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Which one of the following statements is correct concerning a portfolio beta?


A) Portfolio betas range between -1.0 and +1.0.
B) A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.
C) A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification.
D) A portfolio of U.S.Treasury bills will have a beta of +1.0.
E) The beta of a market portfolio is equal to zero.

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

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Which one of the following should earn the most risk premium based on CAPM?


A) diversified portfolio with returns similar to the overall market
B) stock with a beta of 1.38
C) stock with a beta of 0.74
D) U.S.Treasury bill
E) portfolio with a beta of 1.01

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

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


A) income taxes are increased across the board
B) a national sales tax is adopted
C) inflation decreases at the national level
D) an increased feeling of prosperity is felt around the globe
E) consumer spending on entertainment decreased nationally

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

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The principle of diversification tells us that:


A) concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.
B) concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.
C) spreading an investment across five diverse companies will not lower the total risk.
D) spreading an investment across many diverse assets will eliminate all of the systematic risk.
E) spreading an investment across many diverse assets will eliminate some of the total risk.

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

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A stock has an expected return of 11 percent,the risk-free rate is 5.2 percent,and the market risk premium is 5 percent.What is the stock's beta?


A) 1.08
B) 1.16
C) 1.29
D) 1.32
E) 1.35

F) All of the above
G) A) and B)

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Explain how the beta of a portfolio can equal the market beta if 50 percent of the portfolio is invested in a security that has twice the amount of systematic risk as an average risky security.

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An average risky security has a beta of ...

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Treynor Industries is investing in a new project.The minimum rate of return the firm requires on this project is referred to as the:


A) average arithmetic return.
B) expected return.
C) market rate of return.
D) internal rate of return.
E) cost of capital.

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

Correct Answer

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The expected return on JK stock is 15.78 percent while the expected return on the market is 11.34 percent.The stock's beta is 1.51.What is the risk-free rate of return?


A) 2.22 percent
B) 2.31 percent
C) 2.42 percent
D) 2.50 percent
E) 2.63 percent

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

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Which one of the following statements is correct concerning unsystematic risk?


A) An investor is rewarded for assuming unsystematic risk.
B) Eliminating unsystematic risk is the responsibility of the individual investor.
C) Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk.
D) Beta measures the level of unsystematic risk inherent in an individual security.
E) Standard deviation is a measure of unsystematic risk.

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

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Which of the following are examples of diversifiable risk? I.earthquake damages an entire town II.federal government imposes a $100 fee on all business entities III.employment taxes increase nationally IV.toymakers are required to improve their safety standards


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

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

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Which one of the following events would be included in the expected return on Sussex stock?


A) The chief financial officer of Sussex unexpectedly resigned.
B) The labor union representing Sussex' employees unexpectedly called a strike.
C) This morning,Sussex confirmed that its CEO is retiring at the end of the year as was anticipated.
D) The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets.
E) The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.

F) A) and D)
G) All of the above

Correct Answer

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You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy.Given the probabilities of each state of the economy occurring,you anticipate that your stock will earn 6.5 percent next year.Which one of the following terms applies to this 6.5 percent?


A) arithmetic return
B) historical return
C) expected return
D) geometric return
E) required return

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

Correct Answer

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The common stock of Alpha Manufacturers has a beta of 1.14 and an actual expected return of 15.26 percent.The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 percent.Which one of the following statements is true given this information?


A) The actual expected stock return will graph above the Security Market Line.
B) The stock is underpriced.
C) To be correctly priced according to CAPM,the stock should have an expected return of 21.95 percent.
D) The stock has less systematic risk than the overall market.
E) The actual expected stock return indicates the stock is currently underpriced.

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

Correct Answer

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Jerilu Markets has a beta of 1.09.The risk-free rate of return is 2.75 percent and the market rate of return is 9.80 percent.What is the risk premium on this stock?


A) 6.47 percent
B) 7.03 percent
C) 7.68 percent
D) 8.99 percent
E) 9.80 percent

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

Correct Answer

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A portfolio beta is a weighted average of the betas of the individual securities which comprise the portfolio.However,the standard deviation is not a weighted average of the standard deviations of the individual securities which comprise the portfolio.Explain why this difference exists.

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Standard deviation measures total risk.T...

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Total risk is measured by _____ and systematic risk is measured by _____.


A) beta;alpha
B) beta;standard deviation
C) alpha;beta
D) standard deviation;beta
E) standard deviation;variance

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

Correct Answer

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The returns on the common stock of New Image Products are quite cyclical.In a boom economy,the stock is expected to return 32 percent in comparison to 14 percent in a normal economy and a negative 28 percent in a recessionary period.The probability of a recession is 25 percent while the probability of a boom is 20 percent.What is the standard deviation of the returns on this stock?


A) 21.41 percent
B) 21.56 percent
C) 25.83 percent
D) 32.08 percent
E) 39.77 percent

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

Correct Answer

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What is the standard deviation of the returns on a stock given the following information? What is the standard deviation of the returns on a stock given the following information? A) 1.57 percent B) 2.03 percent C) 2.89 percent D) 3.42 percent E) 4.01 percent


A) 1.57 percent
B) 2.03 percent
C) 2.89 percent
D) 3.42 percent
E) 4.01 percent

F) All of the above
G) D) and E)

Correct Answer

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The systematic risk of the market is measured by:


A) a beta of 1.0.
B) a beta of 0.0.
C) a standard deviation of 1.0.
D) a standard deviation of 0.0.
E) a variance of 1.0.

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

Correct Answer

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You recently purchased a stock that is expected to earn 30 percent in a booming economy,9 percent in a normal economy,and lose 33 percent in a recessionary economy.There is a 5 percent probability of a boom and a 75 percent chance of a normal economy.What is your expected rate of return on this stock?


A) -3.40 percent
B) -2.25 percent
C) 1.65 percent
D) 2.60 percent
E) 3.50 percent

F) C) and D)
G) All of the above

Correct Answer

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