32) You are considering a portfolio consisting of equal investments in the stocks Northbank
Inc. and Tropical Escapes Inc. Returns on the 2 stocks under various conditions are shown
below.
Scenario Return (%) Return % Return %
Probability Northbank Tropical Portfolio
0.20 4% 16%
0.50 10% 10%
0.30 20% -10%
Calculate the expected rate of and the standard deviation return of the portfolio.
Question Status: New question
Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and
describe how diversiication afects the returns to a portfolio of investments.
Keywords: portfolio risk and return
Principles: Principle 2: There Is a Risk-Return Tradeof
8.2 Systematic Risk and the Market Portfolio
1) The capital asset pricing model
A) provides a risk-return trade-of in which risk is measured in terms of the market returns.
B) provides a risk-return trade-of in which risk is measured in terms of beta.
C) measures risk as the correlation coeicient between a security and market rates of
return.
D) depicts the total risk of a security.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
2) The appropriate measure for risk according to the capital asset pricing model is
A) the standard deviation of a irm’s cash lows.
B) alpha.
C) beta.
D) probability of correlation.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
3) You are considering investing in Ford Motor Company. Which of the following is an
example of diversiiable risk?
A) Risk resulting from the possibility of a stock market crash
B) Risk resulting from uncertainty regarding a possible strike against Ford
C) Risk resulting from an expected recession
D) Risk resulting from interest rates decreasing
11
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
4) On average, when the overall market changes by 10%, the stock of Veracity
Communications changes 12%. What is Veracity’s beta?
A) 1.2
B) 8.33%
C) 12%
D) Insuicient information is provided
Question Status: New question
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
5) Which of the following has a beta of zero?
A) A risk-free asset
B) The market
C) A high-risk asset
D) Both A and B
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
12
6) Beta is a statistical measure of
A) hyperbolic.
B) total risk.
C) the standard deviation.
D) the relationship between an investment’s returns and the market return.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
7) A stock’s beta is a measure of its
A) systematic risk.
B) unsystematic risk.
C) company-speciic risk.
D) diversiiable risk.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
8) If you hold a portfolio made up of the following stocks:
Investment Value Beta
Stock A $2,000 1.5
Stock B $5,000 1.2
Stock C $3,000 .8
What is the beta of the portfolio?
A) 1.17
B) 1.14
C) 1.32
D) Can’t be determined from information given
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
13
9) Changes in the general economy, such as changes in interest rates or tax laws, represent
what type of risk?
A) Firm-speciic risk
B) Market risk
C) Unsystematic risk
D) Diversiiable risk
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
10) A stock with a beta greater than 1.0 has returns that are ________ volatile than the
market, and a stock with a beta of less than 1.0 exhibits returns which are ________ volatile
than those of the market portfolio.
A) more, more
B) more, less
C) less, more
D) less, less
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
14
11) You hold a portfolio with the following securities:
Percent
Security of Portfolio Beta Return
X Corporation 20% 1.35 14%
Y Corporation 35% .95 10%
Z Corporation 45% .75 8%
Compute the expected return and beta for the portfolio.
A) 10.67%, 1.02
B) 9.9%, 1.02
C) 34.4%, .94
D) 9.9%, .94
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
12) The beta of ABC Co. stock is the slope of
A) the security market line.
B) the characteristic line for a plot of returns on the S&P 500 versus returns on short-term
Treasury bills.
C) the arbitrage pricing line.
D) the line of best it for a plot of ABC Co. returns against the returns of the market
portfolio for the same period.
Question Status: Revised
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
15
13) You are thinking of adding one of two investments to an already well diversiied
portfolio.
Security A Security B
Expected return = 12% Expected return = 12%
Standard deviation of returns = 20.9% Standard deviation of returns = 10.1%
Beta = .8 Beta = 2
If you are a risk-averse investor
A) security A is the better choice.
B) security B is the better choice.
C) either security would be acceptable.
D) cannot be determined with information given.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
14) The market (systematic) risk associated with an individual stock is most closely
identiied with the
A) variance of the returns of the stock.
B) variance of the returns of the market.
C) beta of the stock.
D) standard deviation of the stock.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
15) Which of the following is NOT an example of systematic risk?
A) Inlation
B) Recession
C) Management risk
D) Interest rate risk
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
16
16) What type of risk can investors reduce through diversiication?
A) All risk
B) Systematic risk only
C) Unsystematic risk only
D) Uncertainty
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
17) Which of the following statements is true?
A) A stock with a beta less than zero has no exposure to systematic risk.
B) A stock with a beta greater than 1.0 has lower nondiversiiable risk than a stock with a
beta of 1.0.
C) A stock with a beta less than 1.0 has lower nondiversiiable risk than a stock with a beta
of 1.0.
D) A stock with a beta less than 1.0 has higher nondiversiiable risk than a stock with a
beta of 1.0.
Question Status: Revised
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
18) Currently, the expected return on the market is 12.5% and the required rate of return
for Alpha, Inc. is 12.5%. Therefore, Alpha’s beta must be
A) less than 1.0.
B) greater than 1.0.
C) equal to 1.0.
D) unknown based on the information provided.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
17
19) Investment risk is
A) the probability of achieving a return that is greater than what was expected.
B) the probability of achieving a beta coeicient that is less than what was expected.
C) the probability of achieving a return that is less than what was expected.
D) the probability of achieving a standard deviation that is less than what was expected.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
20) Which of the following statements is true?
A) Systematic, or market, risk can be reduced through diversiication.
B) Both systematic and unsystematic risk can be reduced through diversiication.
C) Unsystematic, or company, risk can be reduced through diversiication.
D) Neither systematic nor unsystematic risk can be reduced through diversiication.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
21) Which of the following is a good measure of the relationship between an investment’s
returns and the market’s returns?
A) The beta coeicient
B) The standard variation
C) The CPI
D) The S&P 500 Index
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
18
22) Which of the following is generally used to measure the market when calculating betas?
A) The Dow Jones Industrial Average
B) The Standard & Poors 500 Index
C) The Value Line Quantam Index
D) The Case Schiller Housing Index
Question Status: Revised
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
23) Your broker mailed you your year-end statement. You have $25,000 invested in Dow
Chemical, $18,000 tied up in GM, $36,000 in Microsoft stock, and $11,000 in Nike. The
betas for each of your stocks are 1.55 for Dow, 1.12 for GM, 2.39 for Microsoft, and .76 for
Nike. What is the beta of your portfolio?
A) 1.46
B) 1.70
C) 2.60
D) 0.41
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
24) You are considering a portfolio of three stocks with 30% of your money invested in
company X, 45% of your money invested in company Y, and 25% of your money invested in
company Z. If the betas for each stock are 1.22 for company X, 1.46 for company Y, and
1.03 for company Z, what is the portfolio beta?
A) 1.24
B) 1.00
C) 1.28
D) 1.33
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
19
25) Beta is a measurement of the relationship between a security’s returns and the general
market’s returns.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
26) Total risk equals unique security risk times systematic risk.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
27) The CAPM designates the risk-return tradeof existing in the market, where risk is
deined in terms of beta.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
28) It is impossible to eliminate all risk through diversiication.
Question Status: New question
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
29) Stocks with higher betas are usually more stable than stocks with lower betas.
Question Status: Previous edition
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
30) A stock with a beta of 1.0 would on average earn the risk-free rate.
Question Status: Revised
Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate
portfolio systematic risk (beta).
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
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