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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 2

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1	The CAPM shows that the expected return for a particular asset depends on: I. The amount of unsystematic risk. II. The reward for bearing systematic risk. III. The pure time value of money.
		A)	I only
		B)	I and II only
		C)	III only
		D)	I, II, and III
		E)	II and III only


2	Which of the following does NOT describe the risk that exists in a well-diversified portfolio?
		A)	Asset-specific risk
		B)	Market risk
		C)	Non-diversifiable risk
		D)	Systematic risk


3	The stock in Scoundrel, Inc. shows an historical return of 13.5% with a standard deviation of 20%. The projected return on Scoundrel, based on 5 possible states of the economy, is 15.5% with a standard deviation of 22%. Which of the following is true about the stock?
		A)	The projected returns of Scoundrel must be positive in all possible states of the economy.
		B)	Projected returns vary less widely from the expected return than historical returns did from the historical average return.
		C)	Investors who prefer assets with high returns and relatively low risk will likely now be more interested in the stock than in the past.
		D)	Investors who choose this stock should expect, on average, to lose money.
		E)	The risk premium for the stock has likely increased.


4	Which of the following is true about the market portfolio?
		A)	It plots below the security market line.
		B)	The expected return of the market portfolio determines the slope of the security market line.
		C)	It has a beta equal to zero.
		D)	It plots above the security market line.
		E)	It has a different reward to risk ratio than the individual assets in the market.


5	Which of the following statements is false?
		A)	Market risk = non-diversifiable risk + asset-specific risk
		B)	Total risk = systematic risk + unsystematic risk.
		C)	Total risk = market risk + unique risk.
		D)	Announcement = expected part + surprise.
		E)	Total return = expected return + unexpected return.


6	Asset A has an expected return of 22% and a beta of 1.8. The expected market return is 14%. What is the risk-free rate?
		A)	6.0%
		B)	4.0%
		C)	3.0%
		D)	1.2%
		E)	0.6%


7	Asset A has an expected return of 12% and a beta of 1.05. The risk-free rate is 4%. What is the market risk premium?
		A)	11.6%
		B)	10.2%
		C)	9.6%
		D)	8.2%
		E)	7.6%


8	What is the portfolio beta if 25% of your funds are invested in the market portfolio, 25% in an asset with twice as much risk as the market portfolio, and the remainder in a risk-free asset?
		A)	0.25
		B)	0.50
		C)	0.75
		D)	1.00
		E)	1.25


9	Asset A has a reward to risk ratio of .075 and a beta of 1.5. The risk-free rate is 5%. What is the expected return on A?
		A)	16.25%
		B)	14.25%
		C)	13.50%
		D)	12.25%
		E)	11.25%


10	You own two risky assets, both of which plot on the security market line. Asset A has an expected return of 12% and a beta of 0.8. Asset B has an expected return of 18% and a beta of 1.4. If your portfolio beta is the same as the market portfolio, what proportion of your funds are invested in asset A?
		A)	0.67
		B)	0.50
		C)	0.33
		D)	1.33
		E)	1.67

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