{"id":61411,"date":"2022-05-15T22:34:09","date_gmt":"2022-05-15T22:34:09","guid":{"rendered":"https:\/\/assignmenttutors.net\/blog\/risk-and-return-ch-11\/"},"modified":"2022-05-15T22:34:09","modified_gmt":"2022-05-15T22:34:09","slug":"risk-and-return-ch-11","status":"publish","type":"post","link":"https:\/\/assignmenttutors.net\/blog\/risk-and-return-ch-11\/","title":{"rendered":"Risk and return ch 11"},"content":{"rendered":"
\n

Multiple Choice Questions<\/span><\/strong>
\u00a0\u00a0<\/span>1.\u00a0Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?\u00a0<\/p>\n

A.\u00a0Expected return
B.\u00a0Real return
C.\u00a0Market rate
D.\u00a0Systematic return
E.\u00a0Risk premium<\/p>\n

2.\u00a0Which one of the following best describes a portfolio?\u00a0<\/p>\n

A.\u00a0Risky security
B.\u00a0Security equally as risky as the overall market
C.\u00a0New issue of stock
D.\u00a0Group of assets held by an investor
E.\u00a0Investment in a risk-free security<\/p>\n

\u00a0<\/span><\/p>\n

3.\u00a0Stock A comprises 28 percent of Susan’s portfolio. Which one of the following terms applies to the 28 percent?\u00a0
A.\u00a0Portfolio variance
B.\u00a0Portfolio standard deviation
C.\u00a0Portfolio weight
D.\u00a0Portfolio expected return
E.\u00a0Portfolio beta<\/p>\n

\u00a0<\/span><\/p>\n

4.\u00a0Which one of the following describes systemic risk?\u00a0
A.\u00a0Risk that affects a large number of assets
B.\u00a0An individual security’s total risk
C.\u00a0Diversifiable risk
D.\u00a0Asset specific risk
E.\u00a0Risk unique to a firm’s management<\/p>\n

\u00a0<\/span><\/p>\n

5.\u00a0Which of the following terms can be used to describe unsystematic risk?
I. asset-specific risk
II. diversifiable risk
III. market risk
IV. unique risk\u00a0
A.\u00a0I and IV only
B.\u00a0II and III only
C.\u00a0I, II, and IV only
D.\u00a0II, III, and IV only
E.\u00a0I, II, III, and IV<\/p>\n

\u00a0<\/span><\/p>\n

6.\u00a0Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?\u00a0
A.\u00a0Systematic
B.\u00a0Unsystematic
C.\u00a0Diversification
D.\u00a0Security market line
E.\u00a0Capital asset pricing model<\/p>\n

\u00a0<\/span><\/p>\n

7.\u00a0The systematic risk principle states that the expected return on a risky asset depends only on which one of the following?\u00a0
A.\u00a0Unique risk
B.\u00a0Diversifiable risk
C.\u00a0Asset-specific risk
D.\u00a0Market risk
E.\u00a0Unsystematic risk<\/p>\n

\u00a0<\/span><\/p>\n

8.\u00a0Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?\u00a0
A.\u00a0Squared deviation
B.\u00a0Beta coefficient
C.\u00a0Standard deviation
D.\u00a0Mean
E.\u00a0Variance<\/p>\n

\u00a0<\/span><\/p>\n

9.\u00a0The 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?\u00a0
A.\u00a0Risk-free rate and beta
B.\u00a0Market rate of return and beta
C.\u00a0Market rate of return and the risk-free rate
D.\u00a0Risk-free rate and the market rate of return
E.\u00a0Expected return and beta<\/p>\n

\u00a0<\/span><\/p>\n

10.\u00a0Which one of the following is the slope of the security market line?\u00a0
A.\u00a0Risk-free rate
B.\u00a0Market risk premium
C.\u00a0Beta coefficient
D.\u00a0Risk premium on an individual asset
E.\u00a0Market rate of return<\/p>\n

\u00a0<\/span><\/p>\n

11.\u00a0The security market line is defined as a positively sloped straight line that displays the relationship between which two of the following variables?\u00a0
A.\u00a0Beta and standard deviation
B.\u00a0Systematic and unsystematic risk
C.\u00a0Nominal and real returns
D.\u00a0Expected return and beta
E.\u00a0Risk premium and beta<\/p>\n

\u00a0<\/span><\/p>\n

12.\u00a0Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?\u00a0
A.\u00a0Risk-free rate
B.\u00a0Market risk premium
C.\u00a0Expected return minus the risk-free rate
D.\u00a0Market rate of return
E.\u00a0Cost of capital<\/p>\n

\u00a0<\/span><\/p>\n

13.\u00a0A 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?\u00a0
A.\u00a0An increase in the rate of return in a recessionary economy
B.\u00a0An increase in the probability of an economic boom
C.\u00a0A decrease in the probability of a recession occurring
D.\u00a0A decrease in the probability of an economic boom
E.\u00a0An increase in the rate of return for a normal economy<\/p>\n

\u00a0<\/span><\/p>\n

14.\u00a0The expected return on a security is currently based on a 22 percent chance of a 15 percent return given an economic boom and a 78 percent chance of a 12 percent return given a normal economy. Which of the following changes will decrease the expected return on this security?
I. an increase in the probability of an economic boom
II. a decrease in the rate of return given a normal economy
III. an increase in the probability of a normal economy
IV. an increase in the rate of return given an economic boom\u00a0
A.\u00a0I and II only
B.\u00a0I and IV only
C.\u00a0II and III only
D.\u00a0I, III, and IV only
E.\u00a0I, II, III, and IV<\/p>\n

