Question 1

The systematic risk (beta)of a portfolio is ________ by holding more stocks,even if they each had the same systematic risk.

Accepted Answer

Systematic risk (beta) of a portfolio remains unchanged by holding more stocks, even if they each had the same systematic risk, because systematic risk is inherent to the entire market or market segment and cannot be diversified away by adding more stocks of the same risk level.

Question 2

WestJet stock has a beta of 1.5.If the risk-free rate is 2.4%,and the expected market return is 10%,what is the expected return of WestJet stock,according to the CAPM?

Accepted Answer

The expected return of WestJet stock can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: Expected Return = 2.4% + 1.5 * (10% - 2.4%) = 2.4% + 1.5 * 7.6% = 2.4% + 11.4% = 13.8%.

Question 3

The security market line is a graph of the expected return of a stock as a function of systematic risk (beta).

Accepted Answer

The security market line is a graph that plots the expected return of a stock or portfolio against the market risk premium, which is the difference between the expected return on the market and the risk-free rate of return. The slope of the security market line is the market risk premium, and the y-intercept is the risk-free rate of return. The systematic risk or beta of the stock or portfolio is represented on the x-axis. Therefore, option A is correct.

Question 4

Your portfolio contains $33,000 of CP Rail Stock,which has a beta of 1.3,and $41,000 of Lululemon stock,which has a beta of 1.05.What is the beta of your portfolio?

Accepted Answer

The answer of Your portfolio contains $33,000 of CP Rail...

Question 5

Loblaw's stock has a beta of 0.9,while Bombardier stock has a beta of 1.35.If the risk-free rate is 2%,and the market risk premium is 8%,what is the expected return on a portfolio with equal holdings of Loblaw's and Bombardier?

Accepted Answer

The answer of Loblaw's stock has a beta of 0.9,while...

Question 6

Barrick Gold Corp stock has a beta of 2.1.If the risk-free rate is 2.6%,and expected market return is 9%,what is the expected return of Barrick Gold Corp stock,according to the CAPM?

Accepted Answer

The expected return according to the CAPM is calculated as: Risk-free rate + Beta * (Market return - Risk-free rate) = 2.6% + 2.1 * (9% - 2.6%) = 16%.

Question 7

The expected return on your of your investment is closest to:

Accepted Answer

The expected return is the average return that you can expect to receive from your investment over time. It is calculated by multiplying the probability of each possible return by the amount of that return. In this case, the expected return is 18%.

Question 8

Your portfolio contains $12,000 of BMO stock,which has a beta of 1.1,and $18,000 of Lululemon stock,which has a beta of 1.4.What is the beta of your portfolio?

Accepted Answer

To calculate the beta of the portfolio, we need to take a weighted average of the individual stock betas, using the proportion of each stock's value in the total portfolio value as the weight.

Beta of Portfolio = (Beta of BMO x Value of BMO stock in the portfolio / Total Portfolio Value) + (Beta of Lululemon x Value of Lululemon stock in the portfolio / Total Portfolio Value)

Beta of Portfolio = (1.1 x 12000/30000) + (1.4 x 18000/30000) = 0.44 + 0.84 = 1.28

Therefore, the answer is C)1.28.

Question 9

CIBC stock has a beta of 1.2.If the risk-free rate is 1.8%,and the market risk premium is 6.5%,what is the expected return of CIBC stock,according to the CAPM?

Accepted Answer

The CAPM formula is: Expected Return = Risk-Free Rate + Beta x Market Risk Premium.

Plugging in the given values: 
Expected Return = 1.8% + 1.2 x 6.5% 
Expected Return = 1.8% + 7.8% 
Expected Return = 9.6%

Therefore, the expected return of CIBC stock according to the CAPM is 9.6%. The answer is (C).

Question 10

Historically,the average excess return of the S&P/TSX Composite Index over the return of Government of Canada bonds has been ________ and is a proxy for the market risk premium.

Accepted Answer

Historically, the average excess return of the S&P/TSX Composite Index over Government of Canada bonds has been between 4% and 6%, which is used as a proxy for the market risk premium.

Question 11

The volatility of your investment is closest to:

Accepted Answer

The volatility of an investment is a measure of its risk. It is calculated as the standard deviation of the investment's returns. The higher the volatility, the riskier the investment. In this case, the volatility of the investment is closest to 40%.

