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

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Question 51

Multiple Choice

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The systematic risk of the market is measured by a:

A) beta of 1.
B) beta of 0.
C) standard deviation of 1.
D) standard deviation of 0.
E) variance of 1.

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

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Question 52

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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

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

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Question 53

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You have a portfolio consisting solely of Stock A and Stock B. The portfolio has an expected return of 10.2 percent. Stock A has an expected return of 11.7 percent while Stock B is expected to return 8.3 percent. What is the portfolio weight of Stock A?

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

Suppose you observe the following situation: $\begin{array}{ccc}&& \text { Expected } \\\text { Security } & \text { Beta } & \text { Retumn } \\\mathrm{A} & 1.16 & .1137 \\\mathrm{~B} & .92 & .0984\end{array}$ Assume these securities are correctly priced. Based on the CAPM, what is the return on the market?

You have $21,600 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14.3 percent and Stock Y with an expected return of 8.1 percent. Your goal is to create a portfolio with an expected return of 12.5 percent. All money must be invested. How much will you invest in Stock X?

A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12 percent. What type of risk does this news flash best represent?

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 is least apt to reduce the unsystematic risk of a portfolio?

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?

The primary purpose of portfolio diversification is to:

Jerilu Markets has a beta of 1.09. The risk-free rate of return is 3.18 percent and the market rate of return is 11.27 percent. What is the risk premium on this stock?

Which one of the following indicates a portfolio is being effectively diversified?

The standard deviation of a portfolio:

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

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

What is the expected return of an equally weighted portfolio comprised of the following three stocks? $\begin{array} { l c c c r } \text { State of } &\text { Probability of }& { \text { Rate of Return } } \\ \text { Economy } & \text { State of Economy } & { \text { if State Occurs } } \\& & \begin{array}{ll} \text { Stock A } & \text { Stock B } & \text { Stock C } \end{array} \\\text { Boom } & .25 &\begin{array}{ccc} .19 \quad \quad \quad& .13 \quad \quad & .07 \quad \quad \end{array} \\\text { Nonnal } & .72 &\begin{array}{ccc} .15 \quad \quad & .05 \quad \quad & .13 \quad \quad \end{array} \\\text { Bust } & .03 & \begin{array}{ccc} - .29 \quad \quad & - .14 \quad \quad & .22 \quad \quad \end{array}\end{array}$

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?

You own a portfolio that has $2,800 invested in Stock A and $3,250 invested in Stock B. The expected returns on these stocks are 14.7 percent and 9.3 percent, respectively. What is the expected return on the portfolio?

What is the standard deviation of the returns on a stock given the following information? $\begin{array} { l c c } { \text { State of } } & \text { Probability of } & \text { Rate of Return } \\\text { Econony } & \text { State of Economy } & \text { if State Occurs } \\\text { Boom } & .28 & .175 \\\text { Normal } & .67 & .128 \\\text { Recession } & .05 & .026\end{array}$