You are considering a portfolio consisting of equal investments in the stocks Northbank Inc. and Tropical Escapes Inc. Returns on the 2 stocks under various conditions are shown below.
Scenario Return (%) Return % Return %
Probability Northbank Tropical Portfolio
0.20 4% 16%
0.50 10% 10%
0.30 20% -10%
Calculate the expected rate of and the standard deviation return of the portfolio.
Answer: In every scenario, the return on the portfolio is 10% so the expected return must also be 10% and the standard deviation is 0%.
The capital asset pricing model
A) provides a risk-return trade-off in which risk is measured in terms of the market returns.
B) provides a risk-return trade-off in which risk is measured in terms of beta.
C) measures risk as the correlation coefficient between a security and market rates of return.
D) depicts the total risk of a security.
The appropriate measure for risk according to the capital asset pricing model is
A) the standard deviation of a firm's cash flows.
B) alpha.
C) beta.
D) probability of correlation.
You are considering investing in Ford Motor Company. Which of the following is an example of diversifiable risk?
A) Risk resulting from the possibility of a stock market crash
B) Risk resulting from uncertainty regarding a possible strike against Ford
C) Risk resulting from an expected recession
D) Risk resulting from interest rates decreasing
On average, when the overall market changes by 10%, the stock of Veracity Communications changes 12%. What is Veracity's beta?
A) 1.2
B) 8.33%
C) 12%
D) Insufficient information is provided
Which of the following has a beta of zero?
A) A risk-free asset
B) The market
C) A high-risk asset
D) Both A and B
Beta is a statistical measure of
A) hyperbolic.
B) total risk.
C) the standard deviation.
D) the relationship between an investment's returns and the market return.
A stock's beta is a measure of its
A) systematic risk.
B) unsystematic risk.
C) company-specific risk.
D) diversifiable risk.
