The slope of the linear relation between the returns on a stock and the returns on the market portfolio is
called the:
b. beta
The Security Market Line describes the relationship between the:
a. expected return on securities and their systematic risk
**Return vs. risk
Unsystematic risk is also known as:
c. firm-specific risk
. The market portfolio would have a beta of
b. +1
**Beta measures the systemic risk of a stock compared to the market portfolio.
Since the market portfolio has the same risk as itself, its beta is 1
Assets that are more volatile than the market have a beta of:
d. more than 1
As defined in accordance with efficient markets notions, a weak-form efficient market would be a market in
which asset prices reflect all:
e. none of the three (a, b, c)
. As defined in accordance with efficient markets notions, a strong-form efficient market would be a market
in which asset prices reflect all of the following EXCEPT:
e. all four (a, b, c, d) are reflected in asset prices
**past public information, current public information, past private information, current private information
After controlling for risk, if someone were able to earn greater than the average returns for the market on a
consistent basis using publicly available information, which form of market efficiency is violated?
b. semi-strong
If prices in a particular market fully reflect all public and private knowledge, the market is efficient in the:
c. strong form
The correlation between the return on the risk-free asset with a constant return over time and the return on a
risky asset is always:
b. 0 (cancels each other out)
If IBM has a beta of 1.2 when the risk-free rate is 6% and the expected return on the market portfolio is
18%, the expected return on IBM is:
E(RIBM) = 6% + (18% - 6%)1.2 = 6% + 12%(1.2) = 20.4%
If the expected return on Stock 1 is 6%, and the expected return on Stock 2 is 20%, the expected return on a
two-asset portfolio that holds 10% of its funds in Stock 1 and 90% in Stock 2 is:
(10%) (6%) + (90%)(20%) = 0.6% + 18% = 18.6%
In an efficient market:
c. information flows are random, both in timing and in content
The strong-form efficient market implies that:
d. all three (a, b, c) are implied in strong-form efficient market
stock prices reflect all public and private knowledge, even corporate officers and insiders cannot earn above-average, risk-adjusted profits, no investor can consistently beat the market a
Systematic risk is rewarded with higher returns in the market because:
a. it is associated with market movements which cannot be eliminated through diversification
If the expected return on the market portfolio is 12%, and the
beta on Consolidated Edison is 0.8, then using the Security Market
Line, the expected return on Con Ed is:
b. less than 12%
***the ? of the market portfolio is 1 ? Con Ed is less risky than the market portfolio ? E(RCon Ed) < 12% =
E(RMKT)
The security market line can be used to determine the expected return on a security if we know the:
d. all three (a, b, c)
risk-free rate, systematic risk of that security, and expected return
The Capital Asset Pricing Model (CAPM) states that the expected return on an asset depends upon its level
of:
a. systematic risk
The systematic risk=
the ? for that security
If the risk-free rate, the expected return on the market portfolio, and the _____________ of a stock is
known, an investor can use the security market line to determine the expected return on that stock.
b. beta
The portfolio that contains all risky assets is known as the:
a. market portfolio
If you invest 40% of your investment in GE with an expected rate of return of 10% and the remainder in
IBM with an expected rate of return of 16%, the expected return on your portfolio is:
E(Rp) = (40%)(10%) + (60%)(16%) = 4% + 9.6% = 13.6%
Which of the following is not required to compute the expected return of a three-asset portfolio?
b. the correlation between the returns on each stock
The benefits of diversification are greatest when asset returns have:
a. negative correlations
In an efficient market which of the following would not be expected to cause a quick price change in the
stock of a company?
d. all three (a, b, c) would be expected to cause a quick price change
Which of the following statements is correct?
c. The market portfolio truly eliminates all unsystematic risk.
Which of the following statements is correct?
a. The U.S. stock market appears to be a fairly good example of a semi-strong form efficient market
Which of the following statements is correct?
a. The security market line graphically shows the expected return and systematic risk relationship
Which of the following statements is false?
d. All three statements (a, b, c) are true
Diversification cannot eliminate risk that is inherent in the macroeconomy or market risk. ,The expected rate of return on a portfolio does not depend on the correlation between the return on each
stock., Althoug
If Stock A had a price of $120 at the beginning of the year, $150 at the end of the year and paid a $6
dividend during the year, what would be the annualized holding period return? Pick the closest answer.
dollar return = ($150 - $120) + $6 = $36 ? % ???????????? =
$????/$?????? = ????%
If the variance for Stock A is greater than the variance for Stock B, then the standard deviation for Stock A:
a. is greater than the standard deviation for Stock B
If the variance for Stock A is greater than the variance for Stock B, then the COEFFICIENT of variation for
Stock A:
d. cannot be determined by this information
. If the variance in returns for Stock A is 400% and the expected return is 5%, then the coefficient of variation
is:
???? = ??????? = ????% and ??? = ??% ? ???? =
????%/??%= 4
???????????????e
According to the definitions given in the text, if Stock A has a standard deviation of 4% and Stock B has a
standard deviation of 3% which stock is riskier?
d. cannot determine from the information given
***use CV to compare the risk of the two stocks
. According to the definitions given in the text, if Stock A has a standard deviation of 4% and expected returns of
9%, and Stock B has a standard deviation of 3% and expected returns of 1%, which stock is riskier?
b. Stock B
. A fruit company has 20% returns in periods of normal rainfall and negative 3% returns in droughts. The
probability of normal rainfall is 60% and droughts 40%. What would the fruit company's expected returns be?
