Ch.11 Quiz

Instructions
Please read the questions carefully.

This assessment is worth 100 points.

  1. Risk that affects a large number of assets, each to a greater or lesser degree, is called:   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  2. Risk that affects at most a small number of assets is called:   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  3. The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the particular asset's:   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  4. A particular risky asset's risk premium, measured relative to its beta coefficient, is its:   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  5. The linear relation between an asset's expected return and its beta coefficient is the:   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  6. Which of the following is a true statement?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  7. Which of the following is true about calculating expected portfolio returns and variances?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  8. Diversification works because:
    1. Unsystematic risk exists.
    2. Forming stocks into portfolios reduces the standard deviation of returns for each stock.
    3. Firm-specific risk can be dramatically reduced if not eliminated.
       (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  9. If investors can freely trade assets in financial markets, then the impact of trading activity on expected returns insures that _______.   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  10. You are looking at two different stocks. IBX has a beta of 1.25 and Microsquish has a beta of 1.95. Which statement is true about these investments?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  11. Which of the following would be considered an example of unsystematic risk?
    1. Higher quarterly loss than expected for Procter and Gamble
    2. Lower consumer spending than expected
    3. Latest unemployment figures increased, as expected
       (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  12. Which of the following would increase a portfolio's systematic risk?
    1. Common stock is sold and replaced with Treasury bills.
    2. Stocks with a beta equal to the market beta are added to a portfolio of Treasury bills.
    3. Low-beta stocks are sold and replaced with high-beta stocks.
       (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  13. Which of the following is/are true for a stock with beta equal to 1.5?
    1. The stock has a 50% higher expected return than the average stock.
    2. Given a market risk premium of 10%, the expected return on the stock would be 15%.
    3. The stock has 50% more systematic risk than the average stock.
       (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  14. Brady Lady Cosmetics just announced that earnings for the first quarter of the current year grew at an annualized rate of 3%, well above the rate for the same quarter the previous year. Upon the announcement, the stock price did not change. (The market in general was unchanged also.) Which of the following is most likely correct?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  15. You own 40 shares of stock A, which has a price of $15 per share, and 200 shares of stock B, which has a price of $2 per share. What is the portfolio weight for stock A in your portfolio?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  16. What is the variance of the following returns?


       (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  17. Asset A has an expected return of 22% and a beta of 1.8. The expected market return is 14%. What is the risk-free rate?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  18. What is the portfolio beta with 125% of your funds invested in the market portfolio via borrowing 25% of the funds at the risk-free interest rate?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  19. You hold three stocks in your portfolio: A, B, and C. The portfolio beta is 1.50. Stock A comprises 20% of the dollar value of your holdings and has a beta of 1.0. If you sell all of your investment in A and invest the proceeds in the risk-free asset, your new portfolio beta will be:   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  20. You own two risky assets, both of which plot on the security market line. Asset A has an expected return of 12% and a beta of 0.8. Asset B has an expected return of 18% and a beta of 1.4. If your portfolio beta is the same as the market portfolio, what proportion of your funds are invested in asset A?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  21. Given the following information, what is the portfolio standard deviation?


       (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  22. Please answer:


    Which security has the greatest systematic risk?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  23. Please answer:


    What is the expected return on a portfolio that is 40% invested in A and 60% invested in B?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  24. Please answer:


    What is the portfolio expected return and the portfolio beta if you invest 30% in A, 30% in B and 40% in the risk-free asset?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  

  25. Please answer:


    What is the expected return for asset A?   (4 points)

    a.  
    b.  
    c.  
    d.  
    e.  



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