Your broker mailed you your year-end statement. You have $25,000 invested in Dow Chemical, $18,000 tied up in GM

Your broker mailed you your year-end statement. You have $25,000 invested in Dow Chemical, $18,000 tied up in GM, $36,000 in Microsoft stock, and $11,000 in Nike. The betas for each of your stocks are 1.55 for Dow, 1.12 for GM, 2.39 for Microsoft, and .76 for Nike. What is the beta of your portfolio?

A) 1.46

B) 1.70

C) 2.60

D) 0.41

You are considering a portfolio of three stocks with 30% of your money invested in company X, 45% of your money invested in company Y, and 25% of your money invested in company Z. If the betas for each stock are 1.22 for company X, 1.46 for company Y, and 1.03 for company Z, what is the portfolio beta?

A) 1.24

B) 1.00

C) 1.28

D) 1.33

Beta is a measurement of the relationship between a security's returns and the general market's returns.

Answer:  TRUE

Total risk equals unique security risk times systematic risk.

Answer:  FALSE

The CAPM designates the risk-return tradeoff existing in the market, where risk is defined in terms of beta.

Answer:  TRUE

It is impossible to eliminate all risk through diversification.

Answer:  TRUE

Stocks with higher betas are usually more stable than stocks with lower betas.

Answer:  FALSE

A stock with a beta of 1.0 would on average earn the risk-free rate.

Answer:  FALSE

Unsystematic risk can be eliminated through diversification.

Answer:  TRUE

Increasing a portfolio from 2 stocks to 4 stocks will reduce risk more than increasing a portfolio from 10 stocks to 12 stocks.

Answer:  FALSE

The market rewards assuming additional unsystematic risk with additional returns.

Answer:  FALSE

On average, the market rewards assuming additional systematic risk with additional returns.

Answer:  TRUE

Betas for individual stocks tend to be stable.

Answer:  FALSE

A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.

Answer:  FALSE

You are thinking of adding one of two investments to an already well diversified portfolio.

You are thinking of adding one of two investments to an already well diversified portfolio.

Security A                                                            Security B

Expected return = 12%                                     Expected return = 12%

Standard deviation of returns = 20.9%       Standard deviation of returns = 10.1%

Beta = .8                                                                Beta = 2

If you are a risk-averse investor

A) security A is the better choice.

B) security B is the better choice.

C) either security would be acceptable.

D) cannot be determined with information given.

The market (systematic) risk associated with an individual stock is most closely identified with the

A) variance of the returns of the stock.

B) variance of the returns of the market.

C) beta of the stock.

D) standard deviation of the stock.

Which of the following is NOT an example of systematic risk?

A) Inflation

B) Recession

C) Management risk

D) Interest rate risk

What type of risk can investors reduce through diversification?

A) All risk

B) Systematic risk only

C) Unsystematic risk only

D) Uncertainty

Which of the following statements is true?

A) A stock with a beta less than zero has no exposure to systematic risk.

B) A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.

C) A stock with a beta less than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.

D) A stock with a beta less than 1.0 has higher nondiversifiable risk than a stock with a beta of 1.0.

Currently, the expected return on the market is 12.5% and the required rate of return for Alpha, Inc. is 12.5%. Therefore, Alpha's beta must be

A) less than 1.0.

B) greater than 1.0.

C) equal to 1.0.

D) unknown based on the information provided.

Investment risk is

A) the probability of achieving a return that is greater than what was expected.

B) the probability of achieving a beta coefficient that is less than what was expected.

C) the probability of achieving a return that is less than what was expected.

D) the probability of achieving a standard deviation that is less than what was expected.

Which of the following statements is true?

A) Systematic, or market, risk can be reduced through diversification.

B) Both systematic and unsystematic risk can be reduced through diversification.

C) Unsystematic, or company, risk can be reduced through diversification.

D) Neither systematic nor unsystematic risk can be reduced through diversification.

Which of the following is a good measure of the relationship between an investment's returns and the market's returns?

A) The beta coefficient

B) The standard variation

C) The CPI

D) The S&P 500 Index

Which of the following is generally used to measure the market when calculating betas?

A) The Dow Jones Industrial Average

B) The Standard & Poors 500 Index

C) The Value Line Quantam Index

D) The Case Schiller Housing Index

If you hold a portfolio made up of the following stocks:What is the beta of the portfolio?

If you hold a portfolio made up of the following stocks:

                       Investment Value           Beta

Stock A                   $2,000                      1.5

Stock B                    $5,000                      1.2

Stock C                    $3,000                        .8

What is the beta of the portfolio?

A) 1.17

B) 1.14

C) 1.32

D) Can't be determined from information given

Changes in the general economy, such as changes in interest rates or tax laws, represent what type of risk?

A) Firm-specific risk

B) Market risk

C) Unsystematic risk

D) Diversifiable risk

A stock with a beta greater than 1.0 has returns that are ________ volatile than the market, and a stock with a beta of less than 1.0 exhibits returns which are ________ volatile than those of the market portfolio.

A) more, more

B) more, less

C) less, more

D) less, less

You hold a portfolio with the following securities:

                                     Percent

    Security              of Portfolio              Beta                Return

X Corporation            20%                    1.35                   14%

Y Corporation            35%                     .95                    10%

Z Corporation            45%                     .75                     8%

Compute the expected return and beta for the portfolio.

