You financial advisor has recommended a $200,000 portfolio containing assets X, Y, and Z. $80,000 will be invested in asset X,

| March 14, 2016

If you include two assets in a portfolio whose returns are perfectly negatively correlated, that portfolio will have an overall risk that

Select one:

a. increases to a level above that of either asset.

b. decreases to a level below that of either asset.

c. stabilizes to a level between the asset with the higher risk and the asset with the lower risk.

d. remains unchanged.

You financial advisor has recommended a $200,000 portfolio containing assets X, Y, and Z. $80,000 will be invested in asset X, with a beta of 1.75; $60,000 will be invested in asset Y, with a beta of 2.5; and $65,000 will be invested in asset Z, with a beta of 0.25. The beta of the portfolio is

Select one:

a. 1.37

b. 1.20

c. 1.53

d. 1.49

Asset G has a beta of 0.5. The risk-free rate of return is 7 percent, while the return on the market portfolio of assets is 12 percent. The asset’s required rate of return is

Select one:

a. 5.4 percent

b. 10.6 percent

c. 13.4 percent

d. 9.5 percent

What is the expected return for asset X if it has a beta of 1.1, the expected market return is 15 percent, and the expected risk-free rate is 5 percent?

Select one:

a. 15.0%

b. 16.0%

c. 20.0%

d. 21.5%

Perfectly ________ correlated assets move precisely together and have a correlation coefficient of ________. Perfectly ________ correlated assets move precisely in opposite directions and have a correlation coefficient of

Select one:

a. positively; -1; negatively; +1

b. positively; +1; negatively; -1

c. negatively; -1; positively; +1

d. negatively; +1; positively; -1

The beta of the market

Select one:

a. is greater than 1

b. is 1

c. is less than 1

d. cannot be determined

Risk that affects all firms is called

select one:

a. nondiversifiable risk

b. management risk

c. diversifiable risk

d. total risk

_________ measures total risk and _________ measures systematic risk.

Select one:

a. Beta; alpha

b. Beta; standard deviation

c. Alpha; beta

d. Standard deviation; beta

e. Standard deviation; variance

In the capital asset pricing model, the beta coefficient is a measure of

Select one:

a. nondiversifiable risk

b. economic risk

c. unsystematic risk

d. diversifiable risk

If asset A has a beta of 1.3, has an expected return of 25 percent, and the expected market return is 20 percent, what is the expected risk-free rate of return?

Select one:

a. 7.5%

b. 22.5%

c. 15.0%

d. 15.0%

What is the expected return for asset A if the beta is 1.8, the market return is 12 percent, and the risk-free rate is 5 percent?

Select one:

a. 14.8%

b. 7.5%

c. 20.0%

d. 17.6%

The ________ is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.

Select one:

a. coefficient of variation

b. mean

c. chi square

d. standard deviation

Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market?

Select one:

a. riskless market

b. evenly distributed market

c. zero volatility market

d. Blume’s market

e. efficient capital market

To calculate the market risk premium, you

Select one:

a. Add the risk-free rate of return to the inflation rate.

b. Add the risk-free rate of return to the market rate of return.

c. Subtract the risk-free rate of return from the inflation rate.

d. Subtract the risk-free rate of return from the market rate of return.

e. Multiply the risk-free rate of return by a beta of 1.0.

For the years 1926 through 2010, which category of stocks yielded the largest average return?

Select one:

a. U.S. Treasury bills

b. large company stocks

c. small company stocks

d. long-term corporate bonds

e. long-term government bonds

The additional return realized by an investment that has a beta of 1.23 over the amount earned by a risk-free asset is called what?

Select one:

a. Market risk premium

b. Risk premium

c. Systematic return

d. Total return

e. Real rate of return

Which one of the following should earn the most risk premium based on CAPM?

Select one:

a. diversified portfolio with returns similar to the overall market

b. stock with a beta of 1.38

c. stock with a beta of 0.74

d. U.S. Treasury bill

e. portfolio with a beta of 1.01

The expected return on a portfolio considers which of the following factors?

I. percentage of the portfolio invested in each individual security

II. projected states of the economy

III. the performance of each security given various economic states

IV. probability of occurrence for each state of the economy

Select one:

a. I and III only

b. II and IV only

c. I, III, and IV only

d. II, III, and IV only

e. I, II, III, and IV

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