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Exam 13: Return, Risk, and the Security Market Line

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Question 51

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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

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

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Question 52

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The standard deviation of a portfolio:

A) is a weighted average of the standard deviations of the individual securities held in the portfolio.
B) can never be less than the standard deviation of the most risky security in the portfolio.
C) must be equal to or greater than the lowest standard deviation of any single security held in the portfolio.
D) is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio.
E) can be less than the standard deviation of the least risky security in the portfolio.

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

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Question 53

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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

You would like to combine a risky stock with a beta of 1.68 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in the risky stock?

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?

The expected return on a portfolio considers which of the following factors? I. percentage of the portfolio invested in each individual security II. projected states of the economy III. the performance of each security given various economic states IV. probability of occurrence for each state of the economy

A stock with an actual return that lies above the security market line has:

The systematic risk of the market is measured by:

Which one of the following is represented by the slope of the security market line?

The expected risk premium on a stock is equal to the expected return on the stock minus the:

You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 8 percent. Your goal is to create a portfolio with an expected return of 12.4 percent. All money must be invested. How much will you invest in stock X?

What is the expected return on a portfolio comprised of $6,200 of stock M and $4,500 of stock N if the economy enjoys a boom period?

What is the beta of the following portfolio?

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 1.62. What is the risk-free rate of return?

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

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?

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.

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.

The common stock of Jensen Shipping has an expected return of 16.3 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?

Which of the following statements are correct concerning diversifiable risks? I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk.