8) Stock A has the following returns for various states of the economy:
State of the Economy
Probability
Stock A's Return
Recession
10%
-30%
Below Average
20%
-2%
Average
40%
10%
Above Average
20%
18%
Boom
10%
40%
Stock A's expected return is
A) 5.4%.
B)
C) 8.2%.
9) Stock A has the following returns for various states of the economy:
State of the Economy
Probability
Stock A's Return
Recession
9%
-72%
Below Average
16%
-15%
Average
51%
16%
Above Average
14%
35%
Boom
10%
85%
Stock A's expected return is
A) 9.9%.
B)
B) 12.7%.
10) You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year. Historical data suggests the following probability distribution for your commission income. Which job has the higher expected in
A) The salary of $50,000 is greater than the expected commission of $49,630.
11) The relevant variable a financial manager uses to measure returns is
A) net income determined using generally accepted accounting principles.
B) earnings per share minus dividends per share.
C) cash flows.
D) dividends.
C) cash flows.
12) Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return. What is the expected amount of return this investment will
A) $4,040
13) Assume that an investment is forecasted to produce the following returns: a 30% probability of a 12% return; a 50% probability of a 16% return; and a 20% probability of a 19% return. What is the expected percentage return this investment will produce?
D) 15.4%
5) Stock W has the following returns for various states of the economy:
State of the Economy
Probability
Stock W's Return
Recession
10%
-30%
Below Average
20%
-2%
Average
40%
10%
Above Average
20%
18%
Boom
10%
40%
Stock W's standard deviation of returns i
C) 17%.
6) Stock W has the following returns for various states of the economy:
State of the Economy
Probability
Stock W's Return
Recession
9%
-72%
Below Average
16%
-15%
Average
51%
16%
Above Average
14%
35%
Boom
10%
85%
Stock W's standard deviation of returns i
C) 37%.
7) Stock W has an expected return of 12% with a standard deviation of 8%. If returns are normally distributed, then approximately two-thirds of the time the return on stock W will be
A) between 12% and 20%.
B) between 8% and 12%.
C) between -4% and 28%.
D
D) between 4% and 20%.
8) Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio?
Investment
?
A
18%
20%
B
20%
20%
C
20%
22%
A) Investment A
B) Investment B
C) Investment C
D) Cannot be determined wi
B) Investment B
9) Assume that you have $330,000 invested in a stock that is returning 11.50%, $170,000 invested in a stock that is returning 22.75%, and $470,000 invested in a stock that is returning 10.25%. What is the expected return of your portfolio?
A) 15.6%
B) 12.
B) 12.9%
10) Assume that you have $100,000 invested in a stock that is returning 14%, $150,000 invested in a stock that is returning 18%, and $200,000 invested in a stock that is returning 15%. What is the expected return of your portfolio?
A) 13.25%
B) 14.97%
C)
D) 15.78%
11) Rogue Recreation, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 5%, while Lake Tours, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 15%. Which of the
C) Lake Tours is more likely to have negative returns than Rogue Rec.
13) Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return. What is the standard deviation of return for this investment?
A) 5.8
C) 2.43%
17) Assume that you expect to hold a $20,000 investment for one year. It is forecasted to have a year end value of $21,000 with a 30% probability; a year end value of $24,000 with a 45% probability; and a year end value of $30,000 with a 25% probability.
C) 16.36%
5) Investment A has an expected return of 15% per year, while Investment B has an expected return of 12% per year. A rational investor will choose
A) Investment A because of the higher expected return.
B) Investment B because a lower return means lower ri
C) Investment A if A and B are of equal risk.
6) Of the following different types of securities, which is typically considered most risky?
A) long-term corporate bonds
B) long-term government bonds
C) common stocks of large companies
D) common stocks of small companies
D) common stocks of small companies
7) The category of securities with the highest historical risk premium is
A) large company stocks.
B) small company stocks.
C) government bonds.
D) small company corporate bonds.
B) small company stocks.
8) If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the least risky investment?
A) common stock of large firms
B) U.S. Treasury bills
C) common stock of small firms
D) long-term govern
B) U.S. Treasury bills
9) If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the highest risk investment?
A) common stock of large firms
B) U.S. Treasury bills
C) common stock of small firms
D) long-term gover
C) common stock of small firms
25) Which of the following statements is MOST correct concerning diversification and risk?
A) Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies
A) Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.
26) Which of the following statements is MOST correct concerning diversification and risk?
A) Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio.
B) Diversification is mainly achieved by
B) Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category.
28) Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12. Wendy sold the shares on 12/31/12 for $3.45. Genetics stock has a beta of 1.9, the risk-free rate of return is 4%, and the market risk premium is 9%. Wendy's holding period return
A) 15.0%.
29) You are considering investing in Ford Motor Company. Which of the following are examples of diversifiable risk?
I. Risk resulting from possibility of a stock market crash.
II. Risk resulting from uncertainty regarding a possible strike against Ford.
I
D) II, III
30) You are considering buying some stock in Continental Grain. Which of the following are examples of non-diversifiable risks?
I. Risk resulting from a general decline in the stock market.
II. Risk resulting from a possible increase in income taxes.
III.
