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A stock has a beta of 1.37 and an expected return of 16.6 percent. The risk-free rate is 4.8 percent. What is the slope of the security market line?


A) 6.49 percent
B) 7.28 percent
C) 8.61 percent
D) 9.23 percent
E) 9.99 percent

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

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Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives?


A) Invest the entire $5,000 in a stock with a beta of 1.0
B) Invest $2,500 in a stock with a beta of 1.98 and $2,500 in a stock with a beta of 1.0
C) Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0
D) Invest $2,500 in a stock with a beta of 1.0, $1,250 in a risk-free asset, and $1,250 in a stock with a beta of 2.0
E) Invest $2,000 in a stock with a beta of 3, $2,000 in a risk-free asset, and $1,000 in a stock with a beta of 1.0

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

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Which one of the following statements is correct?


A) A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0.
B) Any portfolio that is correctly valued will have a beta of 1.0.
C) A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a security market line graph.
D) A risk-free security plots at the origin on a security market line graph.
E) An underpriced security will plot above the security market line.

F) None of the above
G) B) and E)

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Given the following information, what is the variance of the returns on this stock? Given the following information, what is the variance of the returns on this stock? A) 0.021387 B) 0.021449 C) 0.021506 D) 0.021538 E) 0.0215641


A) 0.021387
B) 0.021449
C) 0.021506
D) 0.021538
E) 0.0215641

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

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Currently, the risk-free rate is 3.5 percent. Stock A has an expected return of 9.6 percent and a beta of 1.08. Stock B has an expected return of 13.5 percent. The stocks have equal reward-to-risk ratios. What is the beta of stock B?


A) 1.21
B) 1.33
C) 1.52
D) 1.68
E) 1.77

F) None of the above
G) A) and D)

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The security market line is a linear function which is graphed by plotting data points based on the relationship between which two of the following variables?


A) Risk-free rate and beta
B) Market rate of return and beta
C) Market rate of return and the risk-free rate
D) Risk-free rate and the market rate of return
E) Expected return and beta

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

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Which one of the following is an example of systematic risk?


A) Major layoff by a regional manufacturer of power boats
B) Increase in consumption created by a reduction in personal tax rates
C) Surprise firing of a firm's chief financial officer
D) Closure of a major retail chain of stores
E) Product recall by one manufacturer

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

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Which one of the following statements related to the security market line is correct?


A) An underpriced security will plot below the security market line.
B) A security with a beta of 1.54 will plot on the security market line if it is correctly priced.
C) A portfolio with a beta of 0.93 will plot to the right of the overall market.
D) A security with a beta of 0.99 will plot above the security market line if it is correctly priced.
E) A risk-free security will plot at the origin.

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

Correct Answer

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The capital asset pricing model:


A) assumes the market has a beta of zero.
B) rewards investors based on total risk.
C) considers the time value of money.
D) applies to portfolios but not to individual securities.
E) assumes the market risk premium is constant over time.

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

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The expected rate of return on Delaware Shores, Inc. stock is based on three possible states of the economy. These states are boom, normal, and recession which have probabilities of occurrence of 20 percent, 75 percent, and 5 percent, respectively. Which one of the following statements is correct concerning the variance of the returns on this stock?


A) The variance must decrease if the probability of occurrence for a boom increases.
B) The variance will remain constant as long as the sum of the economic probabilities is 100 percent.
C) The variance can be positive, zero, or negative, depending on the expected rate of return assigned to each economic state.
D) The variance must be positive provided that each state of the economy produces a different expected rate of return.
E) The variance is independent of the economic probabilities of occurrence.

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

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You currently own a portfolio valued at $56,000 that has a beta of 1.25. You have another $10,000 to invest and would like to invest it in a manner such that the portfolio beta decreases to 1.20. What does the beta of the new investment have to be?


A) 0.74
B) 0.79
C) 0.86
D) 0.92
E) 1.00

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

Correct Answer

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Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else constant?


