Question 1

The underlying principles of portfolio theory include:

Accepted Answer

A)   diversifying business-specific risk away.
B)   basing decisions on stocks' risk/return characteristics in a portfolio context rather than on a stand-alone basis.
C)   getting the highest available return for the amount of risk the investor is comfortable with.
D)   All of the above

Question 2

Determine the beta of a portfolio consisting of equal investments in the following common stocks   Security  Beta  Apple Computer 1.15 Coca-Cola 1.05 Harley-Davidson 1.50 Homestake Mining 0.50\begin{array}{ll}	ext { Security } & 	ext { Beta } \\hline 	ext { Apple Computer } & 1.15 \	ext { Coca-Cola } & 1.05 \	ext { Harley-Davidson } & 1.50 \	ext { Homestake Mining } & 0.50\end{array} Security  Apple Computer  Coca-Cola  Harley-Davidson  Homestake Mining ​ Beta 1.151.051.500.50​​

Accepted Answer

A)   1.05
B)   1.00
C)   1.10
D)   0.95

Question 3

The return on an investment in stock:

Accepted Answer

A)   is subject to risk but is generally non-negative like a savings account.
B)   has a standard deviation that has historically been small relative to its average value.
C)   consists of dividend and capital gains yields.
D)   is always very risky.

Question 4

In general, investments yielding higher returns will have:

Accepted Answer

A)   lower tax rates.
B)   higher dividend payments.
C)   higher risk.
D)   lower standard deviations.

Question 5

The ____ the standard deviation, the ____ the investment.

Accepted Answer

A)   smaller, larger the expected return on
B)   larger, riskier
C)   smaller, riskier
D)   larger, smaller the expected return on

Question 6

The vertical intercept of the SML represents:

Accepted Answer

A)   investment in long-term government securities.
B)   investment in short-term corporate bonds.
C)   investment in short-term market securities.
D)   investment in short-term government securities.

Question 7

Consider a portfolio with a known average return and standard deviation. Which of the following stocks, if added to the portfolio, will reduce its risk through diversification?

Accepted Answer

A)   A stock whose return is perfectly negatively correlated with the portfolio's return
B)   A stock whose return is perfectly positively correlated with the portfolio's return
C)   A stock whose return has zero correlation with the portfolio's return
D)   Any stock added to a portfolio will reduce its risk regardless of its correlation with the portfolio

Question 8

Don has $3,000 invested in AT&T with an expected return of 11.6 percent; $10,000 in IBM with an expected return of 12.8 percent; and $6,000 in GM with an expected return of 12.2 percent. What is Don's expected return on his portfolio?

Accepted Answer

A)   12.42%
B)   12.20%
C)   11.81%
D)   Cannot be determined

Question 9

The Security Market Line (SML)  relates risk to return, for a given set of market conditions. If risk aversion increases, which of the following would most likely occur?

Accepted Answer

A)   The market risk premium would increase.
B)   The risk-free rate would increase.
C)   The slope of the SML would increase.
D)   Both a & c
E)   All of the above

Question 10

You have invested in stocks W and X. From the following information, determine the beta for your portfolio.   Expected  Retum  Amount of  Investment  Beta  Stock W 10%$100,0001.40 Stock X 8%$300,0000.80\begin{array}{llll} & \begin{array}{l}	ext { Expected } \	ext { Retum }\end{array} & \begin{array}{l}	ext { Amount of } \	ext { Investment }\end{array} & 	ext { Beta } \	ext { Stock W } & 10 \% & \$ 100,000 & 1.40 \	ext { Stock X } & 8 \% & \$ 300,000 & 0.80\end{array} Stock W  Stock X ​ Expected  Retum ​10%8%​ Amount of  Investment ​$100,000$300,000​ Beta 1.400.80​

Accepted Answer

A)   0.85
B)   0.95
C)   1.00
D)   1.10
E)   2.20

Question 11

Cookie Baking expects to pay $2.40 dividend next year (D1 = 2.40)  and the dividend is expected to grow at 4 percent annually. Cookie has an estimated standard deviation of .24, the market portfolio has a standard deviation of .12, the market expected return is .13 and the risk-free rate is .05. The correlation between Cookie and market returns is 0.8. What are Cookie's beta and required rate of return?

Accepted Answer

A)   1.16, 0.116
B)   0.178, 1.6
C)   1.6, 0.178
D)   0.16, 2.60

Question 12

Risk can be defined as the probability that the return on an investment will turn out to be more or less than the investor expected when the investment was originally made.

Accepted Answer

A) True 
 B)False

Question 13

A statistic known as a stock's beta coefficient measures:

Accepted Answer

A)   total risk.
B)   systematic or market risk.
C)   unsystematic or business-specific risk.
D)   None of the above

Question 14

The larger the variance of the probability distribution of returns, the more actual returns will cluster around the mean or expected value.

Accepted Answer

A) True 
 B)False

Question 15

The slope of the security market line is a reflection of the risk tolerance or level of risk aversion of the investment community. As the line becomes steeper, investors become more risk averse and demand higher risk premiums.