A) I and II
31) Of the following, which differs in meaning from the other three?
A) systematic risk
B) market risk
C) undiversifiable risk
D) asset-unique risk
D) asset-unique risk
32) Most stocks have betas between
A) -1.00 and 1.00.
B) 0.00 and 1.00.
C) 0.60 and 1.60.
D) 1.00 and 2.00.
C) 0.60 and 1.60.
33) A well-diversified portfolio includes investments in 50 securities. The portfolio's systematic risk is likely to be about
A) 50% of the total risk.
B) 40% of the total risk.
C) 25% of the total risk.
D) zero because risk is eliminated with a portfolio
B) 40% of the total risk.
34) Beta is a statistical measure of
A) unsystematic risk.
B) total risk.
C) the standard deviation.
D) the relationship between an investment's returns and the market return.
D) the relationship between an investment's returns and the market return.
35) A stock's beta is a measure of its
A) unsystematic risk.
B) systematic risk.
C) company-unique risk.
D) diversifiable risk.
B) systematic risk.
37) Which of the following is/are true?
A) Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.
B) Two points on the Characteristic Line are the T-bill and the market portfolio.
C) The greater the total risk of an asset, th
A) Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.
38) If we are able to fully diversify, what is the appropriate measure of risk to use?
A) expected return
B) standard deviation
C) beta
D) risk-free rate of return
C) beta
41) Beginning with an investment in one company's securities, as we add securities of other companies to our portfolio, which type of risk declines?
A) systematic risk
B) market risk
C) non-diversifiable risk
D) unsystematic risk
D) unsystematic risk
42) Assume that you expect to hold a $40,000 investment for one year. It is forecasted to have a year end value of $42,000 with a 30% probability; a year end value of $48,000 with a 45% probability; and a year end value of $60,000 with a 25% probability.
C) 23%
43) Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________.
A) standard deviation; beta
B) security market line; standard deviation
C) beta; standard deviation
D) beta; slope of the characteristic li
C) beta; standard deviation
44) How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?
A) Wait until the stock market rises.
B) Increase the amount of money invested in the portfolio.
C) Purchase a variety of secur
C) Purchase a variety of securities; i.e., diversify.
45) Which of the following types of risk is diversifiable?
A) unsystematic, or company-unique risk
B) betagenic, or ecocentric risk
C) systematic risk
D) market risk
A) unsystematic, or company-unique risk
46) You purchased 500 shares of A.M.J. Inc. common stock one year ago for $50 per share. You received a dividend of $2 per share today and decide to take your profits by selling at $54.50 per share. What is your holding period return?
A) 13.0%
B) 9.0%
C)
A) 13.0%
47) Which of the following measures the average relationship between a stock's returns and the market's returns?
A) coefficient of validation
B) standard deviation
C) geometric regression
D) beta coefficient
D) beta coefficient
48) Assume that you have $165,000 invested in a stock whose beta is 1.25, $85,000 invested in a stock whose beta is 2.35, and $235,000 invested in a stock whose beta is 1.11. What is the beta of your portfolio?
A) 1.37
B) 2.01
C) 1.85
D) 1.57
A) 1.37
49) Assume that you have $100,000 invested in a stock whose beta is .85, $200,000 invested in a stock whose beta is 1.05, and $300,000 invested in a stock whose beta is 1.25. What is the beta of your portfolio?
A) 0.97
B) 1.02
C) 1.12
D) 1.21
C) 1.12
50) Which of the following statements is MOST correct regarding beta?
A) Beta must be calculated using at least 5 years of monthly returns data to be accurate.
B) Beta can only be measured properly using daily returns.
C) Beta for a particular company rem
D) Even professionals may not agree on the measurement of beta
51) What is diversifying among different kinds of assets known as?
A) portfolio funding
B) capital asset classification
C) asset allocation
D) multi-diversification
C) asset allocation
52) Investment A has an expected return of 14% with a standard deviation of 4%, while investment B has an expected return of 20% with a standard deviation of 9%. Therefore,
A) a risk averse investor will definitely select investment A because the standard
D) rational investors could pick either A or B, depending on their level of risk aversion.
54) Changes in the general economy, like changes in interest rates or tax laws, represent what type of risk?
A) company-unique risk
B) market risk
C) unsystematic risk
D) diversifiable risk
B) market risk
12) The capital asset pricing model
A) provides a risk-return trade-off in which risk is measured in terms of the market volatility.
B) provides a risk-return trade-off in which risk is measured in terms of beta.
C) measures risk as the coefficient of var
B) provides a risk-return trade-off in which risk is measured in terms of beta.
13) A typical measure for the risk-free rate of return is the
A) U.S. Treasury bill rate.
B) prime lending rate.
C) money-market rate.
D) short-term AAA-rated bond rate.
A) U.S. Treasury bill rate.
14) If the beta for stock A equals zero, then
A) stock A's required return is equal to the required return on the market portfolio.
B) stock A's required return is equal to the risk-free rate of return.
C) stock A has a guaranteed return.
D) stock A's req
B) stock A's required return is equal to the risk-free rate of return.