\u00a0<\/span><\/p>\n

15.\u00a0Which one of the following is the computation of the risk premium for an individual security? E(r) is the expected return on the security, rf<\/sub> is the risk-free rate, b<\/span> is the security’s beta, and E(r)M<\/sub> is the expected rate of return on the market.\u00a0
A.\u00a0E(r)M<\/sub> – rf<\/sub>
B.\u00a0E(r) – E(r)M<\/sub>
C.\u00a0E(r) – (E(r)M<\/sub> + rf<\/sub>)
D.\u00a0b<\/span>[E(r)M<\/sub> – rf<\/sub>]
E.\u00a0b<\/span> [E(r) – rf<\/sub>]<\/p>\n

\u00a0<\/span><\/p>\n

16.\u00a0The 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?\u00a0
A.\u00a0The variance must decrease if the probability of occurrence for a boom increases.
B.\u00a0The variance will remain constant as long as the sum of the economic probabilities is 100 percent.
C.\u00a0The variance can be positive, zero, or negative, depending on the expected rate of return assigned to each economic state.
D.\u00a0The variance must be positive provided that each state of the economy produces a different expected rate of return.
E.\u00a0The variance is independent of the economic probabilities of occurrence.<\/p>\n

\u00a0<\/span><\/p>\n

17.\u00a0Which one of the following statements is correct?\u00a0
A.\u00a0The risk premium on a risk-free security is generally considered to be one percent.
B.\u00a0The expected rate of return on any security, given multiple states of the economy, must be positive.
C.\u00a0There is an inverse relationship between the level of risk and the risk premium given a risky security.
D.\u00a0If a risky security is correctly priced, its expected risk premium will be positive.
E.\u00a0If a risky security is priced correctly, it will have an expected return equal to the risk-free rate.<\/p>\n

\u00a0<\/span><\/p>\n

18.\u00a0You are assigned the task of computing the expected return on a portfolio containing several individual stocks. Which one of the following statements is correct concerning this task?\u00a0
A.\u00a0The expected rate of return on the portfolio must be positive.
B.\u00a0The arithmetic average of the betas for each security held in the portfolio must equal 1.0.
C.\u00a0The portfolio beta must be 1.0.
D.\u00a0The summation of the return deviation from the portfolio expected return for each economic state must equal zero.
E.\u00a0The standard deviation of the portfolio must equal 1.0.<\/p>\n

\u00a0<\/span><\/p>\n

19.\u00a0Consider a portfolio comprised of four risky securities. Assume the economy has three states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero?\u00a0
A.\u00a0The portfolio beta must be 1.0.
B.\u00a0The portfolio expected rate of return must be the same for each economic state.
C.\u00a0The portfolio risk premium must equal zero.
D.\u00a0The portfolio expected rate of return must equal the expected market rate of return.
E.\u00a0There must be equal probabilities that the state of the economy will be a boom or a bust.<\/p>\n

\u00a0<\/span><\/p>\n

20.\u00a0Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?\u00a0
A.\u00a0A news bulletin that the anticipated layoffs by a firm will occur as expected on December 1
B.\u00a0Announcement that the CFO of the firm is retiring June 1st<\/sup> as previously announced
C.\u00a0Announcement that a firm will continue its practice of paying a $3 a share annual dividend
D.\u00a0Statement by a firm that it has just discovered a manufacturing defect and is recalling its product
E.\u00a0The verification by senior management that the firm is being acquired as had been rumored<\/p>\n

\u00a0<\/span><\/p>\n

21.\u00a0Which one of the following is the best example of unsystematic risk?\u00a0
A.\u00a0Inflation exceeding market expectations
B.\u00a0A warehouse fire
C.\u00a0Decrease in corporate tax rates
D.\u00a0Decrease in the value of the dollar
E.\u00a0Increase in consumer spending<\/p>\n

\u00a0<\/span><\/p>\n

22.\u00a0Which one of the following is an example of systematic risk?\u00a0
A.\u00a0Major layoff by a regional manufacturer of power boats
B.\u00a0Increase in consumption created by a reduction in personal tax rates
C.\u00a0Surprise firing of a firm’s chief financial officer
D.\u00a0Closure of a major retail chain of stores
E.\u00a0Product recall by one manufacturer<\/p>\n

\u00a0<\/span><\/p>\n

23.\u00a0Which one of the following is the best example of systematic risk?\u00a0
A.\u00a0Discovery of a major gas field
B.\u00a0Decrease in textile imports
C.\u00a0Increase in agricultural exports
D.\u00a0Decrease in gross domestic product
E.\u00a0Decrease in management bonuses for banking executives<\/p>\n

\u00a0<\/span><\/p>\n

24.\u00a0Standard deviation measures _____ risk while beta measures _____ risk.\u00a0
A.\u00a0systematic; unsystematic
B.\u00a0unsystematic; systematic
C.\u00a0total; unsystematic
D.\u00a0total; systematic
E.\u00a0asset-specific; market<\/p>\n

\u00a0<\/span><\/p>\n

25.\u00a0Which one of the following portfolios will have a beta of zero?\u00a0
A.\u00a0A portfolio that is equally as risky as the overall market.
B.\u00a0A portfolio that consists of a single stock.
C.\u00a0A portfolio comprised solely of U. S. Treasury bills.
D.\u00a0A portfolio with a zero variance of returns.
E.\u00a0No portfolio can have a beta of zero.<\/p>\n

