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Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?


A) Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market.
B) The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved.
C) Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio.
D) The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified.
E) Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

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

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If the economy is normal, Charleston Freight stock is expected to return 16.5 percent.If the economy falls into a recession, the stock's return is projected at a negative 11.6 percent.The probability of a normal economy is 80 percent while the probability of a recession is 20 percent.What is the variance of the returns on this stock?


A) 0.010346
B) 0.012634
C) 0.013420
D) 0.013927
E) 0.014315

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

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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.E(r) = 0.043 + 1.14 (0.1201 - 0.043) = 13.09 percent

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

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A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent.What type of risk does this news flash represent?


A) portfolio
B) nondiversifiable
C) market
D) unsystematic
E) total

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

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Explain the difference between systematic and unsystematic risk.Also explain why one of these types of risks is rewarded with a risk premium while the other type is not.

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Unsystematic, or diversifiable, risk aff...

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Which one of the following is the best example of a diversifiable risk?


A) interest rates increase
B) energy costs increase
C) core inflation increases
D) a firm's sales decrease
E) taxes decrease

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

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Which of the following statements concerning risk are correct? I.Nondiversifiable risk is measured by beta. II.The risk premium increases as diversifiable risk increases. III.Systematic risk is another name for nondiversifiable risk. IV.Diversifiable risks are market risks you cannot avoid.


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

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

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

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The market has an expected rate of return of 11.2 percent.The long-term government bond is expected to yield 5.8 percent and the U.S.Treasury bill is expected to yield 3.9 percent.The inflation rate is 3.6 percent.What is the market risk premium?


A) 6.0 percent
B) 7.3 percent
C) 7.6 percent
D) 8.5 percent
E) 9.3 percent

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

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Explain how the slope of the security market line is determined and why every stock that is correctly priced, according to CAPM, will lie on this line.

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The market risk premium is the slope of ...

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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) C) and D)
G) A) and D)

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What is the expected return of an equally weighted portfolio comprised of the following three stocks? What is the expected return of an equally weighted portfolio comprised of the following three stocks? A) 16.33 percent B) 18.60 percent C) 19.67 percent D) 20.48 percent E) 21.33 percent


A) 16.33 percent
B) 18.60 percent
C) 19.67 percent
D) 20.48 percent
E) 21.33 percent

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

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Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium is 8.8 percent? Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium is 8.8 percent? A) A B) B C) C D) D E) E


A) A
B) B
C) C
D) D
E) E

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

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Suppose you observe the following situation: Suppose you observe the following situation: Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21.What is the expected market risk premium? A) 8.8 percent B) 9.5 percent C) 12.6 percent D) 17.9 percent E) 20.0 percent Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21.What is the expected market risk premium?


A) 8.8 percent
B) 9.5 percent
C) 12.6 percent
D) 17.9 percent
E) 20.0 percent

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

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The common stock of Jensen Shipping has an expected return of 14.7 percent.The return on the market is 10.8 percent and the risk-free rate of return is 3.8 percent.What is the beta of this stock?


A) .92
B) 1.23
C) 1.33
D) 1.41
E) 1.56

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

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According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:


A) amount of total risk assumed and the market risk premium.
B) market risk premium and the amount of systematic risk inherent in the security.
C) risk free rate, the market rate of return, and the standard deviation of the security.
D) beta of the security and the market rate of return.
E) standard deviation of the security and the risk-free rate of return.

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

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If a stock portfolio is well diversified, then the portfolio variance:


A) will equal the variance of the most volatile stock in the portfolio.
B) may be less than the variance of the least risky stock in the portfolio.
C) must be equal to or greater than the variance of the least risky stock in the portfolio.
D) will be a weighted average of the variances of the individual securities in the portfolio.
E) will be an arithmetic average of the variances of the individual securities in the portfolio.

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

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Which one of the following is most directly affected by the level of systematic risk in a security?


A) variance of the returns
B) standard deviation of the returns
C) expected rate of return
D) risk-free rate
E) market risk premium

F) None of the above
G) All of the above

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

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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) A) and E)
G) B) and D)

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