A) An increase in the risk level of that security as measured by the standard deviation
B) An increase in the risk-free rate given a security beta of 1.42
C) A decrease in the market rate of return given a security beta of 1.13
D) A decrease in the market rate of return given a security beta of .78
E) A decrease in the risk-free rate given a security beta of 1.06

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

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You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.04 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?


A) 1.37
B) 1.54
C) 1.96
D) 2.30
E) 2.97

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

Correct Answer

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A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?


A) An increase in the rate of return in a recessionary economy
B) An increase in the probability of an economic boom
C) A decrease in the probability of a recession occurring
D) A decrease in the probability of an economic boom
E) An increase in the rate of return for a normal economy

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

Correct Answer

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Which one of the following is the vertical intercept of the security market line?


A) Market rate of return
B) Individual security rate of return
C) Market risk premium
D) Individual security beta multiplied by the market risk premium
E) Risk-free rate

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

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Portfolio diversification eliminates which one of the following?


A) Total investment risk
B) Portfolio risk premium
C) Market risk
D) Unsystematic risk
E) Reward for bearing risk

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

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Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio:


A) for the portfolio must equal 1.0.
B) for the portfolio must be less than the market risk premium.
C) for each security must equal zero.
D) of each security is equal to the risk-free rate.
E) of each security must equal the slope of the security market line.

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

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Given the following information, what is the standard deviation of the returns on a portfolio that is invested 40 percent in stock A, 35 percent in stock B, and the remainder in stock C? Given the following information, what is the standard deviation of the returns on a portfolio that is invested 40 percent in stock A, 35 percent in stock B, and the remainder in stock C? A) 11.86 percent B) 12.72 percent C) 13.16 percent D) 13.43 percent E) 13.57 percent


A) 11.86 percent
B) 12.72 percent
C) 13.16 percent
D) 13.43 percent
E) 13.57 percent

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

Correct Answer

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A stock has a beta of 1.56 and an expected return of 17.3 percent. A risk-free asset currently earns 5.1 percent. If a portfolio of the two assets has a beta of 1.06, what are the portfolio weights?


A) Stock weight = 0.28; risk-free weight = 0.72
B) Stock weight = 0.032; risk-free weight = 0.68
C) Stock weight = 0.44; risk-free weight = 0.56
D) Stock weight = 0.68; risk-free weight = 0.32
E) Stock weight = 0.72; risk-free weight = 0.28

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

Correct Answer

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Which one of the following is the computation of the risk premium for an individual security? Which one of the following is the computation of the risk premium for an individual security? is the expected return on the security, is the risk-free rate, is the security's beta, and is the expected rate of return on the market. A) B) C) D) E) is the expected return on the security, Which one of the following is the computation of the risk premium for an individual security? is the expected return on the security, is the risk-free rate, is the security's beta, and is the expected rate of return on the market. A) B) C) D) E) is the risk-free rate, Which one of the following is the computation of the risk premium for an individual security? is the expected return on the security, is the risk-free rate, is the security's beta, and is the expected rate of return on the market. A) B) C) D) E) is the security's beta, and Which one of the following is the computation of the risk premium for an individual security? is the expected return on the security, is the risk-free rate, is the security's beta, and is the expected rate of return on the market. A) B) C) D) E) is the expected rate of return on the market.


A) Which one of the following is the computation of the risk premium for an individual security? is the expected return on the security, is the risk-free rate, is the security's beta, and is the expected rate of return on the market. A) B) C) D) E)
B) Which one of the following is the computation of the risk premium for an individual security? is the expected return on the security, is the risk-free rate, is the security's beta, and is the expected rate of return on the market. A) B) C) D) E)
C) Which one of the following is the computation of the risk premium for an individual security? is the expected return on the security, is the risk-free rate, is the security's beta, and is the expected rate of return on the market. A) B) C) D) E)
D) Which one of the following is the computation of the risk premium for an individual security? is the expected return on the security, is the risk-free rate, is the security's beta, and is the expected rate of return on the market. A) B) C) D) E)
E) Which one of the following is the computation of the risk premium for an individual security? is the expected return on the security, is the risk-free rate, is the security's beta, and is the expected rate of return on the market. A) B) C) D) E)

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

Correct Answer

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