# Quiz 13: Cost of Capital

Business

Q 1Q 1

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?
A)arithmetic return
B)historical return
C)expected return
D)geometric return
E)required return

Free

Multiple Choice

C

Q 2Q 2

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total.Which one of the following terms most applies to Suzie's investments?
A)index
B)portfolio
C)collection
D)grouping
E)risk-free

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Multiple Choice

B

Q 3Q 3

Steve has invested in twelve different stocks that have a combined value today of $121,300.Fifteen percent of that total is invested in Wise Man Foods.The 15 percent is a measure of which one of the following?
A)portfolio return
B)portfolio weight
C)degree of risk
D)price-earnings ratio
E)index value

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Multiple Choice

B

Q 4Q 4

Which one of the following is a risk that applies to most securities?
A)unsystematic
B)diversifiable
C)systematic
D)asset-specific
E)total

Free

Multiple Choice

Q 5Q 5

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

Free

Multiple Choice

Q 6Q 6

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.

Free

Multiple Choice

Q 7Q 7

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.
A)efficient markets hypothesis
B)systematic risk principle
C)open markets theorem
D)law of one price
E)principle of diversification

Free

Multiple Choice

Q 8Q 8

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?
A)beta
B)reward-to-risk ratio
C)risk ratio
D)standard deviation
E)price-earnings ratio

Free

Multiple Choice

Q 9Q 9

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?
A)reward-to-risk matrix
B)portfolio weight graph
C)normal distribution
D)security market line
E)market real returns

Free

Multiple Choice

Q 10Q 10

Which one of the following is represented by the slope of the security market line?
A)reward-to-risk ratio
B)market standard deviation
C)beta coefficient
D)risk-free interest rate
E)market risk premium

Free

Multiple Choice

Q 11Q 11

Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?
A)capital asset pricing model
B)time value of money equation
C)unsystematic risk equation
D)market performance equation
E)expected risk formula

Free

Multiple Choice

Q 12Q 12

Treynor Industries is investing in a new project.The minimum rate of return the firm requires on this project is referred to as the:
A)average arithmetic return.
B)expected return.
C)market rate of return.
D)internal rate of return.
E)cost of capital.

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Multiple Choice

Q 13Q 13

The expected return on a stock given various states of the economy is equal to the:
A)highest expected return given any economic state.
B)arithmetic average of the returns for each economic state.
C)summation of the individual expected rates of return.
D)weighted average of the returns for each economic state.
E)return for the economic state with the highest probability of occurrence.

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Multiple Choice

Q 14Q 14

The expected return on a stock computed using economic probabilities is:
A)guaranteed to equal the actual average return on the stock for the next five years.
B)guaranteed to be the minimal rate of return on the stock over the next two years.
C)guaranteed to equal the actual return for the immediate twelve month period.
D)a mathematical expectation based on a weighted average and not an actual anticipated outcome.
E)the actual return you should anticipate as long as the economic forecast remains constant.

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Multiple Choice

Q 15Q 15

The expected risk premium on a stock is equal to the expected return on the stock minus the:
A)expected market rate of return.
B)risk-free rate.
C)inflation rate.
D)standard deviation.
E)variance.

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Multiple Choice

Q 16Q 16

Standard deviation measures which type of risk?
A)total
B)nondiversifiable
C)unsystematic
D)systematic
E)economic

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Multiple Choice

Q 17Q 17

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:
A)number of shares owned of each stock.
B)market price per share of each stock.
C)market value of the investment in each stock.
D)original amount invested in each stock.
E)cost per share of each stock held.

Free

Multiple Choice

Q 18Q 18

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

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Multiple Choice

Q 19Q 19

The expected return on a portfolio:
I)can never exceed the expected return of the best performing security in the portfolio.
II)must be equal to or greater than the expected return of the worst performing security in the portfolio.
III)is independent of the unsystematic risks of the individual securities held in the portfolio.
IV)is independent of the allocation of the portfolio amongst individual securities.
A)I and III only
B)II and IV only
C)I and II only
D)I, II, and III only
E)I, II, III, and IV

Free

Multiple Choice

Q 20Q 20

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.

Free

Multiple Choice

Q 21Q 21

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.