\u00a0<\/span><\/p>\n

26.\u00a0Which one of the following best exemplifies unsystematic risk?\u00a0
A.\u00a0Unexpected economic collapse
B.\u00a0Unexpected increase in interest rates
C.\u00a0Unexpected increase in the variable costs for a firm
D.\u00a0Sudden decrease in inflation
E.\u00a0Expected increase in tax rates<\/p>\n

\u00a0<\/span><\/p>\n

27.\u00a0The risk premium for an individual security is based on which one of the following types of risk?\u00a0
A.\u00a0Total
B.\u00a0Surprise
C.\u00a0Diversifiable
D.\u00a0Systematic
E.\u00a0Unsystematic<\/p>\n

\u00a0<\/span><\/p>\n

28.\u00a0Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security?\u00a0
A.\u00a0Security beta multiplied by the market rate of return
B.\u00a0Market risk premium
C.\u00a0Security beta multiplied by the market risk premium
D.\u00a0Risk-free rate of return
E.\u00a0Zero<\/p>\n

\u00a0<\/span><\/p>\n

29.\u00a0Systematic risk is:\u00a0
A.\u00a0totally eliminated when a portfolio is fully diversified.
B.\u00a0defined as the total risk associated with surprise events.
C.\u00a0risk that affects a limited number of securities.
D.\u00a0measured by beta.
E.\u00a0measured by standard deviation.<\/p>\n

\u00a0<\/span><\/p>\n

30.\u00a0Which one of the following statements is correct?\u00a0
A.\u00a0A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0.
B.\u00a0Any portfolio that is correctly valued will have a beta of 1.0.
C.\u00a0A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a security market line graph.
D.\u00a0A risk-free security plots at the origin on a security market line graph.
E.\u00a0An underpriced security will plot above the security market line.<\/p>\n

\u00a0<\/span><\/p>\n

31.\u00a0Portfolio diversification eliminates which one of the following?\u00a0
A.\u00a0Total investment risk
B.\u00a0Portfolio risk premium
C.\u00a0Market risk
D.\u00a0Unsystematic risk
E.\u00a0Reward for bearing risk<\/p>\n

\u00a0<\/span><\/p>\n

32.\u00a0Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following?\u00a0
A.\u00a0Increase the expected risk premium
B.\u00a0Reduce the beta of the portfolio to zero
C.\u00a0Increase the security’s risk premium
D.\u00a0Reduce the portfolio’s systematic risk level
E.\u00a0Reduce the portfolio’s unique risks<\/p>\n

\u00a0<\/span><\/p>\n

33.\u00a0A risky security has less risk than the overall market. What must the beta of this security be?\u00a0
A.\u00a00
B.\u00a0> 0 but < 1
C.\u00a01
D.\u00a0> 1
E.\u00a0The beta cannot be determined based on the information provided.<\/p>\n

\u00a0<\/span><\/p>\n

34.\u00a0The addition of a risky security to a fully diversified portfolio:\u00a0
A.\u00a0must decrease the portfolio’s expected return.
B.\u00a0must increase the portfolio beta.
C.\u00a0may or may not affect the portfolio beta.
D.\u00a0will increase the unsystematic risk of the portfolio.
E.\u00a0will have no effect on the portfolio beta or its expected return.<\/p>\n

\u00a0<\/span><\/p>\n

35.\u00a0A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is 0.74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta:\u00a0
A.\u00a0must be 1.0 because of the large number of securities in the portfolio.
B.\u00a0is the geometric average of the individual security betas.
C.\u00a0must be less than the market beta.
D.\u00a0will be between 0 and 1.0.
E.\u00a0will be greater than or equal to 0.74 but less than or equal to 1.51.<\/p>\n

\u00a0<\/span><\/p>\n

36.\u00a0The beta of a risky portfolio cannot be less than _____ nor greater than _____.\u00a0
A.\u00a00; 1
B.\u00a01; the market beta
C.\u00a0the lowest individual beta in the portfolio; market beta
D.\u00a0the market beta; the highest individual beta in the portfolio
E.\u00a0the lowest individual beta in the portfolio; the highest individual beta in the portfolio<\/p>\n

\u00a0<\/span><\/p>\n

37.\u00a0If a security plots to the right and below the security market line, then the security has ____ systematic risk than the market and is _____.\u00a0
A.\u00a0more; overpriced
B.\u00a0more; underpriced
C.\u00a0less; overpriced
D.\u00a0less; underpriced
E.\u00a0less; correctly priced<\/p>\n

\u00a0<\/span><\/p>\n

38.\u00a0Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio:\u00a0
A.\u00a0for the portfolio must equal 1.0.
B.\u00a0for the portfolio must be less than the market risk premium.
C.\u00a0for each security must equal zero.
D.\u00a0of each security is equal to the risk-free rate.
E.\u00a0of each security must equal the slope of the security market line.<\/p>\n

\u00a0<\/span><\/p>\n

39.\u00a0Which one of the following statements related to the security market line is correct?\u00a0
A.\u00a0An underpriced security will plot below the security market line.
B.\u00a0A security with a beta of 1.54 will plot on the security market line if it is correctly priced.
C.\u00a0A portfolio with a beta of 0.93 will plot to the right of the overall market.
D.\u00a0A security with a beta of 0.99 will plot above the security market line if it is correctly priced.
E.\u00a0A risk-free security will plot at the origin.<\/p>\n