15) The risk-free rate of interest is 4% and the market risk premium is 9%. Howard Corporation has a beta of 2.0, and last year generated a return of 16% with a standard deviation of returns of 27%. The required return on Howard Corporation stock is
A) 36
D) 22%.
16) Stock A has a beta of 1.2 and a standard deviation of returns of 18%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the market risk premium increases, then
A) the required return on stock B will increase more than the requir
A) the required return on stock B will increase more than the required return on stock A.
17) Stock A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the risk-free rate of return increases and the market risk premium remains constant, then
A) the required re
B) the required returns on stocks A and B will both increase by the same amount.
19) Wendy purchased 800 shares of Robotics stock at $3 per share on 1/1/09. Wendy sold the shares on 12/31/09 for $3.45. Robotics stock has a beta of 1.3, the risk-free rate of return is 3%, and the market risk premium is 8%. The required return on Roboti
A) 13.4%.
20) Based on the security market line, Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%. Robo-Tech has a standard deviation of returns of 18%. Therefore,
A) Friendly must have a standard deviation of
C) for a well-diversified investor, Friendly is less risky than Robo-Tech.
21) Green Company stock has a beta of 2 and a required return of 23%, while Gold Company stock has a beta of 1.0 and a required return of 14%. The standard deviation of returns for Green Company is 10% more than the standard deviation for Gold Company. Th
D) 14%.
22) White Company stock has a beta of 2 and a required return of 23%, while Black Company stock has a beta of 1.0 and a required return of 14%. The standard deviation of returns for White Company is 10% more than the standard deviation for Black Company.
B) 5%
23) Surf and Spray Inc. has a beta equal to 1.8 and a required return of 15% based on the CAPM. If the market risk premium is 7.5%, the risk-free rate of return is
A) 4.1%.
B) 3.4%.
C) 2.0%.
D) 1.5%.
D) 1.5%.
24) Surf and Spray Inc. has a beta equal to 1.8 and a required return of 15% based on the CAPM. If the risk-free rate of return is 4.2%, the expected return on the market portfolio is
A) 21%.
B) 19.2%.
C) 13.4%.
D) 10.2%.
D) 10.2%.
26) The appropriate measure for risk according to the capital asset pricing model is
A) the standard deviation of a firm's cash flows.
B) alpha.
C) the standard deviation of a firm's stock returns.
D) beta
D) beta.
27) Anchor Incorporated has a beta of 1.0. If the expected return on the market is 15%, what is the expected return on Anchor Incorporated's stock?
A) 15%
B) 14%
C) 18%
D) cannot be determined without the risk-free rate
A) 15%
28) Decker Corp. common stock has a required return of 17.5% and a beta of 1.75. If the expected risk free return is 3%, what is the expected return for the market based on the CAPM?
A) 11.29%
B) 14.29%
C) 13.35%
D) 15.27%
A) 11.29%
29) Wildings, Inc. common stock has a beta of 1.2. If the expected risk free return is 4% and the expected market risk premium is 9%, what is the expected return on Wildings' stock?
A) 10.0%
B) 12.0%
C) 13.8%
D) 14.8%
D) 14.8%
30) You determine that LMN common stock has an expected return of 24%. LMN has a Beta of 1.5. The risk-free rate is 5%, and the market expected return is 15%. Which of the following is most likely to happen?
A) You and other investors will buy up LMN stoc
A) You and other investors will buy up LMN stock and its price will rise.
32) Marble Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The return on the market portfolio is 15% and the risk-free rate is 4%. What is the risk premium on the market?
A) 5%
B) 6%
C) 9.00%
D) 11%
D) 11%
33) Marble Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The return on the market portfolio is 15% and the risk-free rate is 4%. According to CAPM, what is the required rate of return on Collectible's stock?
A) 37.5%
B) 31.5%
C) 26.5
B) 31.5%
35) The beta of ABC Co. stock is the slope of
A) the security market line.
B) the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills.
C) the arbitrage pricing line.
D) the characteristic line for a plot of
D) the characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period
36) The rate on T-bills is currently 2%. Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%. According to CAPM, determine the return on the market portfolio.
A) 27.5%
B) 19.0%
C) 14.0%
D) 12.0%
D) 12.0%
37) The return on the market portfolio is currently 12%. Mobile Phone Corporation stockholders require a rate of return of 30% and the stock has a beta of 3.2. According to CAPM, determine the risk-free rate.
A) 9.80%
B) 6.50%
C) 4.64%
D) 3.82%
D) 3.82%
38) Which of the following is the slope of the security market line?
A) beta
B) one
C) It varies, and it is steeper for riskier securities.
D) the market risk premium
D) the market risk premium
39) What is the name given to the equation that financial managers use to measure an investor's required rate of return?
A) the standard deviation
B) the capital asset pricing model
C) the coefficient of variation
D) the MIRR
B) the capital asset pricing mode
40) You are considering an investment in Citizens Bank Corp. The firm has a beta of 1.6. Currently, U.S. Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%. What rate of return should you expect for your investment in Citiz
D) 20.75%
41) The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the
A) stock's beta.
B) investor's risk premium.
C) investor's required rate of return.
C) investor's required rate of return.