Free

Multiple Choice

Q 22Q 22

The standard deviation of a portfolio:
A)is a measure of that portfolio's systematic risk.
B)is a weighed average of the standard deviations of the individual securities held in that portfolio.
C)measures the amount of diversifiable risk inherent in the portfolio.
D)serves as the basis for computing the appropriate risk premium for that portfolio.
E)can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

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Multiple Choice

Q 23Q 23

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.

Free

Multiple Choice

Q 24Q 24

Which one of the following events would be included in the expected return on Sussex stock?
A)The chief financial officer of Sussex unexpectedly resigned.
B)The labor union representing Sussex' employees unexpectedly called a strike.
C)This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated.
D)The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets.
E)The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.

Free

Multiple Choice

Q 25Q 25

Which one of the following statements is correct?
A)The unexpected return is always negative.
B)The expected return minus the unexpected return is equal to the total return.
C)Over time, the average return is equal to the unexpected return.
D)The expected return includes the surprise portion of news announcements.
E)Over time, the average unexpected return will be zero.

Free

Multiple Choice

Q 26Q 26

Which one of the following statements related to unexpected returns is correct?
A)All announcements by a firm affect that firm's unexpected returns.
B)Unexpected returns over time have a negative effect on the total return of a firm.
C)Unexpected returns are relatively predictable in the short-term.
D)Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term.
E)Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

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Multiple Choice

Q 27Q 27

Which one of the following is an example of systematic risk?
A)investors panic causing security prices around the globe to fall precipitously
B)a flood washes away a firm's warehouse
C)a city imposes an additional one percent sales tax on all products
D)a toymaker has to recall its top-selling toy
E)corn prices increase due to increased demand for alternative fuels

Free

Multiple Choice

Q 28Q 28

Unsystematic risk:
A)can be effectively eliminated by portfolio diversification.
B)is compensated for by the risk premium.
C)is measured by beta.
D)is measured by standard deviation.
E)is related to the overall economy.

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Multiple Choice

Q 29Q 29

Which one of the following is an example of unsystematic risk?
A)income taxes are increased across the board
B)a national sales tax is adopted
C)inflation decreases at the national level
D)an increased feeling of prosperity is felt around the globe
E)consumer spending on entertainment decreased nationally

Free

Multiple Choice

Q 30Q 30

Which one of the following is least apt to reduce the unsystematic risk of a portfolio?
A)reducing the number of stocks held in the portfolio
B)adding bonds to a stock portfolio
C)adding international securities into a portfolio of U.S.stocks
D)adding U.S.Treasury bills to a risky portfolio
E)adding technology stocks to a portfolio of industrial stocks

Free

Multiple Choice

Q 31Q 31

Which one of the following statements is correct concerning unsystematic risk?
A)An investor is rewarded for assuming unsystematic risk.
B)Eliminating unsystematic risk is the responsibility of the individual investor.
C)Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk.
D)Beta measures the level of unsystematic risk inherent in an individual security.
E)Standard deviation is a measure of unsystematic risk.

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Multiple Choice

Q 32Q 32

Which one of the following statements related to risk is correct?
A)The beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio.
B)Every portfolio that contains 25 or more securities is free of unsystematic risk.
C)The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.
D)Adding five additional stocks to a diversified portfolio will lower the portfolio's beta.
E)Stocks that move in tandem with the overall market have zero betas.

Free

Multiple Choice

Q 33Q 33

Which one of the following risks is irrelevant to a well-diversified investor?
A)systematic risk
B)unsystematic risk
C)market risk
D)nondiversifiable risk
E)systematic portion of a surprise

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Multiple Choice

Q 34Q 34

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

Free

Multiple Choice

Q 35Q 35

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

Free

Multiple Choice

Q 36Q 36

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

Free

Multiple Choice

Q 37Q 37

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

Free

Multiple Choice

Q 38Q 38

The primary purpose of portfolio diversification is to:
A)increase returns and risks.
B)eliminate all risks.
C)eliminate asset-specific risk.
D)eliminate systematic risk.
E)lower both returns and risks.