E(R) = (60%)(20%) +(40%)(-3%) = 12% - 1.2% = 10.8%
If Stock A is considered to be of lower risk than Stock B, then Stock A should have returns that are
a. lower than Stock B
**principle of finance #2
If the return for Stock A this year was 3% and the expected return for next year is 3%, then next year's
return will actually be
c. cannot say for certain
Which one of the following is not considered to be a generally recognized type of market efficiency?
d. insider-information form
**illegal under Securities Exchange Act of 1934
A statistical concept that relates movements in one set of returns to movements in another set over time is
called:
d. correlation
The total risk of a well-diversified portfolio of U.S. stocks appears to be about what proportion of the risk of
an average one-stock portfolio?
b. one-half
The total risk of a well-diversified international portfolio of stocks appears to be about what proportion of
the risk of an average one-stock portfolio?
b. one-third
Portfolio risk is comprised of:
c. systematic and unsystematic risk
Which of the following is not a component of the security market line equation?
d. an asset's unsystematic risk
The square root of the standard deviation is called the:
d. none of these
. If we assume that asset X has an expected return of 10 and a variance of 10, then its coefficient of variation
is:
?? = ????? = ??. ???? ? ???? =??/??? =
??.????/????
= ??. ????6
Maximum diversification benefit can be achieved if one were to form a portfolio of two stocks whose
returns had a correlation coefficient of:
a. -1.0
**perfectly negatively correlated, change in opposite directions by same percentage
Variations in operating income over time because of variations in unit sales, price, cost margins, and/or
fixed expenses are called:
a. business risk
The effect on revenues and expenses from variations in the value of the U.S. dollar in terms of othercurrencies is called:
b. exchange rate risk
The risk caused by changes in inflation that affect revenues, expenses and profitability is called:
c. purchasing power risk
. The risk caused by variations in interest expense unrelated to sales or operating income arising from
changes in the level of interest rates in the economy is called:
a. interest rate risk
The risk caused by variations in income before taxes over time because fixed interest expenses do not
change when operating income rises or falls is called:
c. financial risk
Variations in a firm's tax rate and tax-related charges over time due to changing tax laws and regulations is
called:
e. tax risk
Assume the probability of a pessimistic, most likely and optimistic state of nature is .25, .45 and .30, and the
returns associated with those states of nature are 10%, 12%, and 16% for asset X. Based on this information,
the expected return and standard
E(R) = (.25)(10%)+(.45)(12%)+(.30)(16%) = 2.5% + 5.4% + 4.8% = 12.70%
?2 = (.25)(10%-12.7%)2 + (.45)(12%-12.7%)2 + (.30)(16%-12.7%)2 =
1.8225 + 0.2205 + 3.267 = 5.2945 ? ?? = ???. ????????=??.??%
A lower the coefficient of variation indicates ____________ risk per unit of return
a. lower
Assume the probability of a pessimistic, most likely and optimistic state of nature is .25, .55 and .20, and the
returns associated with those states of nature are 5%, 10%, and 13% for asset Y. Based on this information, the
expected return, standard devi
E(R) = (0.25)(5%) + (0.55)(10%) + (0.20)( 13%) =
1.25% + 5.5% + 2.6% = 9.35%
?2 = (.25)(5%-9.35%)2+(.55)(10%-9.35%)2+(.20)(13%-9.35%)2 =4.7306 + 0.2324 + 2.6645 = 7.6275 ? ?? = ???. ???????? = 2.7618%
???? =??.????????%/??.????%= ??. ????????
Rico bought 100 shares of Banana Republic stock for $24.00 per share on January 1, 2010. He received a
dividend of $2.00 per share at the end of 2010 and $3.00 per share at the end of 2011. At the end of 2012, Rico
collected a dividend of $4.00 per share
Dollar Return = ($18 - $24) + $2 + $3 + $4 = $3
?????????????? ???????????? ???????????? =
$??/$????= ????. ??%
If a person requires greater return when risk increases, that person is said to be:
b. risk averse
. Which of the following statements is correct?
b. Combining negatively correlated assets having the same expected return results in a portfolio with the same
level of expected return and a lower level of risk.
. Which of the following statements is correct?
c. Perfectly positively correlated series move exactly together and have a correlation coefficient of +1.0 while
perfectly negatively correlated series move exactly in opposite directions and have a correlation coefficient of -
1.0.
Investing in is a way for small investors to enjoy the benefits of professional management and
diversification
c. mutual funds
A stock that went from $40 per share at the beginning of the year to $45 at the end of the year and paid a $2
dividend provided an investor with a ____ return.
dollar return = $45 - $40 + $2 = $7 ?% ???????????? =
$??/$????= ????. ??%