Question 1

If the covariance of stock 1 with stock 2 is -.0065,then what is the covariance of stock 2 with stock 1?

Accepted Answer

A)  -.0065
B)  +.0065
C)  greater than +.0065
D)  less than -.0065
E)  Need additional information.F) A) and B)
G) A) and C)

Question 2

According to the Capital Asset Pricing Model:

Accepted Answer

A)  the expected return on a security is positively and linearly related to the security's beta.
B)  the expected return on a security is negatively and linearly related to the security's beta.
C)  the expected return on a security is positively and non-linearly related to the security's beta.
D)  the expected return on a security is positively and linearly related to the security's variance.
E)  the expected return on a security is negatively and non-linearly related to the security's beta.F) A) and D)
G) A) and C)

Question 3

The risk premium for an individual security is computed by:

Accepted Answer

A)  adding the risk-free rate to the security's expected return.
B)  multiplying the security's beta by the risk-free rate of return.
C)  multiplying the security's beta by the market risk premium.
D)  dividing the market risk premium by the beta of the security.
E)  dividing the market risk premium by the quantity (1 - beta) .F) A) and E)
G) None of the above

Question 4

What is the separation principle?

Accepted Answer

The separation principle says that an in...

Question 5

You would like to combine a risky stock with a beta of 1.5 with U.S.Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in Treasury bills?

Accepted Answer

A)  25%
B)  33%
C)  50%
D)  67%
E)  75%F) C) and D)
G) D) and E)

Question 6

The percentage of a portfolio's total value invested in a particular asset is called that asset's:

Accepted Answer

A)  rate of return.
B)  portfolio risk.
C)  portfolio weight.
D)  portfolio return.
E)  investment value.F) B) and D)
G) None of the above

Question 7

The efficient set of portfolios

Accepted Answer

A)  contains the portfolio combinations with the highest return for a given level of risk.
B)  contains the portfolio combinations with the lowest risk for a given level of return.
C)  is the lowest overall risk portfolio.
D)  Both A and B
E)  Both A and C.F) D) and E)
G) All of the above

Question 8

The correlation between two stocks:

Accepted Answer

A)  can take on positive values.
B)  can take on negative values.
C)  cannot be greater than 1.
D)  cannot be less than -1.
E)  All of the above.F) A) and D)
G) A) and C)

Question 9

The principle of diversification tells us that:

Accepted Answer

A)  concentrating an investment in three companies all within the same industry will greatly reduce your overall risk.
B)  concentrating an investment in two or three large stocks will eliminate all of your risk.
C)  spreading an investment across many diverse assets will eliminate some of the risk.
D)  spreading an investment across many diverse assets will eliminate all of the risk.
E)  spreading an investment across five diverse companies will not lower your overall risk at all.F) A) and B)
G) D) and E)

Question 10

What is the standard deviation of the returns on a stock given the following information?

Accepted Answer

A)  5.80%
B)  7.34%
C)  8.38%
D)  9.15%
E)  9.87%F) B) and D)
G) B) and E)

Question 11

You have a portfolio of two risky stocks which turns out to have no diversification benefit.The reason you have no diversification is the returns:

Accepted Answer

A)  are too small.
B)  move perfectly opposite of one another.
C)  are too large to offset.
D)  move perfectly with one another.
E)  are completely unrelated to one another.F) None of the above
G) B) and E)

Question 12

The standard deviation of GenLabs returns is

Accepted Answer

A)  .0845
B)  .2069
C)  .3065
D)  .3358
E)  None of the above.F) A) and B)
G) A) and E)

Question 13

What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy is in a normal period?

Accepted Answer

A)  6.4%
B)  7.6%
C)  10.4%
D)  13.2%
E)  14.0%F) A) and E)
G) All of the above

Question 14

The common stock of Flavorful Teas has an expected return of 14.4%.The return on the market is 10% and the risk-free rate of return is 2.5%.What is the beta of this stock?