Free

Multiple Choice

Q 39Q 39

Which one of the following indicates a portfolio is being effectively diversified?
A)an increase in the portfolio beta
B)a decrease in the portfolio beta
C)an increase in the portfolio rate of return
D)an increase in the portfolio standard deviation
E)a decrease in the portfolio standard deviation

Free

Multiple Choice

Q 40Q 40

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?
A)5
B)10
C)25
D)50
E)75

Free

Multiple Choice

Q 41Q 41

Systematic risk is measured by:
A)the mean.
B)beta.
C)the geometric average.
D)the standard deviation.
E)the arithmetic average.

Free

Multiple Choice

Q 42Q 42

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

Free

Multiple Choice

Q 43Q 43

Which one of the following statements is correct concerning a portfolio beta?
A)Portfolio betas range between -1.0 and +1.0.
B)A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.
C)A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification.
D)A portfolio of U.S.Treasury bills will have a beta of +1.0.
E)The beta of a market portfolio is equal to zero.

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Multiple Choice

Q 44Q 44

The systematic risk of the market is measured by:
A)a beta of 1.0.
B)a beta of 0.0.
C)a standard deviation of 1.0.
D)a standard deviation of 0.0.
E)a variance of 1.0.

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Multiple Choice

Q 45Q 45

At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset?
I)asset's standard deviation
II)asset's beta
III)risk-free rate of return
IV)market risk premium
A)I and III only
B)II and IV only
C)III and IV only
D)I, III, and IV only
E)I, II, III, and IV

Free

Multiple Choice

Q 46Q 46

Total risk is measured by _____ and systematic risk is measured by _____.
A)beta; alpha
B)beta; standard deviation
C)alpha; beta
D)standard deviation; beta
E)standard deviation; variance

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Multiple Choice

Q 47Q 47

The intercept point of the security market line is the rate of return which corresponds to:
A)the risk-free rate.
B)the market rate.
C)a return of zero.
D)a return of 1.0 percent.
E)the market risk premium.

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Multiple Choice

Q 48Q 48

A stock with an actual return that lies above the security market line has:
A)more systematic risk than the overall market.
B)more risk than that warranted by CAPM.
C)a higher return than expected for the level of risk assumed.
D)less systematic risk than the overall market.
E)a return equivalent to the level of risk assumed.

Free

Multiple Choice

Q 49Q 49

The market rate of return is 11 percent and the risk-free rate of return is 3 percent.Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent.This stock:
A)is underpriced.
B)is correctly priced.
C)will plot below the security market line.
D)will plot on the security market line.
E)will plot to the right of the overall market on a security market line graph.

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Multiple Choice

Q 50Q 50

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?
A)variance
B)standard deviation
C)reward-to-risk ratio
D)beta
E)risk premium

Free

Multiple Choice

Q 51Q 51

The market risk premium is computed by:
A)adding the risk-free rate of return to the inflation rate.
B)adding the risk-free rate of return to the market rate of return.
C)subtracting the risk-free rate of return from the inflation rate.
D)subtracting the risk-free rate of return from the market rate of return.
E)multiplying the risk-free rate of return by a beta of 1.0.

Free

Multiple Choice

Q 52Q 52

The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:
A)market risk premium.
B)risk premium.
C)systematic return.
D)total return.
E)real rate of return.

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Multiple Choice

Q 53Q 53

The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.
A)real return
B)actual return
C)nominal return
D)risk premium
E)expected return

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Multiple Choice

Q 54Q 54

The capital asset pricing model (CAPM) assumes which of the following?
I)a risk-free asset has no systematic risk.
II)beta is a reliable estimate of total risk.
III)the reward-to-risk ratio is constant.
IV)the market rate of return can be approximated.
A)I and III only
B)II and IV only
C)I, III, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Free

Multiple Choice

Q 55Q 55

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.

