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| 1 | |
If the total risk of firm X is greater than that of firm Y, then the beta of firm X must be greater than that of firm Y. |
| | A) | True |
| | B) | False |
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| 2 | |
No matter how much total risk an asset has, only the unsystematic portion is relevant in determining the expected return on that asset. |
| | A) | True |
| | B) | False |
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| 3 | |
If world events cause investors to become more risk-averse, you would expect the market risk premium to increase. |
| | A) | True |
| | B) | False |
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| 4 | |
The projected risk premium is defined as the sum of the expected return on a risky investment and the return on a risk-free investment. |
| | A) | True |
| | B) | False |
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| 5 | |
The security market line is based on the principle that the reward-to-risk ratio must be constant for all assets in the market. |
| | A) | True |
| | B) | False |
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| 6 | |
Which one of the following is an accurate statement? |
| | A) | To calculate an expected risk premium you need to compute the expected return on an average risky asset and the return on a risk-free asset. |
| | B) | The risk premium is the difference between the return on a risky asset and the return on a market portfolio. |
| | C) | The expected return on an asset decreases as the firm-specific risk increases. |
| | D) | A comparison of two different risky assets can not be simplified by computing the expected return on each asset. |
| | E) | The expected return on a security depends on the expected states of the economy but not on the associated probabilities of those states occurring. |
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| 7 | |
Diversification works because:
I. unsystematic risk exists.
II. combining stocks into a portfolio reduces the standard deviation of each stock in the portfolio.
III. firm-specific risk can be dramatically reduced if not eliminated. |
| | A) | I only |
| | B) | III only |
| | C) | I and II only |
| | D) | I and III only |
| | E) | I, II, and III |
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| 8 | |
You are looking at two different stocks. Stock A has a beta of 1.25 and stock B has a beta of 1.30. Which one of the following statements is true about these investments? |
| | A) | Stock A is a better addition to your portfolio. |
| | B) | Stock B is a better addition to your portfolio. |
| | C) | The expected return on stock A will exceed that of stock B. |
| | D) | Stock B has a higher standard deviation than stock A. |
| | E) | Stock A should have the same reward-to-risk ratio as stock B. |
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| 9 | |
Which one of the following portfolios would have the least systematic risk? |
| | A) | a portfolio of the common stocks of 100 different companies |
| | B) | a market portfolio |
| | C) | a portfolio half invested in the market portfolio and half invested in Treasury bills |
| | D) | a portfolio half invested in the market portfolio and half invested in stocks with betas of 1.50 |
| | E) | a portfolio made up entirely of Treasury bills |
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| 10 | |
The expected return on a risky asset depends only on that asset's _____ risk. |
| | A) | diversifiable |
| | B) | asset-specific |
| | C) | surprise |
| | D) | unique |
| | E) | systematic |
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| 11 | |
Suppose you have a portfolio comprised of two securities. You have 60 shares of the stock X valued at $10 per share and 40 shares of stock Y valued at $3 per share. What is the weight of stock X in the portfolio? |
| | A) | 23 percent |
| | B) | 40 percent |
| | C) | 60 percent |
| | D) | 77 percent |
| | E) | 83 percent |
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| 12 | |
Which of the following is (are) true?
I. Systematic risk is all that matters to a well-diversified investor.
II. The amount of systematic risk in an asset relative to an average risky asset is measured by beta.
III. Spreading a portfolio across a number of assets will eliminate all of the risk.
IV. On average, the standard deviation of a portfolio declines as the number of assets in the portfolio is increased but it can not decline to zero. |
| | A) | II and III only |
| | B) | I and II only |
| | C) | I, II, and III only |
| | D) | I, II, and IV only |
| | E) | I, III, and IV only |
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| 13 | |
You hold four stocks (A, B, C, and D) in your portfolio. The portfolio beta is 1.20. Stock C constitutes 40 percent of the dollar value of your holdings and has a beta of 1.60. If you sell all of your holdings in stock C, and replace them with an equal investment in stock E (which has a beta of 1.25), your new portfolio beta will be: |
| | A) | 1.00. |
| | B) | 1.06. |
| | C) | 1.12. |
| | D) | 1.25. |
| | E) | 1.32. |
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| 14 | |
There are two expected states of the economy. The probability of a normal economy is 70 percent and the probability of a recession is 30 percent. If the economy is normal, Security A is expected to earn 20 percent and Security B is expected to earn 6 percent. If the economy goes into a recession, Security A is expected to earn 4 percent and Security B is expected to earn 24 percent. What is the expected return on a portfolio that is invested 60 percent in A and 40 percent in B? |
| | A) | 10.89 percent |
| | B) | 11.07 percent |
| | C) | 13.68 percent |
| | D) | 14.28 percent |
| | E) | 14.79 percent |
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| 15 | |
There are two expected states of the economy. The probability of a boom is 60 percent and the probability of a bust is 40 percent. If the economy booms, stock A is expected to earn 15 percent and stock B is expected to earn 8 percent. If the economy goes bust, stock A is expected to earn 5 percent and stock B is expected to earn 18 percent. What is the expected return on a portfolio that is equally divided among stock A, stock B, and a risk-free asset? The expected return on the risk-free asset is 4 percent regardless of the state of the economy. |
| | A) | 8.97 percent |
| | B) | 9.00 percent |
| | C) | 10.11 percent |
| | D) | 11.82 percent |
| | E) | 13.88 percent |
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