Question 1

You 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?
A) The expected rate of return on the portfolio must be positive.
B) The arithmetic average of the betas for each security held in the portfolio must equal 1.0.
C) The portfolio beta must be 1.0.
D) The summation of the return deviation from the portfolio expected return for each economic state must equal zero.
E) The standard deviation of the portfolio must equal 1.0.

Accepted Answer

D

Question 2

A 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?
A) An increase in the rate of return in a recessionary economy
B) An increase in the probability of an economic boom
C) A decrease in the probability of a recession occurring
D) A decrease in the probability of an economic boom
E) An increase in the rate of return for a normal economy

Accepted Answer

An increase in the probability of an economic boom or an increase in the rate of return for a normal economy would both increase the overall expected rate of return. A decrease in the probability of a recession occurring would also increase the overall expected rate of return. However, a decrease in the probability of an economic boom would lower the overall expected rate of return since the rate of return during an economic boom is higher than during a normal or recessionary economy. Therefore, the correct answer is D.

Question 3

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

Accepted Answer

The variance of the returns on the stock will be positive if there are different expected rates of return for each state of the economy. This is because the variance measures the dispersion of the different returns around the expected value. If the expected returns are all the same, then there is no dispersion and the variance is zero. The economic probabilities do not affect the variance, but rather the expected value of the returns. Therefore, choice B and E are incorrect. Choice A is also incorrect because the probability of occurrence of a particular state of the economy does not affect its expected return.

Question 4

Which one of the following is the slope of the security market line?
A) Risk-free rate
B) Market risk premium
C) Beta coefficient
D) Risk premium on an individual asset
E) Market rate of return

Accepted Answer

The answer of Which one of the following is the...

Question 5

The security market line is defined as a positively sloped straight line that displays the relationship between which two of the following variables?
A) Beta and standard deviation
B) Systematic and unsystematic risk
C) Nominal and real returns
D) Expected return and beta
E) Risk premium and beta

Accepted Answer

The security market line displays the relationship between expected return and beta. It is used to determine whether a security is undervalued or overvalued in relation to its expected return, given its level of systematic risk (beta). The slope of the security market line represents the market risk premium.

Question 6

Which one of the following is the computation of the risk premium for an individual
security?  is the expected return on the security,  is the risk-free rate,  is the security's
beta, and  is the expected rate of return on the market.

A) 
B) 
C) 
D) 
E)

Accepted Answer

The answer of Which one of the following is the...

Question 7

Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?
A) Systematic
B) Unsystematic
C) Diversification
D) Security market line
E) Capital asset pricing model

Accepted Answer

Diversification is the practice of investing in a variety of diverse assets in order to reduce risk. It involves spreading investments across multiple asset classes and sectors, rather than putting all of one's money into a single investment. This helps to reduce the impact of any one investment's loss on the overall portfolio, and can potentially lead to more stable returns over time.

Question 8

Which one of the following describes systemic risk?
A) Risk that affects a large number of assets
B) An individual security's total risk
C) Diversifiable risk
D) Asset specific risk
E) Risk unique to a firm's management

Accepted Answer

Systemic risk is the risk that affects a wide range of assets or the entire market, rather than just a specific security or company. It is often caused by events or factors that are beyond the control of individual investors or companies, such as economic recessions or natural disasters.

Question 9

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?
A) Risk-free rate
B) Market risk premium
C) Expected return minus the risk-free rate
D) Market rate of return
E) Cost of capital

Accepted Answer

The answer of Which one of the following is the...

Question 10

The systematic risk principle states that the expected return on a risky asset depends only on which one of the following?
A) Unique risk
B) Diversifiable risk
C) Asset-specific risk
D) Market risk
E) Unsystematic risk

Accepted Answer

The systematic risk principle states that the expected return on a risky asset depends only on market risk, also known as systematic risk. This refers to the risk that cannot be diversified away through portfolio diversification, and is instead inherent in the overall market conditions.

Question 11

Which one of the following best describes a portfolio?
A) Risky security
B) Security equally as risky as the overall market
C) New issue of stock
D) Group of assets held by an investor
E) Investment in a risk-free security

Accepted Answer

A portfolio refers to a group of assets held by an investor, which could include a mix of stocks, bonds, and other securities. A portfolio is not necessarily a single security, nor is it necessarily a new issue of stock. The level of risk or whether it includes a risk-free security depends on the specific assets included in the portfolio.

Question 12

Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?
A) A news bulletin that the anticipated layoffs by a firm will occur as expected on December 1
B) Announcement that the CFO of the firm is retiring June  as previously announced
C) Announcement that a firm will continue its practice of paying a $3 a share annual dividend
D) Statement by a firm that it has just discovered a manufacturing defect and is recalling its product
E) The verification by senior management that the firm is being acquired as had been rumored

Accepted Answer

The announcement that the firm has discovered a manufacturing defect and is recalling its product is most apt to result in an unexpected return because it implies that the company may have to incur a significant cost to rectify the issue, potentially affecting its profits and revenue. This unexpected development may also negatively impact the company's reputation and stock prices.