Free

Multiple Choice

Q 56Q 56

Which one of the following should earn the most risk premium based on CAPM?
A)diversified portfolio with returns similar to the overall market
B)stock with a beta of 1.38
C)stock with a beta of 0.74
D)U.S.Treasury bill
E)portfolio with a beta of 1.01

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Multiple Choice

Q 57Q 57

You want your portfolio beta to be 0.90.Currently, your portfolio consists of $4,000 invested in stock A with a beta of 1.47 and $3,000 in stock B with a beta of 0.54.You have another $9,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset.How much should you invest in the risk-free asset?
A)$3,965.52
B)$4,425.29
C)$4,902.29
D)$5,034.48
E)$5,683.92

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Multiple Choice

Q 58Q 58

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

Free

Multiple Choice

Q 59Q 59

The common stock of Manchester & Moore is expected to earn 13 percent in a recession, 6 percent in a normal economy, and lose 4 percent in a booming economy.The probability of a boom is 5 percent while the probability of a recession is 45 percent.What is the expected rate of return on this stock?
A)8.52 percent
B)8.74 percent
C)8.65 percent
D)9.05 percent
E)9.28 percent

Free

Multiple Choice

Q 60Q 60

Jerilu Markets has a beta of 1.09.The risk-free rate of return is 2.75 percent and the market rate of return is 9.80 percent.What is the risk premium on this stock?
A)6.47 percent
B)7.03 percent
C)7.68 percent
D)8.99 percent
E)9.80 percent

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Multiple Choice

Q 61Q 61

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

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Multiple Choice

Q 62Q 62

The rate of return on the common stock of Lancaster Woolens is expected to be 21 percent in a boom economy, 11 percent in a normal economy, and only 3 percent in a recessionary economy.The probabilities of these economic states are 10 percent for a boom, 70 percent for a normal economy, and 20 percent for a recession.What is the variance of the returns on this common stock?
A)0.002150
B)0.002606
C)0.002244
D)0.002359
E)0.002421

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Multiple Choice

Q 63Q 63

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

Free

Multiple Choice

Q 64Q 64

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

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Multiple Choice

Q 65Q 65

You own the following portfolio of stocks.What is the portfolio weight of stock C?
A)39.85 percent
B)42.86 percent
C)44.41 percent
D)48.09 percent
E)52.65 percent

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Multiple Choice

Q 66Q 66

You own a portfolio with the following expected returns given the various states of the economy.What is the overall portfolio expected return?
A)6.49 percent
B)8.64 percent
C)8.87 percent
D)9.86 percent
E)10.23 percent

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Multiple Choice

Q 67Q 67

What is the expected return on a portfolio which is invested 25 percent in stock A, 55 percent in stock B, and the remainder in stock C?
A)-1.06 percent
B)2.38 percent
C)2.99 percent
D)5.93 percent
E)6.10 percent

Free

Multiple Choice

Q 68Q 68

What is the expected return on this portfolio?
A)11.48 percent
B)12.37 percent
C)13.03 percent
D)13.42 percent
E)13.97 percent

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Multiple Choice

Q 69Q 69

What is the expected return on a portfolio that is equally weighted between stocks K and L given the following information?
A)11.13 percent
B)11.86 percent
C)12.25 percent
D)13.32 percent
E)14.40 percent

Free

Multiple Choice

Q 70Q 70

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?
A)10.93 percent
B)11.16 percent
C)12.55 percent
D)12.78 percent
E)13.69 percent

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Multiple Choice

Q 71Q 71

What is the variance of the returns on a portfolio that is invested 60 percent in stock S and 40 percent in stock T?
A).000017
B).000023
C).000118
D).000136
E).000161

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Multiple Choice

Q 72Q 72

What is the variance of the returns on a portfolio comprised of $5,400 of stock G and $6,600 of stock H?
A).000709
B).000848
C).001475
D).001554
E).001568

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Multiple Choice

Q 73Q 73

What is the standard deviation of the returns on a portfolio that is invested 52 percent in stock Q and 48 percent in stock R?
A)1.66 percent
B)2.47 percent
C)2.63 percent
D)3.28 percent
E)3.41 percent

Free

Multiple Choice

Q 74Q 74

What is the standard deviation of the returns on a $30,000 portfolio which consists of stocks S and T? Stock S is valued at $21,000.
A)2.07 percent
B)2.61 percent
C)3.36 percent
D)3.49 percent
E)3.63 percent

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Multiple Choice

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Multiple Choice

Q 76Q 76

Your portfolio is comprised of 40 percent of stock X, 15 percent of stock Y, and 45 percent of stock Z.Stock X has a beta of 1.16, stock Y has a beta of 1.47, and stock Z has a beta of 0.42.What is the beta of your portfolio?
A)0.87
B)1.09
C)1.13
D)1.18
E)1.21