\u00a0<\/span><\/p>\n

40.\u00a0Which one of the following is the vertical intercept of the security market line?\u00a0
A.\u00a0Market rate of return
B.\u00a0Individual security rate of return
C.\u00a0Market risk premium
D.\u00a0Individual security beta multiplied by the market risk premium
E.\u00a0Risk-free rate<\/p>\n

\u00a0<\/span><\/p>\n

41.\u00a0Based on the capital asset pricing model, investors are compensated based on which of the following?
I. market risk premium
II. portfolio standard deviation
III. portfolio beta
IV. risk-free rate\u00a0
A.\u00a0I and III only
B.\u00a0II and IV only
C.\u00a0I, II, and III only
D.\u00a0I, III, and IV only
E.\u00a0I, II, III, and IV<\/p>\n

\u00a0<\/span><\/p>\n

42.\u00a0World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stock’s rate of return without affecting the risk level of the stock, all else constant?\u00a0
A.\u00a0An increase in the risk-free rate
B.\u00a0Decrease in the security’s beta
C.\u00a0Overpricing of the stock in the market place
D.\u00a0Increase in the market risk-to-reward ratio
E.\u00a0Decrease in the market rate of return<\/p>\n

\u00a0<\/span><\/p>\n

43.\u00a0The expected return on a security depends on which of the following?
I. risk-free rate of return
II. amount of the security’s unique risk
III market rate of return
IV. standard deviation of returns\u00a0
A.\u00a0I and III only
B.\u00a0II and IV only
C.\u00a0II, III, and IV only
D.\u00a0I, III, and IV only
E.\u00a0I, II, III, and IV<\/p>\n

\u00a0<\/span><\/p>\n

44.\u00a0The capital asset pricing model:\u00a0
A.\u00a0assumes the market has a beta of zero.
B.\u00a0rewards investors based on total risk.
C.\u00a0considers the time value of money.
D.\u00a0applies to portfolios but not to individual securities.
E.\u00a0assumes the market risk premium is constant over time.<\/p>\n

\u00a0<\/span><\/p>\n

45.\u00a0Julie 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?\u00a0
A.\u00a0Invest the entire $5,000 in a stock with a beta of 1.0
B.\u00a0Invest $2,500 in a stock with a beta of 1.98 and $2,500 in a stock with a beta of 1.0
C.\u00a0Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0
D.\u00a0Invest $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.\u00a0Invest $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<\/p>\n

\u00a0<\/span><\/p>\n

46.\u00a0Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else constant?\u00a0
A.\u00a0An increase in the risk level of that security as measured by the standard deviation
B.\u00a0An increase in the risk-free rate given a security beta of 1.42
C.\u00a0A decrease in the market rate of return given a security beta of 1.13
D.\u00a0A decrease in the market rate of return given a security beta of .78
E.\u00a0A decrease in the risk-free rate given a security beta of 1.06<\/p>\n

\u00a0<\/span><\/p>\n

47.\u00a0Blue Lagoon stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock?
\u00a0\"\"\u00a0\u00a0
A.\u00a03.90 percent
B.\u00a04.23 percent
C.\u00a04.51 percent
D.\u00a05.47 percent
E.\u00a05.92 percent<\/p>\n

\u00a0<\/span><\/p>\n

48.\u00a0Candy and More stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock?
\u00a0\"\"\u00a0\u00a0
A.\u00a07.89 percent
B.\u00a08.56 percent
C.\u00a09.43 percent
D.\u00a09.90 percent
E.\u00a010.02 percent<\/p>\n

\u00a0<\/span><\/p>\n

49.\u00a0Northern Wear stock has an expected return of 14.6 percent. Given the information below, what is the expected return on this stock if the economy is normal?
\u00a0\"\"\u00a0\u00a0
A.\u00a013 percent
B.\u00a016 percent
C.\u00a018 percent
D.\u00a021 percent
E.\u00a023 percent<\/p>\n

\u00a0<\/span><\/p>\n

50.\u00a0Hal Enterprises stock has an expected return of 10.2 percent. Given the information below, what is the expected return if the economy is in a recession?
\u00a0\"\"\u00a0\u00a0
A.\u00a0-12.94 percent
B.\u00a0-11.71 percent
C.\u00a0-11.28 percent
D.\u00a0-10.76 percent
E.\u00a0-10.03 percent<\/p>\n

\u00a0<\/span><\/p>\n

51.\u00a0Neighborhood Stores’ stock has a risk premium of 9.6 percent while the inflation rate is 3.1 percent and the risk-free rate is 3.8 percent. What is the expected return on this stock?\u00a0
A.\u00a012.3 percent
B.\u00a012.7 percent
C.\u00a013.4 percent
D.\u00a013.6 percent
E.\u00a016.5 percent<\/p>\n

\u00a0<\/span><\/p>\n

52.\u00a0What is the expected return on a security given the following information?
\u00a0\"\"\u00a0\u00a0
A.\u00a08.78 percent
B.\u00a09.43 percent
C.\u00a09.97 percent
D.\u00a010.11 percent
E.\u00a011.38 percent<\/p>\n

\u00a0<\/span><\/p>\n

53.\u00a0Given the following information, what is the variance of the returns on this stock?
\u00a0\"\"\u00a0\u00a0
A.\u00a00.021387
B.\u00a00.021449
C.\u00a00.021506
D.\u00a00.021538
E.\u00a00.0215641<\/p>\n