Accepted Answer

A) True 
 B)False

Question 16

Risk aversion means:

Accepted Answer

A)   investors prefer less risk when expected returns are equal.
B)   investors always choose low risk stocks.
C)   gamblers don't behave rationally.
D)   investors avoid risk at all costs.

Question 17

According to the Capital Asset Pricing Model a stock's risk premium is:

Accepted Answer

A)   a price premium on low risk stocks that investors are willing to pay for safety.
B)   the risk premium on an average stock factored by a measure of the stock's market risk.
C)   the risk premium on an average stock factored by a measure of the stock's total risk.
D)   extra money paid for high risk stocks because they usually have high returns.

Question 18

It is important to understand that business-specific (unsystematic)  risk is not included in the capital asset pricing model, because beta measures only market (systematic)  risk. The underlying assumption is that:

Accepted Answer

A)   we don't need to worry about business-specific risk in portfolios because it's diversified away.
B)   we can't measure business-specific risk so it's useless to worry about it.
C)   business-specific risk is usually small compared with market risk.
D)   All of the above

Question 19

The standard deviation is:

Accepted Answer

A)   the square of the variance.
B)   the square root of the variance.
C)   one-half of the variance.
D)   twice the variance.

Question 20

Beta measures:

Accepted Answer

A)   business risk.
B)   risk aversion.
C)   total risk.
D)   market risk.

Exam 9: Risk and Return

A statistic known as a stock's beta coefficient measures:

Correct Answer
verified

The larger the variance of the probability distribution of returns, the more actual returns will cluster around the mean or expected value.

Correct Answer
verified

The standard deviation is:

Correct Answer
verified

It is important to understand that business-specific (unsystematic) risk is not included in the capital asset pricing model, because beta measures only market (systematic) risk. The underlying assumption is that:

Correct Answer
verified

Don has $3,000 invested in AT&T with an expected return of 11.6 percent; $10,000 in IBM with an expected return of 12.8 percent; and $6,000 in GM with an expected return of 12.2 percent. What is Don's expected return on his portfolio?

Correct Answer
verified

The vertical intercept of the SML represents:

Correct Answer
verified

The return on an investment in stock:

Correct Answer
verified

Consider a portfolio with a known average return and standard deviation. Which of the following stocks, if added to the portfolio, will reduce its risk through diversification?

Correct Answer
verified

The the standard deviation, the the investment.

Correct Answer
verified

Beta measures:

Correct Answer
verified

Risk aversion means:

Correct Answer
verified

Risk can be defined as the probability that the return on an investment will turn out to be more or less than the investor expected when the investment was originally made.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

According to the Capital Asset Pricing Model a stock's risk premium is:

Correct Answer
verified

The slope of the security market line is a reflection of the risk tolerance or level of risk aversion of the investment community. As the line becomes steeper, investors become more risk averse and demand higher risk premiums.

Correct Answer
verified

In general, investments yielding higher returns will have:

Correct Answer
verified

The Security Market Line (SML) relates risk to return, for a given set of market conditions. If risk aversion increases, which of the following would most likely occur?

Correct Answer
verified

Correct Answer
verified

The underlying principles of portfolio theory include:

Correct Answer
verified

Exam 9: Risk and Return

A statistic known as a stock's beta coefficient measures:

Correct AnswerverifiedShow Answer

The larger the variance of the probability distribution of returns, the more actual returns will cluster around the mean or expected value.

Correct AnswerverifiedShow Answer

The standard deviation is:

Correct AnswerverifiedShow Answer

It is important to understand that business-specific (unsystematic) risk is not included in the capital asset pricing model, because beta measures only market (systematic) risk. The underlying assumption is that:

Correct AnswerverifiedShow Answer

Don has $3,000 invested in AT&T with an expected return of 11.6 percent; $10,000 in IBM with an expected return of 12.8 percent; and $6,000 in GM with an expected return of 12.2 percent. What is Don's expected return on his portfolio?

Correct AnswerverifiedShow Answer

The vertical intercept of the SML represents:

Correct AnswerverifiedShow Answer

The return on an investment in stock:

Correct AnswerverifiedShow Answer

Consider a portfolio with a known average return and standard deviation. Which of the following stocks, if added to the portfolio, will reduce its risk through diversification?

Correct AnswerverifiedShow Answer

The ____ the standard deviation, the ____ the investment.

Correct AnswerverifiedShow Answer

Beta measures:

Correct AnswerverifiedShow Answer

Risk aversion means:

Correct AnswerverifiedShow Answer

Risk can be defined as the probability that the return on an investment will turn out to be more or less than the investor expected when the investment was originally made.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

According to the Capital Asset Pricing Model a stock's risk premium is:

Correct AnswerverifiedShow Answer

The slope of the security market line is a reflection of the risk tolerance or level of risk aversion of the investment community. As the line becomes steeper, investors become more risk averse and demand higher risk premiums.

Correct AnswerverifiedShow Answer

In general, investments yielding higher returns will have:

Correct AnswerverifiedShow Answer

The Security Market Line (SML) relates risk to return, for a given set of market conditions. If risk aversion increases, which of the following would most likely occur?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The underlying principles of portfolio theory include:

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

The the standard deviation, the the investment.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified