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Fundamentals of Corporate Finance, 4/c/e
Fundamentals of Corporate Finance, 4/e
Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University
Return, Risk, and the Security Market Line

Quick Quiz 1

After taking this quiz, click 'Submit Answers' for graded results. You'll also have the option of emailing the results to your instructor and/or yourself.



1

Which of the following is a true statement?
A)Comparison of two different risky assets cannot be simplified by calculating the expected return for each.
B)The risk premium is the difference between the return on a risky asset and the return on the market portfolio.
C)The expected return on an asset is equal to the sum of the possible returns divided by their probabilities.
D)To calculate the expected risk premium one needs the expected return on the risky asset and the return on a risk-free asset.
E)Expected returns depend on the states of the economy but not the associated probabilities.
2

The true risk of any investment is the .
A)standard deviation of the investment's return
B)expected part of any announcement
C)part of the return resulting from surprises
D)impact of unsystematic risk
E)risk premium of the investment
3

Diversification works because:
I. Unsystematic risk exists.
II. Forming stocks into portfolios reduces the standard deviation of returns for each stock.
III. Firm-specific risk can be dramatically reduced if not eliminated
A)I only
B)I and III only
C)I and II only
D)III only
E)I, II, and III
4

Total risk equals __________.
A)diversifiable risk plus unsystematic risk
B)firm-specific risk plus diversifiable risk
C)systematic risk minus unsystematic risk
D)market risk plus firm-specific risk
E)market risk plus non-diversifiable risk
5

The ___________ portion of the total return contains news that has been "discounted" by the market.
A)unexpected
B)actual
C)expected
D)unsystematic
E)surprise
6

What is the expected portfolio return given the following information:
AssetPortfolio
weight		Return
A.2515%
B.2520%
C.3010%
D.2035%
A)7.71%
B)9.23%
C)18.75%
D)19.25%
E)21.15%
7

What is the expected market return if the expected return on asset A is 16% and the risk-free rate is 7%? Asset A has a beta of 1.2.
A)9.5%
B)14.5%
C)16.5%
D)17.5%
E)20.5%
8

You hold three stocks in your portfolio: A, B, and C. The portfolio beta is 1.50. Stock A comprises 20% of the dollar value of your holdings and has a beta of 1.0. If you sell all of your investment in A and invest the proceeds in the risk-free asset, your new portfolio beta will be:
A)0.850
B)1.200
C)1.025
D)1.625
E)1.300
9

What is the expected return on asset A if it has a beta of 0.3, the expected market return is 14%, and the risk-free rate is 5%?
A)6.0%
B)9.2%
C)7.2%
D)7.7%
E)8.3%
10

Given the following information, what is the portfolio standard deviation?
State Probability Return
Boom .2 .30
Good .6 .21
Recession .2 .08
A).0128
B).0527
C).0638
D).0703
E).1159




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