\u00a0<\/span><\/p>\n

54.\u00a0Given the following information, what is the variance of the returns on this stock?
\u00a0\"\"\u00a0\u00a0
A.\u00a00.002453
B.\u00a00.002663
C.\u00a00.002691
D.\u00a00.002759
E.\u00a00.002914<\/p>\n

\u00a0<\/span><\/p>\n

55.\u00a0Given the following information, what is the standard deviation of the returns on this stock?
\u00a0\"\"\u00a0\u00a0
A.\u00a019.90 percent
B.\u00a020.52 percent
C.\u00a022.41 percent
D.\u00a023.79 percent
E.\u00a025.52 percent<\/p>\n

\u00a0<\/span><\/p>\n

56.\u00a0Given the following information, what is the standard deviation of the returns on this stock?
\u00a0\"\"\u00a0\u00a0
A.\u00a07.38 percent
B.\u00a07.55 percent
C.\u00a07.80 percent
D.\u00a07.91 percent
E.\u00a08.06 percent<\/p>\n

\u00a0<\/span><\/p>\n

57.\u00a0You own a portfolio that is invested as follows: $11,600 of stock A, $7,800 of stock B, $14,900 of stock C, and $3,200 of stock D. What is the portfolio weight of stock C?\u00a0
A.\u00a038.47 percent
B.\u00a039.73 percent
C.\u00a041.26 percent
D.\u00a041.94 percent
E.\u00a043.08 percent<\/p>\n

\u00a0<\/span><\/p>\n

58.\u00a0You own a $46,000 portfolio comprised of four stocks. The values of stocks A, B, and C are $5,600, $16,700, and $11,400, respectively. What is the portfolio weight of stock D?\u00a0
A.\u00a026.74 percent
B.\u00a028.39 percent
C.\u00a030.33 percent
D.\u00a032.10 percent
E.\u00a032.58 percent<\/p>\n

\u00a0<\/span><\/p>\n

59.\u00a0You own a portfolio of two stocks, A and B. Stock A is valued at $6,540 and has an expected return of 11.2 percent. Stock B has an expected return of 8.1 percent. What is the expected return on the portfolio if the portfolio value is $9,500?\u00a0
A.\u00a09.58 percent
B.\u00a09.62 percent
C.\u00a09.74 percent
D.\u00a09.97 percent
E.\u00a010.23 percent<\/p>\n

\u00a0<\/span><\/p>\n

60.\u00a0You own a portfolio that is invested 38 percent in stock A, 43 percent in stock B, and the remainder in stock C. The expected returns on these stocks are 10.7 percent, 15.4 percent, and 9.1 percent, respectively. What is the expected return on the portfolio?\u00a0
A.\u00a010.55 percent
B.\u00a011.02 percent
C.\u00a011.67 percent
D.\u00a012.42 percent
E.\u00a013.01 percent<\/p>\n

\u00a0<\/span><\/p>\n

61.\u00a0You own a portfolio consisting of the securities listed below. The expected return for each security is as shown. What is the expected return on the portfolio?
\u00a0\"\"\u00a0\u00a0
A.\u00a09.97 percent
B.\u00a010.86 percent
C.\u00a011.23 percent
D.\u00a012.09 percent
E.\u00a014.20 percent<\/p>\n

\u00a0<\/span><\/p>\n

62.\u00a0You have compiled the following information on your investments. What rate of return should you expect to earn on this portfolio?
\u00a0\"\"\u00a0\u00a0
A.\u00a09.54 percent
B.\u00a09.83 percent
C.\u00a010.01 percent
D.\u00a010.27 percent
E.\u00a010.58 percent<\/p>\n

\u00a0<\/span><\/p>\n

63.\u00a0You want to create a $48,000 portfolio that consists of three stocks and has an expected return of 14.5 percent. Currently, you own $16,700 of stock A and $24,200 of stock B. The expected return for stock A is 18.7 percent, and for stock B it is 11.2 percent. What is the expected rate of return for stock C?\u00a0
A.\u00a013.67 percent
B.\u00a014.14 percent
C.\u00a015.38 percent
D.\u00a015.87 percent
E.\u00a016.11 percent<\/p>\n

\u00a0<\/span><\/p>\n

64.\u00a0You would like to invest $18,000 and have a portfolio expected return of 12.3 percent. You are considering two securities, A and B. Stock A has an expected return of 15.6 percent and B has an expected return of 10.3 percent. How much should you invest in stock A if you invest the balance in stock B?\u00a0
A.\u00a0$5,807
B.\u00a0$6,792
C.\u00a0$7,411
D.\u00a0$7,937
E.\u00a0$8,626<\/p>\n

\u00a0<\/span><\/p>\n

65.\u00a0Given the following information, what is the expected return on a portfolio that is invested 30 percent in both stocks A and C, and 40 percent in stock B?
\u00a0\"\"\u00a0\u00a0
A.\u00a011.97 percent
B.\u00a012.94 percent
C.\u00a013.33 percent
D.\u00a013.84 percent
E.\u00a014.42 percent<\/p>\n

\u00a0<\/span><\/p>\n

66.\u00a0Given the following information, what is the expected return on a portfolio that is invested 35 percent in Stock A, 45 percent in stock B, and the balance in Stock C?
\u00a0\"\"\u00a0\u00a0
A.\u00a011.84 percent
B.\u00a012.53 percent
C.\u00a012.91 percent
D.\u00a013.46 percent
E.\u00a013.87 percent<\/p>\n