Question 12

The expected return is usually ________ the baseline risk-free rate of return that we demand to compensate for inflation and time value of money.

Accepted Answer

The expected return is usually higher than the baseline risk-free rate of return that we demand to compensate for inflation and time value of money. This is because investors expect to earn a premium for taking on additional risk beyond the risk-free rate.

Question 13

RBC stock has a beta of 0.85,while TD stock has a beta of 1.21.The risk-free rate is 1.5%,and the expected return on a portfolio with 50% weight in RBC and the remainder in TD is 9.74%.What is the market risk premium?

Accepted Answer

The answer of RBC stock has a beta of 0.85,while...

Question 14

The Capital Asset Pricing Model asserts that the ________ return is equal to the risk-free rate plus a risk premium for systematic risk.

Accepted Answer

The Capital Asset Pricing Model (CAPM) states that the expected return of an asset is equal to the risk-free rate plus a risk premium for systematic risk. Therefore, option B, "expected return" is the correct answer. However, options A, C, D, and E are not accurate because they refer to different types of returns that are not directly related to the CAPM.

Question 15

Assume that the ETF you invested in returns -10%.Then the realized return on your investment is closest to:

Accepted Answer

The answer of Assume that the ETF you invested in...

Question 16

The Capital Asset Pricing Model (CAPM)says that the excess return on a stock is equal to its beta times the market risk premium.

Accepted Answer

The CAPM states that the expected excess return of a security over the risk-free rate is proportional to its beta (systematic risk) and the market risk premium (the difference between the expected return on the market and the risk-free rate). Therefore, the excess return on a stock is equal to its beta times the market risk premium.

Question 17

Potash Corp stock has a beta of 1.2,while Tim Horton's stock has a beta of 1.7.If the risk-free rate is 2.2%,and the market risk premium is 7%,what is the expected return on a portfolio with 40% weight in Potash and the remainder in Tim Horton's?

Accepted Answer

The answer of Potash Corp stock has a beta of...

Question 18

Blackberry stock has a beta of 1.7.If the risk-free rate is 2.1%,and the market risk premium is 7%,what is the expected return of Blackberry stock,according to the CAPM?

Accepted Answer

The expected return of Blackberry stock according to the CAPM is calculated using the formula: Expected Return = Risk-Free Rate + Beta * Market Risk Premium. Plugging in the values: 2.1% + 1.7 * 7% = 14%.

Question 19

Your portfolio contains $20,000 of Air Canada stock,which has a beta of 1.4,and $30,000 of WestJet stock,which has a beta of 1.8.What is the beta of your portfolio?

Accepted Answer

Beta of portfolio= (Weight of Air Canada x Beta of Air Canada) + (Weight of WestJet x Beta of WestJet)
                = [(20,000/50,000) x 1.4] + [(30,000/50,000) x 1.8]
                = 0.56 + 1.08
                = 1.64

Therefore, the answer is A) 1.64.

Question 20

Potash Corp stock has a beta of 1.1,while Tim Horton's stock has a beta of 1.4.The risk-free rate is 1.9%,and the expected return on a portfolio with 30% weight in Potash and the remainder in Tim Horton's is 9.76%.What is the market risk premium?

Accepted Answer

First, we need to calculate the expected return of each stock using the Capital Asset Pricing Model (CAPM):

Expected return of Potash Corp = 1.9% + 1.1*(Market Risk Premium)
Expected return of Tim Horton's = 1.9% + 1.4*(Market Risk Premium)

Next, we can use the expected returns and portfolio weight to calculate the overall expected return:

0.30*(Expected return of Potash Corp) + 0.70*(Expected return of Tim Horton's) = 9.76%

Substituting the CAPM equations, we get:

0.30*(1.9% + 1.1*(Market Risk Premium)) + 0.70*(1.9% + 1.4*(Market Risk Premium)) = 9.76%

Solving for Market Risk Premium, we get:

Market Risk Premium = 6%

Therefore, the answer is C) 6%.

Quiz 11: Systematic Risk and the Equity Risk Premium

The systematic risk (beta) of a portfolio is ________ by holding more stocks,even if they each had the same systematic risk.