A) 10.67%, 1.02

B) 9.9%, 1.02

C) 34.4%, .94

D) 9.9%, .94

The beta of ABC Co. stock is the slope of

A) the security market line.

B) the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills.

C) the arbitrage pricing line.

D) the line of best fit for a plot of ABC Co. returns against the returns of the market portfolio for the same period.

You are considering a portfolio consisting of equal investments in the stocks Northbank Inc. and Tropical Escapes Inc

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.

The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%

The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%.  The coefficient of correlation between the stocks is .75. The standard deviation of any portfolio combining the two stocks will be less than 20%.

Answer:  TRUE

The portfolio standard deviation will always be less than the standard deviation of any asset in the portfolio.

Answer:  FALSE

When assets are positively correlated, they tend to rise or fall together.

Answer:  TRUE

The standard deviation of a portfolio is always just the weighted average of the standard deviations of assets in the portfolio.

Answer:  FALSE

A correlation coefficient of +1 indicates that returns on one asset can be exactly predicted from the returns on another asset.

Answer:  TRUE

Adequate portfolio diversification can be achieved by investing in several companies in the same industry.

Answer:  FALSE

A portfolio will always have less risk than the riskiest asset in it if the correlation of assets is less than perfectly positive.

Answer:  TRUE

Most financial assets have correlation coefficients between 0 and 1.

Answer:  TRUE

Portfolio returns can be calculated as the geometric mean of the returns on the individual assets in the portfolio.

Answer:  FALSE

When constructing a portfolio, it is a good idea to put all your eggs in one basket, then watch the basket closely.

Answer:  FALSE

A portfolio containing a mix of stocks, bonds, and real estate is likely to be more diversified than a portfolio made up of only one asset class.

Answer:  TRUE

An asset with a large standard deviation of returns can lower portfolio risk if its returns are uncorrelated with the returns on the other assets in the portfolio.

Answer:  TRUE

The greater the dispersion of possible returns, the riskier is the investment.

Answer:  TRUE

For the most part, there has been a positive relation between risk and return historically.

Answer:  TRUE

The benefit from diversification is far greater when the diversification occurs across asset types.

Answer:  TRUE

Investing in foreign stocks is one way to improve diversification of a portfolio.

Answer:  TRUE

Use the following information, which describes the expected return and standard deviation for three different assets

Use the following information, which describes the expected return and standard deviation for three different assets, to answer the following question(s).

                                                            Portfolio X         Portfolio Y          Portfolio Z

        Expected return                           9.5%                     8.8%                      9.5%

        Standard deviation                    4.9%                     5.5%                      5.5%

If an investor must choose between investing in either portfolio X or portfolio Y, then

A) she will always choose Asset X over Asset Y.

B) she will always choose Asset Y over Asset X.

C) she will be indifferent between investing in Asset X and Asset Y.

D) none of the above.

An investor will get maximum risk reduction by combining assets that are

A) negatively correlated.

B) positively correlated.

C) uncorrelated.

D) perfectly, positively correlated.

A negative coefficient of correlation implies that

A) on average, returns to such assets are negative.

B) asset returns tend to move in opposite directions.

C) asset return tend to move in opposite directions.

D) None of the above because the coefficient of correlation cannot be negative.

What is the expected rate of return on a portfolio 18% of which is invested in an S&P 500 Index fund, 65% in a technology fund, and 17% in Treasury Bills.  The expected rate of return is 11% on the S&P Index fund, 14% on the technology fund and 2% on the Treasury Bills.

A) 10.25%

B) 8.33%

C) 11.42%

D) 9.00%

What is the expected rate of return on a portfolio Which consists of $9,000 invested in an S&P 500 Index fund, $32,500 in a technology fund, and $8,500 in Treasury Bills.  The expected rate of return is 11% on the S&P Index fund, 14% on the technology fund and 2% on the Treasury Bills.

A) $154.00

B) $142.80

C) $65.00

D) $15.12

The expected return on MSFT next year is 12% with a standard deviation of 20%. The expected return on AAPL

The expected return on MSFT next year is 12% with a standard deviation of 20%.  The expected return on AAPL next year is 24% with a standard deviation of 30%.  The correlation between the two stocks is .6.  If James makes equal investments in MSFT and AAPL, what is the expected return on his portfolio.

A) 21.45%

B) 25.00%

C) 4.60%

D) 15.00%

Use the following information, which describes the possible outcomes from investing in a particular asset, to answer the following question(s).

        State of the Economy         Probability of the States       Percentage Returns

        Economic recession                              25%                                         5%

        Moderate economic growth               55%                                        10%

        Strong economic growth                     20%                                        13%

9) The expected return from investing in the asset is

A) 9.00%.

B) 9.35%.

C) 10.00%.

D) 10.55%.

10) The standard deviation of returns is

A) 8.00%.

B) 7.63%.

C) 4.68%.

D) 2.76%.

The expected return on MSFT next year is 12% with a standard deviation of 20%.  The expected return on AAPL next year is 24% with a standard deviation of 30%.  If James makes equal investments in MSFT and AAPL, what is the expected return on his portfolio.

A) 20%

B) 16%

C) 18%

D) 25%