Question 1

Stocks D, E, and F have actual reward-to-risk ratios of 7.1, 6.8, and 7.4, respectively. Given this, you know for certain that:

Accepted Answer

A)  Stock E is preferable to Stock F.
B)  Stock D has a higher beta than Stock F.
C)  the market risk premium is greater than 6.8 and less than 7.4.
D)  Stock F is riskier than Stock D.
E)  at least two of the securities are mispriced.F) All of the above
G) D) and E)

Question 2

Stock A is a risky asset that has a beta of 1.4 and an expected return of 13.2%. Stock B is also a risky asset and has a beta of 1.25. The risk-free rate is 5.5%. Assuming both stocks are correctly priced, what is the expected return on Stock B?

Accepted Answer

A)  11.90%
B)  12.11%
C)  12.29%
D)  12.38%
E)  12.46%F) B) and D)
G) B) and C)

Question 3

A stock has a standard deviation of 21.0% and a covariance with the market of .0110. The market has a standard deviation of 12.0%. What is the beta of this stock?

Accepted Answer

A)  .294
B)  .572
C)  .764
D)  .973
E)  1.075F) All of the above
G) A) and E)

Question 4

Which one of the following statements is true?

Accepted Answer

A)  Risk and return are inversely related.
B)  Investors are compensated only for diversifiable risk.
C)  The beta of a portfolio may be lower than the lowest beta of any individual security held within the portfolio.
D)  How a security affects the risk of a portfolio is less important than the actual risk of the security itself.
E)  Investing has two dimensions: risk and return.F) B) and E)
G) C) and D)

Question 5

The amount of risk premium allocated to Security A is dependent upon which one of the following?

Accepted Answer

A)  unsystematic risk associated only with Security A
B)  total risk associated with Security A's classification
C)  total surprise associated with Security A
D)  the difference between the expected return and the actual return on Security A
E)  systematic risk associated with Security AF) D) and E)
G) A) and E)

Question 6

A security has a zero covariance with the market. This means that:

Accepted Answer

A)  the return on the security is always equal to that of the market.
B)  the return on the security moves in the same direction as the market return.
C)  the security is a risk-free security.
D)  there is no identifiable relationship between the return on the security and that of the market.
E)  the return on the security must vary more than that of the market.F) B) and E)
G) All of the above

Question 7

Which of the following correctly identifies the factors included in the Fama-French three-factor model?

Accepted Answer

A)  standard deviation, beta, and company size
B)  the risk-free rate, beta, and the market risk premium
C)  company size, company industry, and beta
D)  price-earnings ratios, beta, and book-to-market ratios
E)  beta, company size, and book-to-market ratiosF) A) and D)
G) A) and C)

Question 8

Which one of the following will increase the slope of the security market line? Assume all else constant.

Accepted Answer

A)  increasing the beta of an efficiently-priced portfolio
B)  increasing the risk-free rate
C)  increasing the market risk premium
D)  decreasing the market rate of return
E)  replacing a low-beta stock with a high-beta stock within a portfolioF) A) and D)
G) B) and C)

Question 9

Stock X has a beta of 1.02 and an expected return of 11.8%. Stock Y has a beta of 1.15 and an expected return of 13.1%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

Accepted Answer

A)  1.10%
B)  1.60%
C)  2.06%
D)  3.30%
E)  3.50%F) C) and D)
G) B) and E)

Question 10

Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month. This announcement will cause the firm's stock price to:

Accepted Answer

A)  increase.
B)  either increase or remain constant.
C)  remain constant.
D)  decrease.
E)  either increase, decrease, or remain constant.F) B) and E)
G) A) and B)

Question 11

The slope of the security market line is equal to the:

Accepted Answer

A)  market risk premium.
B)  risk-free rate of return.
C)  market rate of return.
D)  market rate of return multiplied by any security's beta, given an inefficient market.
E)  market rate of return multiplied by the risk-free rate.F) B) and E)
G) A) and E)

Question 12

A portfolio consists of one risky asset and one risk-free asset. The risky asset has an expected return of 13.2% and a beta of 1.32. The risk-free asset has an expected return of 1.5%. How much of the portfolio is invested in the risk-free asset if the portfolio beta is 1.02?

Accepted Answer

A)  16%
B)  23%
C)  32%
D)  45%
E)  54%F) A) and B)
G) A) and C)

Question 13

Pat realized a total return of 13.2%, which is more than his expected return of 12.5%. What is the amount of his unexpected return?

Accepted Answer

A)  −1.4%
B)  −.7%
C)  .7%
D)  1.4%
E)  1.8%F) A) and B)
G) A) and E)

Question 14

Which one of the following is the best example of unsystematic risk?