Accepted Answer

A)  .65
B)  1.09
C)  1.32
D)  1.59
E)  1.68F) B) and C)
G) C) and E)

Question 15

You have plotted the data for two securities over time on the same graph,i.e.,the month return of each security for the last 5 years.If the pattern of the movements of the two securities rose and fell as the other did,these two securities would have:

Accepted Answer

A)  no correlation at all.
B)  a weak negative correlation.
C)  a strong positive correlation.
D)  a strong negative correlation.
E)  one can not get any idea of the correlation from a graph.F) All of the above
G) A) and B)

Question 16

A well-diversified portfolio has negligible

Accepted Answer

A)  unsystematic risk.
B)  systematic risk.
C)  expected return.
D)  variance.
E)  Both C and D.F) A) and E)
G) B) and D)

Question 17

You are considering purchasing stock S.This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period.The overall expected rate of return on this stock will:

Accepted Answer

A)  increase as the probability of a boom economy increases.
B)  increase as the probability of a recession increases.
C)  vary inversely with the growth of the economy.
D)  be equal to 75% of 8% if there is a 75% chance of a boom economy.
E)  be equal to one-half of 8% if there is a 50% chance of an economic boom.F) A) and B)
G) A) and C)

Question 18

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

Accepted Answer

A)  Efficient Markets Hypothesis (EMH) 
B)  systematic risk principle
C)  Open Markets Theorem
D)  Law of One Price
E)  principle of diversificationF) A) and E)
G) B) and D)

Question 19

Why are some risks diversifiable and some nondiversifiable?
 Give an example of each.

Accepted Answer

A reasonable answer would,at a minimum,e...

Question 20

A portfolio is made up of 75% of stock 1,and 25% of stock 2.Stock 1 has a variance of .08,and stock 2 has a variance of .035.The covariance between the stocks is -.001.Calculate both the variance and the standard deviation of the portfolio.

Accepted Answer

² = (.75)²(.08)+ (.25...

Exam 11: Return and Risk: The Capital Asset Pricing Model Capm

You are considering purchasing stock S.This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period.The overall expected rate of return on this stock will:

Correct AnswerverifiedShow Answer

You have plotted the data for two securities over time on the same graph,i.e.,the month return of each security for the last 5 years.If the pattern of the movements of the two securities rose and fell as the other did,these two securities would have:

Correct AnswerverifiedShow Answer

The risk premium for an individual security is computed by:

Correct AnswerverifiedShow Answer

What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy is in a normal period?

Correct AnswerverifiedShow Answer

The efficient set of portfolios

Correct AnswerverifiedShow Answer

If the covariance of stock 1 with stock 2 is -.0065,then what is the covariance of stock 2 with stock 1?

Correct AnswerverifiedShow Answer

You would like to combine a risky stock with a beta of 1.5 with U.S.Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in Treasury bills?

Correct AnswerverifiedShow Answer

A well-diversified portfolio has negligible

Correct AnswerverifiedShow Answer

Why are some risks diversifiable and some nondiversifiable? Give an example of each.

Correct AnswerverifiedA reasonable answer would,at a minimum,e...View AnswerShow Answer

According to the Capital Asset Pricing Model:

Correct AnswerverifiedShow Answer

The common stock of Flavorful Teas has an expected return of 14.4%.The return on the market is 10% and the risk-free rate of return is 2.5%.What is the beta of this stock?

Correct AnswerverifiedShow Answer

The principle of diversification tells us that:

Correct AnswerverifiedShow Answer

What is the standard deviation of the returns on a stock given the following information?

Correct AnswerverifiedShow Answer

The correlation between two stocks:

Correct AnswerverifiedShow Answer

The percentage of a portfolio's total value invested in a particular asset is called that asset's:

Correct AnswerverifiedShow Answer

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

Correct AnswerverifiedShow Answer

You have a portfolio of two risky stocks which turns out to have no diversification benefit.The reason you have no diversification is the returns:

Correct AnswerverifiedShow Answer

The standard deviation of GenLabs returns is

Correct AnswerverifiedShow Answer

What is the separation principle?

Correct AnswerverifiedThe separation principle says that an in...View AnswerShow Answer

A portfolio is made up of 75% of stock 1,and 25% of stock 2.Stock 1 has a variance of .08,and stock 2 has a variance of .035.The covariance between the stocks is -.001.Calculate both the variance and the standard deviation of the portfolio.

Correct Answerverified 2 = (.75)2(.08)+ (.25...View AnswerShow Answer

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A reasonable answer would,at a minimum,e...
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The separation principle says that an in...
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² = (.75)²(.08)+ (.25...
View Answer