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The market risk premium is computed by:


A) adding the risk-free rate of return to the inflation rate.
B) adding the risk-free rate of return to the market rate of return.
C) subtracting the risk-free rate of return from the inflation rate.
D) subtracting the risk-free rate of return from the market rate of return.
E) multiplying the risk-free rate of return by a beta of 1.0.

F) A) and C)
G) C) and D)

Correct Answer

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Steve has invested in twelve different stocks that have a combined value today of $121,300.Fifteen percent of that total is invested in Wise Man Foods.The 15 percent is a measure of which one of the following?


A) portfolio return
B) portfolio weight
C) degree of risk
D) price-earnings ratio
E) index value

F) A) and B)
G) A) and C)

Correct Answer

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What is the standard deviation of the returns on a portfolio that is invested 52 percent in stock Q and 48 percent in stock R? What is the standard deviation of the returns on a portfolio that is invested 52 percent in stock Q and 48 percent in stock R? A) 1.66 percent B) 2.47 percent C) 2.63 percent D) 3.28 percent E) 3.41 percent


A) 1.66 percent
B) 2.47 percent
C) 2.63 percent
D) 3.28 percent
E) 3.41 percent

F) A) and B)
G) B) and D)

Correct Answer

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At a minimum,which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? I.asset's standard deviation II.asset's beta III.risk-free rate of return IV.market risk premium


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

F) B) and C)
G) B) and D)

Correct Answer

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If a stock portfolio is well diversified,then the portfolio variance:


A) will equal the variance of the most volatile stock in the portfolio.
B) may be less than the variance of the least risky stock in the portfolio.
C) must be equal to or greater than the variance of the least risky stock in the portfolio.
D) will be a weighted average of the variances of the individual securities in the portfolio.
E) will be an arithmetic average of the variances of the individual securities in the portfolio.

F) A) and D)
G) B) and E)

Correct Answer

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The intercept point of the security market line is the rate of return which corresponds to:


A) the risk-free rate.
B) the market rate.
C) a return of zero.
D) a return of 1.0 percent.
E) the market risk premium.

F) None of the above
G) A) and D)

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A

The capital asset pricing model (CAPM) assumes which of the following? I.a risk-free asset has no systematic risk. II.beta is a reliable estimate of total risk. III.the reward-to-risk ratio is constant. IV.the market rate of return can be approximated.


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

F) C) and E)
G) D) and E)

Correct Answer

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Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?


A) Given the unequal weights of both the securities and the economic states,the standard deviation of the portfolio must equal that of the overall market.
B) The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved.
C) Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio.
D) The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified.
E) Given both the unequal weights of the securities and the economic states,an investor might be able to create a portfolio that has an expected standard deviation of zero.

F) A) and C)
G) A) and B)

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What is the variance of the returns on a portfolio that is invested 60 percent in stock S and 40 percent in stock T? What is the variance of the returns on a portfolio that is invested 60 percent in stock S and 40 percent in stock T? A) .000017 B) .000023 C) .000118 D) .000136 E) .000161


A) .000017
B) .000023
C) .000118
D) .000136
E) .000161

F) A) and B)
G) A) and E)

Correct Answer

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According to CAPM,the amount of reward an investor receives for bearing the risk of an individual security depends upon the:


A) amount of total risk assumed and the market risk premium.
B) market risk premium and the amount of systematic risk inherent in the security.
C) risk free rate,the market rate of return,and the standard deviation of the security.
D) beta of the security and the market rate of return.
E) standard deviation of the security and the risk-free rate of return.

F) A) and C)
G) A) and B)

Correct Answer

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


A) investors panic causing security prices around the globe to fall precipitously
B) a flood washes away a firm's warehouse
C) a city imposes an additional one percent sales tax on all products
D) a toymaker has to recall its top-selling toy
E) corn prices increase due to increased demand for alternative fuels

F) C) and E)
G) B) and C)

Correct Answer

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A

The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:


A) market risk premium.
B) risk premium.
C) systematic return.
D) total return.
E) real rate of return.

F) A) and B)
G) None of the above

Correct Answer

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What is the expected return and standard deviation for the following stock? What is the expected return and standard deviation for the following stock? A) 15.49 percent;14.28 percent B) 15.49 percent;14.67 percent C) 18.80 percent;14.95 percent D) 18.80 percent;15.74 percent E) 18.80 percent';16.01 percent


A) 15.49 percent;14.28 percent
B) 15.49 percent;14.67 percent
C) 18.80 percent;14.95 percent
D) 18.80 percent;15.74 percent
E) 18.80 percent';16.01 percent

F) A) and B)
G) A) and C)

Correct Answer

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What is the expected return on a portfolio which is invested 25 percent in stock A,55 percent in stock B,and the remainder in stock C? What is the expected return on a portfolio which is invested 25 percent in stock A,55 percent in stock B,and the remainder in stock C? A) -1.06 percent B) 2.38 percent C) 2.99 percent D) 5.93 percent E) 6.10 percent


A) -1.06 percent
B) 2.38 percent
C) 2.99 percent
D) 5.93 percent
E) 6.10 percent

F) A) and E)
G) None of the above

Correct Answer

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D

If the economy is normal,Charleston Freight stock is expected to return 16.5 percent.If the economy falls into a recession,the stock's return is projected at a negative 11.6 percent.The probability of a normal economy is 80 percent while the probability of a recession is 20 percent.What is the variance of the returns on this stock?


A) 0.010346
B) 0.012634
C) 0.013420
D) 0.013927
E) 0.014315

F) A) and D)
G) A) and E)

Correct Answer

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The rate of return on the common stock of Lancaster Woolens is expected to be 21 percent in a boom economy,11 percent in a normal economy,and only 3 percent in a recessionary economy.The probabilities of these economic states are 10 percent for a boom,70 percent for a normal economy,and 20 percent for a recession.What is the variance of the returns on this common stock?


A) 0.002150
B) 0.002606
C) 0.002244
D) 0.002359
E) 0.002421

F) B) and D)
G) B) and E)

Correct Answer

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Which one of the following is a risk that applies to most securities?


A) unsystematic
B) diversifiable
C) systematic
D) asset-specific
E) total

F) B) and C)
G) A) and E)

Correct Answer

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The expected risk premium on a stock is equal to the expected return on the stock minus the:


A) expected market rate of return.
B) risk-free rate.
C) inflation rate.
D) standard deviation.
E) variance.

F) A) and E)
G) C) and D)

Correct Answer

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What is the expected return on a portfolio comprised of $6,200 of stock M and $4,500 of stock N if the economy enjoys a boom period? What is the expected return on a portfolio comprised of $6,200 of stock M and $4,500 of stock N if the economy enjoys a boom period? A) 10.93 percent B) 11.16 percent C) 12.55 percent D) 12.78 percent E) 13.69 percent


A) 10.93 percent
B) 11.16 percent
C) 12.55 percent
D) 12.78 percent
E) 13.69 percent

F) C) and D)
G) A) and B)

Correct Answer

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Unsystematic risk:


A) can be effectively eliminated by portfolio diversification.
B) is compensated for by the risk premium.
C) is measured by beta.
D) is measured by standard deviation.
E) is related to the overall economy.

F) None of the above
G) A) and B)

Correct Answer

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