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An investment's expected rate of return is found by multiplying which of the following?


A) each possible outcome's variance by its probability
B) each possible outcome's standard deviation by its average rate of return.
C) the average return of each occurrence by its squared variance
D) each possible outcome or "state" by its probability of occurrence

E) A) and C)
F) B) and C)

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Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5.The market is in equilibrium,with required returns equalling expected returns.Which of the following statements is correct?


A) If expected inflation remains constant but the market risk premium (rM - rRF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase.
B) If both expected inflation and the market risk premium (rM - rRF) increase, the required return on Stock HB will increase by more than that of Stock LB.
C) If both expected inflation and the market risk premium (rM - rRF) increase, the required returns of both stocks will increase by the same amount.
D) If expected inflation remains constant but the market risk premium (rM - rRF) declines, the required return on Stock HB will decline but the required return of Stock LB will increase.

E) B) and D)
F) C) and D)

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Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,its standard deviation.

A) True
B) False

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You observe the following information regarding Companies X and Y:​- Company X has a higher expected return than Company Y.- Company X has a lower standard deviation of returns than Company Y.- Company X has a higher beta than Company Y.​Given this information,which of the following statements is correct?


A) Company X has more company-specific risk than Company Y.
B) Company X has a lower coefficient of variation than Company Y.
C) Company X has less market risk than Company Y.
D) Company X's returns will be negative when Y's returns are positive.

E) A) and B)
F) A) and C)

Correct Answer

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Which best describes risk-averse investors?


A) They require higher rates of return on investments whose returns have low uncertainty.
B) They require higher rates of return on investments whose returns have high uncertainty.
C) They require lower rates of return on investments whose returns have low uncertainty.
D) There is no such thing as a risk-averse investor.

E) All of the above
F) A) and D)

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You are given the following returns on the Market and on Stock A.Calculate Stock A's beta coefficient.  Year  Market  Stock A 2005−5.00%−15.00%200611.00%12.00%200725.00%40.00%\begin{array}{ccc}\text { Year } & \text { Market } & \text { Stock A } \\\hline 2005 & -5.00 \% & -15.00 \% \\2006 & 11.00 \% & 12.00 \% \\2007 & 25.00 \% & 40.00 \%\end{array}


A) 1.74
B) 1.83
C) 1.92
D) 2.02

E) None of the above
F) A) and B)

Correct Answer

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Which of the following is correct regarding a change in beta and its potential impact on a stock's price?


A) Any change in beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's price.
B) Any change in beta is not likely to affect the required rate of return on a stock. However, which implies that a change in beta will likely have an impact on the stock's price.
C) Any change in beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely not have an impact on the stock's price.
D) Any change in beta is not likely to affect the required rate of return on a stock, which implies that a change in beta will not likely have an impact on the stock's price.

E) A) and B)
F) A) and C)

Correct Answer

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Which of the following is correct regarding the SML?


A) The greater the marginal investor's risk aversion, the steeper the SML.
B) The greater the marginal investor's risk aversion, the flatter the SML.
C) The greater the marginal investor's risk aversion, the more negative the SML slope.
D) The lower the marginal investor's risk aversion, the steeper the SML.

E) A) and B)
F) None of the above

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We will generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.

A) True
B) False

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Suppose you have an asset with a return that rises as GDP increases.How will the asset's return be affected if the government announces that GDP is unexpectedly higher than was previously thought?


A) The return will increase.
B) The return will remain unchanged.
C) The return will decrease.
D) It is undetermined and more information is needed.

E) A) and C)
F) B) and C)

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Since the market return represents the expected return on an average stock,that return has a certain amount of risk.As a result,there exists a market risk premium,which is the amount over and above the risk-free rate,which is required to compensate stock investors for assuming an average amount of risk.

A) True
B) False

Correct Answer

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Which of the following is true regarding dollar returns?


A) Dollar returns fail to take into account the scale of the investment.
B) Dollar returns take into account the timing of the investments.
C) Dollar returns fail to take into account the timing of investment.
D) Both A and C are true regarding dollar returns.

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

Correct Answer

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What happens to the amount of market risk as the number of assets in a portfolio increases?


A) It decreases.
B) It increases.
C) It remains constant.
D) It changes randomly.

E) B) and C)
F) A) and B)

Correct Answer

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What is implied when an asset has a negative beta value?


A) It implies that the asset can't exist because negative beta assets are theoretically impossible.
B) It implies that the asset is a necessary component for achieving a fully diversified portfolio.
C) It implies that the asset is a risk-reducing property when added to a portfolio.
D) It implies that the asset has a higher expected return.

E) A) and B)
F) None of the above

Correct Answer

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In a two-asset portfolio,Stock A and Stock B have a measured correlationship of r = -.80.Which of the following best describes the impact on the portfolio of having "A" and "B" in the portfolio?


A) A and B are perfectly positively correlated, which reduces diversification.
B) A and B are negatively correlated, which improves diversification in the portfolio.
C) A and B are negatively correlated, which reduces diversification in the portfolio.
D) A and B are perfectly negatively correlated, which reduces diversification.

E) A) and B)
F) B) and C)

Correct Answer

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Stock X has a beta of 0.6,while Stock Y has a beta of 1.4.Which of the following statements is correct?


A) A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a required return that exceeds that of the overall market.
B) Stock Y must have a higher expected return and a higher standard deviation than Stock X.
C) If expected inflation increases (but the market risk premium is unchanged) , the required return on both stocks will decrease by the same amount.
D) If the market risk premium decreases but expected inflation is unchanged, the required return on both stocks will decrease, but the decrease will be greater for Stock Y.

E) A) and B)
F) B) and C)

Correct Answer

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An investment has an average return of 4.7%.The standard deviation of returns on this investment is 25.81%.Given this information,what is the range of return 68% of the time?


A) 30.51% to -21.11%
B) 4.70% to 25.81%
C) 70.73% to -21.11%
D) 8.3% to 54.13%

E) A) and B)
F) All of the above

Correct Answer

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Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y.Both stocks have an expected return of 15%,betas of 1.6,and standard deviations of 30%.The returns of the two stocks are independent,so the correlation coefficient between them,rXY,is zero.Which statement best describes the characteristics of your two-stock portfolio?


A) Your portfolio has a standard deviation of 30%, and its expected return is 15%.
B) Your portfolio has a standard deviation less than 30%, and its beta is greater than 1.6.
C) Your portfolio has a beta equal to 1.6, and its expected return is 15%.
D) Your portfolio has a beta greater than 1.6, and its expected return is greater than 15%.

E) A) and C)
F) C) and D)

Correct Answer

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Bad managerial judgments or unforeseen negative events that happen to a firm are defined as company-specific,or unsystematic,events,and their effects on investment risk can in theory be diversified away.

A) True
B) False

Correct Answer

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Which of the following statements is correct?


A) A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected.
B) Company-specific (or diversifiable) risk can be reduced by forming a large portfolio, but normally even highly diversified portfolios are subject to market (or systematic) risk.
C) A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a one-stock portfolio if that one stock has a beta less than 1.0.
D) If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.

E) B) and D)
F) B) and C)

Correct Answer

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