FIN 3826 Final Review

Risk that can be eliminated through diversification is called ________ risk.
A) diversifiable
B) unique
C) all of these options
D) firm-specific

c) all of these options

Based on the outcomes in the following table, choose which of the statements below is (are) correct?
I. The covariance of security A and security B is zero.
II. The correlation coefficient between securities A and C is negative.
III. The correlation coeff

d) I and II only

The ________ is equal to the square root of the systematic variance divided by the total variance.
A) correlation coefficient
B) covariance
C) standard deviation
D) reward-to-variability ratio

A) correlation coefficient

Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio?
A) .40
B) .75
C) .50
D) .80

A) .40

On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the ________ the current investment opportunity set.
A) right and below
B) right and above
C) left and below
D) left and above

D) left and above

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the varian

D) .583

Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1

C) 8.8%

You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ________ and the line of best fit has a ___

C) all fall on the line of best fit; negative slope

Which of the following are not true about CAPM?
I. All stocks have the same returns.
II. All investors choose one market portfolio.
III. Market expect return is related to the idiosyncratic risk.
IV. Stock expect return depends on market expected return
A

A) I, and III only

In the context of the capital asset pricing model, the systematic measure of risk is captured by ________.
A) beta
B) unique risk
C) the variance of returns
D) the standard deviation of returns

A) beta

If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing ________ and ________.
A) expected returns to rise; risk premiums to rise
B) expected returns to fall; risk premiums to rise
C) expected returns to ri

D) expected returns to fall; risk premiums to fall

According to the capital asset pricing model, fairly priced securities have ________.
A) positive alphas
B) positive betas
C) zero alphas
D) negative betas

C) zero alphas

You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?
A) 1
B) 1.048
C)

B) 1.048

Expected return of the multifactor model depends on which of the following elements
1) Beta of the first factor
2) Beta of the second factor
3) Risk premium of both factors
A) 1 only
B) 1 and 2 only
C) 1, 2, and 3
D) None of them

C) 1, 2, and 3

A stock has 20% return, with market return 25% return. What do we know about this stock?
A) Idiosyncratic risk of the stock is high.
B) Systematic risk of the stock is low.
C) The stock has very high alpha.
D) The market is not efficient.

B) Systematic risk of the stock is low.

Which is the following is not the benefit to assume return follows a normal distribution?
A) Real returns are close to a normal distribution.
B) Normal distribution only depends on two parameters.
C) Risk of return can be capture by normal distribution.
D

B) Normal distribution only depends on two parameters.