Question 13

The 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
A) I and II only
B) I and IV only
C) II and III only
D) I, III, and IV only
E) I, II, III, and IV

Accepted Answer

The expected return on a security is calculated by multiplying the probability of each possible return by its associated return and summing them up. Therefore, an increase in the probability of an economic boom (I) or an increase in the rate of return given an economic boom (IV) will increase the overall expected return. On the other hand, a decrease in the rate of return given a normal economy (II) or an increase in the probability of a normal economy (III) will decrease the expected return. Therefore, only option C includes factors that could potentially decrease the expected return on this security.

Question 14

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?
A) Squared deviation
B) Beta coefficient
C) Standard deviation
D) Mean
E) Variance

Accepted Answer

The beta coefficient measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset. The formula for beta is the covariance between the asset and the market divided by the variance of the market. A beta of 1 indicates that the asset has the same level of systematic risk as the market, while a beta greater than 1 indicates that the asset has more systematic risk and a beta less than 1 indicates that the asset has less systematic risk than the market.

Question 15

Consider 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?
A) The portfolio beta must be 1.0.
B) The portfolio expected rate of return must be the same for each economic state.
C) The portfolio risk premium must equal zero.
D) The portfolio expected rate of return must equal the expected market rate of return.
E) There must be equal probabilities that the state of the economy will be a boom or a bust.

Accepted Answer

In order for the portfolio variance to be zero, the portfolio must have no variation in returns across economic states. This can only occur if the expected rate of return is the same for each economic state. Therefore, choice B is the correct answer. Choices A, C, D, and E do not guarantee a portfolio variance of zero.

Question 16

Which one of the following statements is correct?
A) The risk premium on a risk-free security is generally considered to be one percent.
B) The expected rate of return on any security, given multiple states of the economy, must be positive.
C) There is an inverse relationship between the level of risk and the risk premium given a risky security.
D) If a risky security is correctly priced, its expected risk premium will be positive.
E) If a risky security is priced correctly, it will have an expected return equal to the risk-free rate.

Accepted Answer

The answer of Which one of the following statements is...

Question 17

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?
A) Portfolio variance
B) Portfolio standard deviation
C) Portfolio weight
D) Portfolio expected return
E) Portfolio beta

Accepted Answer

The term that applies to the 28 percent is portfolio weight, which represents the percentage of Susan's total portfolio that is invested in Stock A. Portfolio variance and portfolio standard deviation are measures of risk, portfolio expected return is the average return of the entire portfolio, and portfolio beta measures the systematic risk of the entire portfolio compared to the market. None of these terms applies specifically to the 28 percent represented by Stock A.

Question 18

The 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?
A) Risk-free rate and beta
B) Market rate of return and beta
C) Market rate of return and the risk-free rate
D) Risk-free rate and the market rate of return
E) Expected return and beta

Accepted Answer

The security market line (SML) represents the relationship between the expected return of a security and its beta, which measures the security's risk in relation to the market.

Question 19

Mary 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?
A) Expected return
B) Real return
C) Market rate
D) Systematic return
E) Risk premium

Accepted Answer

The 16.5 percent rate is the return that Mary anticipates earning on her investment in the risky stock. This is a forward-looking estimate and is referred to as the expected return.

Question 20

Which of the following terms can be used to describe unsystematic risk? I. asset-specific risk
II) diversifiable risk
III) market risk
IV) unique risk
A) I and IV only
B) II and III only
C) I, II, and IV only
D) II, III, and IV only
E) I, II, III, and IV

Accepted Answer

Unsystematic risk is specific to a particular asset or company and can be reduced through diversification. It is also known as asset-specific risk, diversifiable risk, and unique risk. Market risk, however, is systematic and affects the entire market.

Quiz 11: Risk and Return

You 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?

A 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?

Which one of the following is the slope of the security market line?

The security market line is defined as a positively sloped straight line that displays the relationship between which two of the following variables?

Which one of the following is the computation of the risk premium for an individual security? is the expected return on the security, is the risk-free rate, is the security's beta, and is the expected rate of return on the market.

Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

Which one of the following describes systemic risk?

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

The systematic risk principle states that the expected return on a risky asset depends only on which one of the following?

Which one of the following best describes a portfolio?

Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?

Consider 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?

Which one of the following statements is correct?

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?

The 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?

Mary 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?

Which of the following terms can be used to describe unsystematic risk? I. asset-specific risk II) diversifiable risk III) market risk IV) unique risk