .94

Question 6

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

Accepted Answer

A) there is a shortage of nurses 
B) a fire destroys a warehouse 
C) gas prices rise sharply 
D) the cost of sugar increases 
E) two firms merge their operations

Question 7

Laura has one risk-free asset and one risky stock in her portfolio.The risk-free asset has an expected return of 3.2 percent.The risky asset has a beta of 1.3 and an expected return of 14.9 percent.What is the expected return on the portfolio if the portfolio beta is .975?

Accepted Answer

A) 7.65 percent 
B) 9.83 percent 
C) 10.73 percent 
D) 11.98 percent 
E) 12.37 percent

Question 8

The market has a standard deviation of 10.8 percent (0.108)while a risky security has a standard deviation of 22.5 (0.225)percent.The covariance of the stock with the market is .0149.What is the beta of the stock?

Accepted Answer

A) 1.09 
B) 1.11 
C) 1.15 
D) 1.19 
E) 1.28

Question 9

The market has an expected return of 11.4 percent and a risky asset with a beta of 1.18 has an expected return of 13 percent.Based on this information,what is the pure time value of money?

Accepted Answer

A) 1.84 percent 
B) 1.90 percent 
C) 2.38 percent 
D) 2.51 percent 
E) 2.90 percent

Question 10

Which one of the following terms is the measure of the tendency of two things to move or vary together?

Accepted Answer

A) variance 
B) squared deviation 
C) standard deviation 
D) alpha 
E) covariance

Question 11

What is the beta of a portfolio which consists of the following?

Accepted Answer

A) 1.01 
B) 1.24 
C) 1.26 
D) 1.29 
E) 1.32

Question 12

Which one of the following announcements is most apt to cause the price of a firm's stock to increase?

Accepted Answer

A) The firm met its quarterly earnings forecast. 
B) An unpopular CEO unexpectedly announced he is resigning effective immediately. 
C) A firm officially confirmed the rumors that it is merging with a competitor. 
D) The firm just lowered its projected earnings per share for next year. 
E) Analysts are expected to lower the firm's credit rating on its debt.

Question 13

What is the covariance of security A to the market given the following information?

Accepted Answer

A) 23.14 
B) 29.88 
C) 48.83 
D) 99.18 
E) 114.01

Question 14

Identify and describe each of the three components of a security's expected return according to the capital asset pricing model.

Accepted Answer

The answer of Identify and describe each of the three...

Question 15

Which one of the following is most commonly used as the measure of the overall market rate of return?

Accepted Answer

A) DJIA 
B) S&P 500 
C) NASDAQ 100 
D) Wilshire 5000 
E) Wilshire 3000

Question 16

According to the capital asset pricing model,which of the following will increase the expected rate of return on a security that has a beta that is less than that of the market? Assume the market rate of return is greater than the risk-free rate and both rates are positive.
I.increase in the risk-free rate
II.decrease in the risk-free rate
III.increase in the market risk premium
IV.decrease in the market rate of return

Accepted Answer

A) I and III only 
B) II and III only 
C) I and IV only 
D) II and IV only 
E) II, III, and IV only

Question 17

You own three stocks which have betas of 1.16,1.34,and 1.02.You would like to add a fourth security such that your portfolio beta will match that of the market.Given this situation,the new security:

Accepted Answer

A) must have a beta of 1.0. 
B) must have a beta of zero. 
C) could be a U.S. Treasury bill. 
D) could have any beta greater than 1.0. 
E) must have a portfolio weight of 50 percent or more.

Question 18

Which one of the following statements applies to unsystematic risk?

Accepted Answer

A) It can be eliminated through portfolio diversification. 
B) It is also called market risk. 
C) It is a type of risk that applies to most, if not all, securities. 
D) Investors receive a risk premium as compensation for accepting this risk. 
E) This risk is related to expected returns.

Question 19

The reward-to-risk ratio is 6.8 percent and the risk-free rate is 5.3 percent.What is the expected return on a risky asset if the beta of that asset is 1.03?

Accepted Answer

A) 7.00 percent 
B) 12.00 percent 
C) 12.02 percent 
D) 12.07 percent 
E) 12.30 percent

Question 20

The risk-free rate is 3.0 percent and the expected return on the market is 9 percent.Stock A has a beta of 1.20.For a given year,Stock A returned 12.5 percent while the market returned 9.75 percent.The systematic portion of Stock A's unexpected return was _____ percent and the unsystematic portion was _____ percent.

Accepted Answer

A) 0.80; 1.30 
B) 0.90; 1.40 
C) 1.11; 2.30 
D) 1.40; 0.90 
E) 4.62; 1.41

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

Which one of the following betas represents the greatest level of systematic risk?

What is the covariance of security A to the market given the following information?

What is the beta of an average asset?

Which one of the following has the highest expected risk premium?

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

Laura has one risk-free asset and one risky stock in her portfolio.The risk-free asset has an expected return of 3.2 percent.The risky asset has a beta of 1.3 and an expected return of 14.9 percent.What is the expected return on the portfolio if the portfolio beta is .975?

The market has a standard deviation of 10.8 percent (0.108) while a risky security has a standard deviation of 22.5 (0.225) percent.The covariance of the stock with the market is .0149.What is the beta of the stock?

The market has an expected return of 11.4 percent and a risky asset with a beta of 1.18 has an expected return of 13 percent.Based on this information,what is the pure time value of money?

Which one of the following terms is the measure of the tendency of two things to move or vary together?

What is the beta of a portfolio which consists of the following?

Which one of the following announcements is most apt to cause the price of a firm's stock to increase?

What is the covariance of security A to the market given the following information?

Identify and describe each of the three components of a security's expected return according to the capital asset pricing model.

Which one of the following is most commonly used as the measure of the overall market rate of return?

You own three stocks which have betas of 1.16,1.34,and 1.02.You would like to add a fourth security such that your portfolio beta will match that of the market.Given this situation,the new security:

Which one of the following statements applies to unsystematic risk?

The reward-to-risk ratio is 6.8 percent and the risk-free rate is 5.3 percent.What is the expected return on a risky asset if the beta of that asset is 1.03?