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

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Question 41

Multiple Choice

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What is the beta of a portfolio which consists of the following?

A) 1.01
B) 1.24
C) 1.26
D) 1.29
E) 1.31

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Question 42

Multiple Choice

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Which one of the following statements is true?

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.

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Question 43

Multiple Choice

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Which one of the following is the best example of a risk associated with stock ownership?

Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent. The risk-free rate is 2.6 percent and the market risk premium is 6 percent. This stock is _____ because the CAPM return for the stock is _____ percent.

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

Alfonso Rodriquez has served as the president of Imports United for the past six years. During his tenure, the company has grown significantly and provided above-average returns to its shareholders. Thus, Mr. Rodriquez is highly admired. Yesterday, he announced that he will be retiring at the end of this quarter. You expected the stock price of Imports United to decline on this news because of the admiration investors have for this gentleman. Contrary to your expectations, the price of the stock remained unchanged. There was no other relevant market news related to this firm and the overall market also remained relatively unchanged for the day. What explanation can be given for the market not reacting as you expected to Mr. Rodriquez's announcement?

Which one of the following is the type of risk that only affects either a single firm or just a small number of firms?

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

Which one of the following must be equal for two individual securities with differing betas if those securities are correctly priced according to the capital asset pricing model?

Which one of the following is expressed as "E(R_M) - R_f"?

Which one of the following measures systematic risk?

Which of the following are needed to compute the beta of an individual security? I. average return on the market for the period II. standard deviation of the security and the market III. returns on the security and the market for multiple time periods IV. correlation of the security to the market

A portfolio is comprised of two stocks. Stock A comprises 55 percent of the portfolio and has a beta of 1.31. Stock B has a beta of .98. What is the portfolio beta?

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

A portfolio beta is computed as which one of the following?

What is the covariance of security A to the market given the following information?

What is the covariance of security A to the market given the following information?

Home Interior's stock has an expected return of 12.89 percent and a beta of 1.28. The market return is 10.7 percent and the risk-free rate is 2.8 percent. This stock is _____ because the CAPM return for the stock is _____ percent.

A stock has an expected return of 14.59 percent and a beta of 1.35. What is the risk-free rate if the market rate is 12.7 percent?

Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money, the reward for bearing systematic risk, and the amount of systematic risk?