\u00a0<\/span><\/p>\n

67.\u00a0Given the following information, what is the variance of the returns on a portfolio that is invested 40 percent in both stocks A and B, and 20 percent in stock C? \u00a0\"\"\u00a0\u00a0
A.\u00a00.002102
B.\u00a00.002490
C.\u00a00.002513
D.\u00a00.005746
E.\u00a00.006143<\/p>\n

\u00a0<\/span><\/p>\n

68.\u00a0Given the following information, what is the standard deviation of the returns on a portfolio that is invested 35 percent in both stocks A and C, and 30 percent in stock B? \u00a0\"\"\u00a0\u00a0
A.\u00a02.77 percent
B.\u00a04.13 percent
C.\u00a06.67 percent
D.\u00a08.91 percent
E.\u00a09.36 percent<\/p>\n

\u00a0<\/span><\/p>\n

69.\u00a0Given 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?
\u00a0\"\"\u00a0\u00a0
A.\u00a011.86 percent
B.\u00a012.72 percent
C.\u00a013.16 percent
D.\u00a013.43 percent
E.\u00a013.57 percent<\/p>\n

\u00a0<\/span><\/p>\n

70.\u00a0You want to create a $65,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 14.2 percent and stock B has an expected return of 17.8 percent. You want to own $20,000 of stock B. The risk-free rate is 4.8 percent and the expected return on the market is 13.1 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest in the risk-free security?\u00a0
A.\u00a0$11,921
B.\u00a0$13,509
C.\u00a0$15,266
D.\u00a0$17,315
E.\u00a0$18,775<\/p>\n

\u00a0<\/span><\/p>\n

71.\u00a0A portfolio has an expected return of 12.3 percent. This portfolio contains two stocks and one risk-free security. The expected return on stock X is 9.7 percent and on stock Y it is 17.7 percent. The risk-free rate is 3.8 percent. The portfolio value is $78,000 of which $18,000 is the risk-free security. How much is invested in stock X?\u00a0
A.\u00a0$18,600
B.\u00a0$19,667
C.\u00a0$21,375
D.\u00a0$22,204
E.\u00a0$24,800<\/p>\n

\u00a0<\/span><\/p>\n

72.\u00a0You own a $210,000 portfolio that is invested in stock A and B. The portfolio beta is equal to the market beta. Stock A has an expected return of 18.7 percent and has a beta of 1.42. Stock B has a beta of 0.88. What is the value of your investment in stock A?\u00a0
A.\u00a0$38,600
B.\u00a0$42,333
C.\u00a0$44,500
D.\u00a0$46,667
E.\u00a0$47,200<\/p>\n

\u00a0<\/span><\/p>\n

73.\u00a0A $36,000 portfolio is invested in a risk-free security and two stocks. The beta of stock A is 1.29 while the beta of stock B is 0.90. One-half of the portfolio is invested in the risk-free security. How much is invested in stock A if the beta of the portfolio is 0.58?\u00a0
A.\u00a0$6,000
B.\u00a0$9,000
C.\u00a0$12,000
D.\u00a0$15,000
E.\u00a0$18,000<\/p>\n

\u00a0<\/span><\/p>\n

74.\u00a0What is the beta of the following portfolio?
\u00a0\"\"\u00a0\u00a0
A.\u00a01.08
B.\u00a01.14
C.\u00a01.17
D.\u00a01.21
E.\u00a01.23<\/p>\n

\u00a0<\/span><\/p>\n

75.\u00a0What is the beta of the following portfolio?
\u00a0\"\"\u00a0\u00a0
A.\u00a00.98
B.\u00a01.02
C.\u00a01.11
D.\u00a01.14
E.\u00a01.20<\/p>\n

\u00a0<\/span><\/p>\n

76.\u00a0You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. One stock has a beta of 1.14. What does the beta of the second stock have to be if you want the portfolio to be equally as risky as the overall market?\u00a0
A.\u00a00.62
B.\u00a00.97
C.\u00a01.23
D.\u00a01.55
E.\u00a01.86<\/p>\n

\u00a0<\/span><\/p>\n

77.\u00a0You 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?\u00a0
A.\u00a00.74
B.\u00a00.79
C.\u00a00.86
D.\u00a00.92
E.\u00a01.00<\/p>\n

\u00a0<\/span><\/p>\n

78.\u00a0Currently, you own a portfolio comprised of the following three securities. How much of the riskiest security should you sell and replace with risk-free securities if you want your portfolio beta to equal 90 percent of the market beta?
\u00a0\"\"\u00a0\u00a0
A.\u00a0$7,023.15
B.\u00a0$7,811.29
C.\u00a0$8,666.67
D.\u00a0$9,613.64
E.\u00a0$10,318.50<\/p>\n

\u00a0<\/span><\/p>\n

79.\u00a0You currently own a portfolio valued at $80,000 that is equally as risky as the market. Given the information below, what is the beta of stock C? \u00a0\"\"\u00a0\u00a0
A.\u00a00.91
B.\u00a00.95
C.\u00a01.04
D.\u00a01.13
E.\u00a01.18<\/p>\n

\u00a0<\/span><\/p>\n

80.\u00a0Stock A has an expected return of 15.6 percent and a beta of 1.27. Stock B has an expected return of 11.4 percent and a beta of 0.89. Both stocks have the same reward-to-risk ratio. What is the risk-free rate?\u00a0
A.\u00a01.56 percent
B.\u00a02.28 percent
C.\u00a02.79 percent
D.\u00a03.35 percent
E.\u00a03.92 percent<\/p>\n

