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

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Question 41

Multiple Choice

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What is the expected return on this portfolio?

A) 11.48 percent
B) 11.92 percent
C) 13.03 percent
D) 13.42 percent
E) 13.97 percent

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Question 42

Multiple Choice

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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

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Question 43

Multiple Choice

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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?

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?

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?

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 10 percent. What is the standard deviation of the returns on this stock?

Your portfolio is invested 26 percent each in Stocks A and C, and 48 percent in Stock B. What is the standard deviation of your portfolio given the following information?

Which one of the following is a risk that applies to most securities?

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?

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.

The intercept point of the security market line is the rate of return which corresponds to:

Which one of the following statements is correct concerning unsystematic risk?

Total risk is measured by _____ and systematic risk is measured by _____.

Systematic risk is measured by:

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?

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.

You want your portfolio beta to be 0.95. 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?

The principle of diversification tells us that:

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?

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.