Accepted Answer

A)  decrease in company sales
B)  increase in market interest rates
C)  change in corporate tax rates
D)  increase in inflation
E)  decrease in market interest ratesF) B) and E)
G) A) and B)

Question 15

Stock X has a beta of .88 and an expected return of 10.8%. Stock Y has a beta of 1.15 and an expected return of 13.1%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

Accepted Answer

A)  1.10%
B)  1.20%
C)  2.06%
D)  3.30%
E)  3.50%F) A) and E)
G) C) and E)

Question 16

What is the covariance of Security A to the market given the following information?
  Year  Security A Returns  Market Returns 11%−6%29143−2741812\begin{array} { c c c } 	ext { Year } & 	ext { Security A Returns } & 	ext { Market Returns } \1 & 1\% & - 6\% \2 & 9 & 14 \3 & - 2 & 7 \4 & 18 & 12\end{array} Year 1234​ Security A Returns 1%9−218​ Market Returns −6%14712​

Accepted Answer

A)  23.14
B)  29.88
C)  48.83
D)  99.18
E)  114.01 F) B) and C)
G) None of the above

Question 17

The risk-free rate is 4.0% and the expected return on the market is 8%. Stock A has a beta of 1.35. For a given year, Stock A returned 12.0% while the market returned 8.80%. The systematic portion of Stock A's unexpected return was ________% and the unsystematic portion was ________%.

Accepted Answer

A)  .80; 1.30
B)  .90; 1.40
C)  1.08; 1.52
D)  1.40; .90
E)  4.62; 1.41F) A) and B)
G) B) and D)

Question 18

Which one of the following betas represents the greatest level of systematic risk?

Accepted Answer

A)  .05
B)  .68
C)  1.00
D)  1.19
E)  1.27F) A) and D)
G) All of the above

Question 19

The market has an expected return of 11.3% and a risky asset with a beta of 1.18 has an expected return of 13%. Based on this information, what is the pure time value of money?

Accepted Answer

A)  1.86%
B)  1.90%
C)  2.38%
D)  2.51%
E)  2.90%F) D) and E)
G) B) and D)

Question 20

Where will a security plot in relation to the security market line (SML) if it has a beta of 1.1 and is overvalued?

Accepted Answer

A)  to the right of the overall market and above the SML
B)  to the right of the overall market and below the SML
C)  to the left of the overall market and above the SML
D)  to the left of the overall market and below the SML
E)  on the SMLF) A) and E)
G) B) and C)

Exam 12: Return, Risk, and the Security Market Line

Stocks D, E, and F have actual reward-to-risk ratios of 7.1, 6.8, and 7.4, respectively. Given this, you know for certain that:

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Which of the following correctly identifies the factors included in the Fama-French three-factor model?

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The risk-free rate is 4.0% and the expected return on the market is 8%. Stock A has a beta of 1.35. For a given year, Stock A returned 12.0% while the market returned 8.80%. The systematic portion of Stock A's unexpected return was ________% and the unsystematic portion was ________%.

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Which one of the following is the best example of unsystematic risk?

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The amount of risk premium allocated to Security A is dependent upon which one of the following?

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Stock X has a beta of 1.02 and an expected return of 11.8%. Stock Y has a beta of 1.15 and an expected return of 13.1%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

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Which one of the following betas represents the greatest level of systematic risk?

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The slope of the security market line is equal to the:

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A stock has a standard deviation of 21.0% and a covariance with the market of .0110. The market has a standard deviation of 12.0%. What is the beta of this stock?

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Which one of the following statements is true?

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A security has a zero covariance with the market. This means that:

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Where will a security plot in relation to the security market line (SML) if it has a beta of 1.1 and is overvalued?

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Stock A is a risky asset that has a beta of 1.4 and an expected return of 13.2%. Stock B is also a risky asset and has a beta of 1.25. The risk-free rate is 5.5%. Assuming both stocks are correctly priced, what is the expected return on Stock B?

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A portfolio consists of one risky asset and one risk-free asset. The risky asset has an expected return of 13.2% and a beta of 1.32. The risk-free asset has an expected return of 1.5%. How much of the portfolio is invested in the risk-free asset if the portfolio beta is 1.02?

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Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month. This announcement will cause the firm's stock price to:

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Which one of the following will increase the slope of the security market line? Assume all else constant.

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Stock X has a beta of .88 and an expected return of 10.8%. Stock Y has a beta of 1.15 and an expected return of 13.1%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

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The market has an expected return of 11.3% and a risky asset with a beta of 1.18 has an expected return of 13%. Based on this information, what is the pure time value of money?

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Pat realized a total return of 13.2%, which is more than his expected return of 12.5%. What is the amount of his unexpected return?

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The risk-free rate is 4.0% and the expected return on the market is 8%. Stock A has a beta of 1.35. For a given year, Stock A returned 12.0% while the market returned 8.80%. The systematic portion of Stock A's unexpected return was % and the unsystematic portion was %.

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