\u00a0<\/span><\/p>\n

81.\u00a0Currently, 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?\u00a0
A.\u00a01.21
B.\u00a01.33
C.\u00a01.52
D.\u00a01.68
E.\u00a01.77<\/p>\n

\u00a0<\/span><\/p>\n

82.\u00a0Stock A has a beta of 1.47 while stock B has a beta of 1.08 and an expected return of 13.2 percent. What is the expected return on stock A if the risk-free rate is 4.5 percent and both stocks have equal reward-to-risk premiums?\u00a0
A.\u00a012.12 percent
B.\u00a015.07 percent
C.\u00a016.34 percent
D.\u00a016.89 percent
E.\u00a017.78 percent<\/p>\n

\u00a0<\/span><\/p>\n

83.\u00a0A 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?\u00a0
A.\u00a06.49 percent
B.\u00a07.28 percent
C.\u00a08.61 percent
D.\u00a09.23 percent
E.\u00a09.99 percent<\/p>\n

\u00a0<\/span><\/p>\n

84.\u00a0A stock has an expected return of 17.2 percent and a beta of 1.59. The risk-free rate is 5.1 percent. What is the slope of the security market line?\u00a0
A.\u00a07.55 percent
B.\u00a07.61 percent
C.\u00a07.78 percent
D.\u00a07.92 percent
E.\u00a08.03 percent<\/p>\n

\u00a0<\/span><\/p>\n

85.\u00a0Stock J has a beta of 1.47 and an expected return of 15.8 percent. Stock K has a beta of 1.05 and an expected return of 11.9 percent. What is the risk-free rate if these securities both plot on the security market line?\u00a0
A.\u00a02.15 percent
B.\u00a03.34 percent
C.\u00a03.88 percent
D.\u00a04.41 percent
E.\u00a04.68 percent<\/p>\n

\u00a0<\/span><\/p>\n

86.\u00a0The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a beta of 0.87 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not?\u00a0
A.\u00a0No; Stock A is underpriced and stock B is overpriced.
B.\u00a0No; Stock A is overpriced and stock B is underpriced.
C.\u00a0No; Stock A is overpriced but stock B is correctly priced.
D.\u00a0No; Stock A is underpriced but stock B is correctly priced.
E.\u00a0Yes; Both stocks are correctly priced.<\/p>\n

\u00a0<\/span><\/p>\n

87.\u00a0Worth While Entertainment has common stock with a beta of 1.46. The market risk premium is 9.1 percent and the risk-free rate is 4.6 percent. What is the expected return on this stock?\u00a0
A.\u00a016.31 percent
B.\u00a016.67 percent
C.\u00a017.40 percent
D.\u00a017.89 percent
E.\u00a018.23 percent<\/p>\n

\u00a0<\/span><\/p>\n

88.\u00a0The stock of Billingsley United has a beta of 0.92. The market risk premium is 8.4 percent and the risk-free rate is 3.2 percent. What is the expected return on this stock?\u00a0
A.\u00a08.87 percent
B.\u00a09.69 percent
C.\u00a010.93 percent
D.\u00a011.52 percent
E.\u00a012.01 percent<\/p>\n

\u00a0<\/span><\/p>\n

89.\u00a0LKP, Inc., stock has an expected return of 14.47 percent. The risk-free rate is 3.8 percent and the market risk premium is 8.6 percent. What is the stock’s beta?\u00a0
A.\u00a01.19
B.\u00a01.21
C.\u00a01.24
D.\u00a01.28
E.\u00a01.32<\/p>\n

\u00a0<\/span><\/p>\n

90.\u00a0Hardware and Moore has an expected return of 12.9 percent and a beta of 1.21. The expected return on the market is 11.7 percent. What is the risk-free rate?\u00a0
A.\u00a03.87 percent
B.\u00a04.24 percent
C.\u00a04.61 percent
D.\u00a05.38 percent
E.\u00a05.99 percent<\/p>\n

\u00a0<\/span><\/p>\n

91.\u00a0You own a stock that has an expected return of 16.48 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.65 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market?\u00a0
A.\u00a013.07 percent
B.\u00a013.30 percent
C.\u00a013.64 percent
D.\u00a014.09 percent
E.\u00a014.42 percent<\/p>\n

\u00a0<\/span><\/p>\n

92.\u00a0A stock has a beta of 1.24, an expected return of 13.68 percent, and lies on the security market line. A risk-free asset is yielding 2.8 percent. You want to create a $6,000 portfolio consisting of Stock A and the risk-free security such that the portfolio beta is 0.65. What rate of return should you expect to earn on your portfolio?\u00a0
A.\u00a08.50 percent
B.\u00a09.16 percent
C.\u00a09.33 percent
D.\u00a09.41 percent
E.\u00a09.56 percent<\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Essay Questions<\/span><\/strong>
\u00a0<\/span><\/p>\n

93.\u00a0Explain the relationships among the reward-to-risk ratio, risk-free rate of return, market rate of return, market risk premium, beta, and the security market line.\u00a0<\/p>\n


\u00a0<\/span><\/p>\n


\u00a0<\/span><\/p>\n


\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

94.\u00a0What is the significance of the slope of the security market line? Should investors prefer a steeper slope or a flatter slope?\u00a0<\/p>\n