Free

Multiple Choice

Q 77Q 77

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?
A)32 percent
B)40 percent
C)54 percent
D)60 percent
E)68 percent

Free

Multiple Choice

Q 78Q 78

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

Free

Multiple Choice

Q 79Q 79

The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent.What is the expected rate of return on a stock with a beta of 1.21?
A)10.92 percent
B)11.40 percent
C)12.22 percent
D)12.47 percent
E)12.79 percent

Free

Multiple Choice

Q 80Q 80

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

Free

Multiple Choice

Q 81Q 81

The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent.The risk-free rate of return is 3.7 percent.What is the expected market risk premium?
A)7.02 percent
B)7.90 percent
C)10.63 percent
D)11.22 percent
E)11.60 percent

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Multiple Choice

Q 82Q 82

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 1.51.What is the risk-free rate of return?
A)2.22 percent
B)2.31 percent
C)2.42 percent
D)2.50 percent
E)2.63 percent

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Multiple Choice

Q 83Q 83

Thayer Farms stock has a beta of 1.12.The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent.What is the expected rate of return on this stock?
A)8.35 percent
B)9.01 percent
C)10.23 percent
D)13.21 percent
E)13.73 percent

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Multiple Choice

Q 84Q 84

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

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Multiple Choice

Q 85Q 85

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

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Multiple Choice

Q 86Q 86

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.2 percent and the market rate of return is 11.76 percent?
A)A
B)B
C)C
D)D
E)E

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Multiple Choice

Q 87Q 87

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?
A)$800
B)$1,200
C)$4,600
D)$8,800
E)$9,200

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Multiple Choice

Q 88Q 88

What is the expected return and standard deviation for the following stock?
A)15.49 percent; 14.28 percent
B)15.49 percent; 14.67 percent
C)18.80 percent; 14.95 percent
D)18.80 percent; 15.74 percent
E)18.80 percent'; 16.01 percent

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Multiple Choice

Q 89Q 89

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

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Multiple Choice

Q 90Q 90

You own a portfolio equally invested in a risk-free asset and two stocks.One of the stocks has a beta of 1.9 and the total portfolio is equally as risky as the market.What is the beta of the second stock?
A)0.75
B)0.80
C)0.94
D)1.00
E)1.10

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Multiple Choice

Q 91Q 91

A stock has an expected return of 11 percent, the risk-free rate is 5.2 percent, and the market risk premium is 5 percent.What is the stock's beta?
A)1.08
B)1.16
C)1.29
D)1.32
E)1.35

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Multiple Choice

Q 92Q 92

A stock has a beta of 1.2 and an expected return of 17 percent.A risk-free asset currently earns 5.1 percent.The beta of a portfolio comprised of these two assets is 0.85.What percentage of the portfolio is invested in the stock?
A)71 percent
B)77 percent
C)84 percent
D)89 percent
E)92 percent

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Multiple Choice

Q 93Q 93

Suppose you observe the following situation: Assume these securities are correctly priced.Based on the CAPM, what is the return on the market?
A)13.99 percent
B)14.42 percent
C)14.67 percent
D)14.78 percent
E)15.01 percent

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Multiple Choice

Q 94Q 94

Consider the following information on Stocks I and II: The market risk premium is 8 percent, and the risk-free rate is 3.6 percent.The beta of stock I is _____ and the beta of stock II is _____.
A)2.08; 2.47
B)2.08; 2.76
C)3.21; 3.84
D)4.47; 3.89
E)4.03; 3.71

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Multiple Choice

Q 95Q 95

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

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Multiple Choice

Q 96Q 96

According to CAPM, the expected return on a risky asset depends on three components.Describe each component and explain its role in determining expected return.

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Essay

Q 97Q 97

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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Essay

Q 98Q 98

Explain how the beta of a portfolio can equal the market beta if 50 percent of the portfolio is invested in a security that has twice the amount of systematic risk as an average risky security.

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Essay

Q 99Q 99

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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Essay

Q 100Q 100

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.

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Essay