\u00a0<\/span><\/p>\n


\u00a0<\/span><\/p>\n


\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

95.\u00a0Using a security market line graph, illustrate a security that is overpriced and has a beta of 0.89. Label all relevant points, including those that represent the overall market. Explain why the security plots as you have illustrated it.\u00a0<\/p>\n


\u00a0<\/span><\/p>\n


\u00a0<\/span><\/p>\n


\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

96.\u00a0Explain the differences between total risk, unsystematic risk, and systematic risk. Identify which risk is measured by standard deviation and which is measured by beta.\u00a0<\/p>\n


\u00a0<\/span><\/p>\n


\u00a0<\/span><\/p>\n


\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

97.\u00a0Global Importers predicted that its earnings per share for the year would be $1.86. Today, the firm released its earnings report and the earnings per share turned out to be $1.99 per share. In response to the earnings report, the price per share of Global Importers stock declined by 3.4 percent. Explain how the market price can decrease when the announced earnings were higher than the firm predicted.\u00a0<\/p>\n


\u00a0<\/span><\/p>\n


\u00a0<\/span><\/p>\n


\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n


Multiple Choice Questions<\/strong>
\u00a0<\/span><\/p>\n

98.\u00a0You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in Stock B. If the expected returns on these stocks are 9 percent and 15 percent, respectively, what is the expected return on the portfolio?\u00a0
A.\u00a010.57 percent
B.\u00a011.14 percent
C.\u00a011.96 percent
D.\u00a012.52 percent
E.\u00a013.07 percent<\/p>\n

\u00a0<\/span><\/p>\n

99.\u00a0Consider the following information:
\u00a0\"\"\u00a0
What is the variance of a portfolio invested 30 percent each in A and B and 40 percent in C?\u00a0
A.\u00a00.000065
B.\u00a00.000163
C.\u00a00.000289
D.\u00a00.000528
E.\u00a00.001740<\/p>\n

\u00a0<\/span><\/p>\n

100.\u00a0You 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?\u00a0
A.\u00a01.37
B.\u00a01.54
C.\u00a01.96
D.\u00a02.30
E.\u00a02.97<\/p>\n

\u00a0<\/span><\/p>\n

101.\u00a0A stock has a beta of 1.68, the expected return on the market is 14.72, and the risk-free rate is 4.65. What must the expected return on this stock be?\u00a0
A.\u00a015.67 percent
B.\u00a016.75 percent
C.\u00a017.10 percent
D.\u00a018.46 percent
E.\u00a021.57 percent<\/p>\n

\u00a0<\/span><\/p>\n

102.\u00a0A stock has an expected return of 14.3 percent, the risk-free rate is 3.2 percent, and the market risk premium is 8.1 percent. What must the beta of this stock be?\u00a0
A.\u00a00.88
B.\u00a00.94
C.\u00a01.08
D.\u00a01.21
E.\u00a01.37<\/p>\n

\u00a0<\/span><\/p>\n

103.\u00a0A 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?\u00a0
A.\u00a0Stock weight = 0.28; risk-free weight = 0.72
B.\u00a0Stock weight = 0.032; risk-free weight = 0.68
C.\u00a0Stock weight = 0.44; risk-free weight = 0.56
D.\u00a0Stock weight = 0.68; risk-free weight = 0.32
E.\u00a0Stock weight = 0.72; risk-free weight = 0.28<\/p>\n

\u00a0<\/span><\/p>\n

104.\u00a0Stock Y has a beta of 1.28 and an expected return of 13.7 percent. Stock Z has a beta of 1.02 and an expected return of 11.4 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?\u00a0
A.\u00a02.38 percent
B.\u00a02.76 percent
C.\u00a03.23 percent
D.\u00a03.69 percent
E.\u00a04.08 percent<\/p>\n

\u00a0<\/span><\/p>\n

105.\u00a0Stock J has a beta of 1.17 and an expected return of 14.4 percent, while Stock K has a beta of 0.68 and an expected return of 7.6 percent. You want a portfolio with the same risk as the market. What is the expected return of your portfolio?\u00a0
A.\u00a010.67 percent
B.\u00a011.18 percent
C.\u00a011.62 percent
D.\u00a012.04 percent
E.\u00a013.13 percent<\/p>\n

\u00a0<\/span><\/p>\n

106.\u00a0Consider the following information on a portfolio of three stocks:
\u00a0\"\"\u00a0
The portfolio is invested 35 percent in each A and B and 30 percent in C. If the expected T-bill rate is 3.90 percent, what is the expected risk premium on the portfolio?\u00a0
A.\u00a06.19 percent
B.\u00a06.90 percent
C.\u00a07.38 percent
D.\u00a07.72 percent
E.\u00a08.68 percent<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Multiple Choice Questions\u00a0\u00a01.\u00a0Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?\u00a0 A.\u00a0Expected returnB.\u00a0Real returnC.\u00a0Market rateD.\u00a0Systematic returnE.\u00a0Risk premium 2.\u00a0Which one of the following best describes a portfolio?\u00a0 A.\u00a0Risky securityB.\u00a0Security equally as risky as the overall marketC.\u00a0New issue of […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16],"tags":[],"class_list":["post-61411","post","type-post","status-publish","format-standard","hentry","category-education"],"_links":{"self":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts\/61411","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/comments?post=61411"}],"version-history":[{"count":0,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/posts\/61411\/revisions"}],"wp:attachment":[{"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/media?parent=61411"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/categories?post=61411"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/assignmenttutors.net\/blog\/wp-json\/wp\/v2\/tags?post=61411"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}