Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 12 Systematic Risk and the Equity Risk Premium
12.1 The Expected Return of a Portfolio
1) Stocks have both diversiiable risk and undiversiiable risk, but only diversiiable risk is
rewarded with higher expected returns.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) The volatility of an individual stock is more than the volatility of a well-diversiied
portfolio of stocks.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) A portfolio comprises two stocks, A and B, with equal amounts of money invested in
each. If stock A’s stock price increases and that of stock B decreases, the weight of stock A
in the portfolio will increase.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
1
4) A portfolio has three stocks — 240 shares of Yahoo (YHOO), 150 Shares of General
Motors (GM), and 40 shares of Standard and Poor’s Index Fund (SPY). If the price of YHOO
is $30, the price of GM is $30, and the price of SPY is $130, calculate the portfolio weight
of YHOO and GM.
A) 42.6%, 26.6%
B) 23.4%, 49.3%
C) 12.8%, 16.0%
D) 40.5%, 28.0%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
5) A portfolio has three stocks — 300 shares of Yahoo (YHOO), 300Shares of General
Motors (GM), and 80 shares of Standard and Poor’s Index Fund (SPY). If the price of YHOO
is $20, the price of GM is $30, and the price of SPY is $150, calculate the portfolio weight
of YHOO and GM.
A) 11.1%, 20.0%
B) 16.7%, 28.3%
C) 22.2%, 33.3%
D) 22.2%, 43.3%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
2
6) A portfolio has three stocks — 110 shares of Yahoo (YHOO), 210 Shares of General
Motors (GM), and 70 shares of Standard and Poor’s Index Fund (SPY). If the price of YHOO
is $20, the price of GM is $20, and the price of SPY is $130, calculate the portfolio weight
of YHOO and GM.
A) 10.6%, 13.5%
B) 9.9%, 25.7%
C) 13.5%, 24.4%
D) 14.2%, 27.1%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
7) Suppose you invest in 100 shares of Harley-Davidson (HOG) at $40 per share and 230
shares of Yahoo (YHOO) at $25 per share. If the price of Harley-Davidson increases to $50
and the price of Yahoo decreases to $20 per share, what is the return on your portfolio?
A) -1.54%
B) 12.25%
C) -10.50%
D) -5.20%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
3
8) Suppose you invest in 220 shares of Johnson and Johnson (JNJ) at $70 per share and 240
shares of Yahoo (YHOO) at $20 per share. If the price of Johnson and Johnson increases to
$80 and the price of Yahoo decreases to $18 per share, what is the return on your
portfolio?
A) 12.77%
B) 8.51%
C) 9.37%
D) 10.22%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
9) Suppose you invest in 110 shares of Merck (MRK) at $40 per share and 120 shares of
Yahoo (YHOO)at $25 per share. If the price of Merck increases to $45 and the price of
Yahoo decreases to $22 per share, what is the return on your portfolio?
A) 7.70%
B) 4.11%
C) 2.57%
D) 3.47%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4
10) Your retirement portfolio comprises 100 shares of the Standard & Poor’s 500 fund
(SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is
$118 and that of AGG is $97. If you expect the return on SPY to be 11% in the next year
and the return on AGG to be 6%, what is the expected return for your retirement portfolio?
A) 8.74%
B) 10.06%
C) 7.43%
D) 7.87%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
11) Your retirement portfolio comprises 300 shares of the S&P 500 fund (SPY) and 100
shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $136 and that
of AGG is $97. If you expect the return on SPY to be 11% in the next year and the return on
AGG to be 10%, what is the expected return for your retirement portfolio?
A) 9.73%
B) 8.65%
C) 10.81%
D) 10.27%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
5
12) Your retirement portfolio comprises 200 shares of the S&P 500 fund (SPY) and 100
shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $134 and that
of AGG is $110. If you expect the return on SPY to be 10% in the next year and the return
on AGG to be 8%, what is the expected return for your retirement portfolio?
A) 8.48%
B) 154.10%
C) 9.89%
D) 9.42%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
13) The price of Microsoft is $30 per share and that of Apple is $58 per share. The price of
Microsoft increases to $39 per share after one year and to $42 after two years. Also, shares
of Apple increase to $66 after one year and to $71 after two years. If your portfolio
comprises 100 shares of each security, what is your portfolio return over year 1 and year 2?
Assume no dividends are paid.
A) 19.32%, 7.62%
B) 28.01%, 8.38%
C) 23.18%, 11.43%
D) 22.22%, 13.71%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
6
14) The price of Microsoft is $25 per share and that of Apple is $50 per share. The price of
Microsoft increases to $36 per share after one year and to $41 after two years. Also, shares
of Apple increase to $56 after one year and to $66 after two years. If your portfolio
comprises 100 shares of each security, what is your portfolio return over year 1 and year 2?
Assume no dividends are paid.
A) 21.53%, 14.67%
B) 22.67%, 16.30%
C) 24.93%, 18.75%
D) 22.21%, 18.26%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
15) The price of Microsoft is $37 per share and that of Apple is $43 per share. The price of
Microsoft increases to $42 per share after one year and to $47 after two years. Also, shares
of Apple increase to $49 after one year and to $59 after two years. If your portfolio
comprises 100 shares of each security, what is your portfolio return in year 1 and year 2?
Assume no dividends are paid.
A) 13.06%, 14.84%
B) 10.31%, 18.96%
C) 13.75%, 16.48%
D) 11.69%, 19.78%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
7
16) Which of the following statements is FALSE?
A) Without trading, the portfolio weights will decrease for the stocks in the portfolio whose
returns are above the overall portfolio return.
B) The expected return of a portfolio is simply the weighted average of the expected
returns of the investments within the portfolio.
C) Portfolio weights add up to 1 so that they represent the way we have divided our money
between the diferent individual investments in the portfolio.
D) A portfolio weight is the fraction of the total investment in the portfolio held in an
individual investment in the portfolio.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
17) Which of the following equations is INCORRECT?
A) xi =
B) Rp = Σi xiPi
C) Rp = x1P1 + x2P2 + … + xnPn
D) E[Rp] = E[Σi xiRi]
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
8
18) Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT) at $55 per
share, 200 shares of Lowes (LOW) at $35 per share, and 100 shares of Ball Corporation
(BLL) at $45 per share. The weight of Abbott Labs in your portfolio is ________.
A) 48.89%
B) 39.11%
C) 29.33%
D) 19.56%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
19) Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT) at $55 per
share, 200 shares of Lowes (LOW) at $35 per share, and 100 shares of Ball Corporation
(BLL) at $45 per share. The weight of Lowes in your portfolio is ________.
A) 40.44%
B) 21.78%
C) 49.78%
D) 31.11%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
20) Suppose you invest $15,000 by purchasing 200 shares of Abbott Labs (ABT) at $40 per
share, 200 shares of Lowes (LOW) at $20 per share, and 100 shares of Ball Corporation
(BLL) at $30 per share. The weight of Ball Corporation in your portfolio is ________.
A) 50.00%
B) 40.00%
C) 20.00%
D) 30.00%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
21) Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per
share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation
(BLL) at $40 per share. Suppose over the next year Ball has a return of 12.5%, Lowes has a
return of 21%, and Abbott Labs has a return of -10%. The return on your portfolio over the
year is ________.
A) 0%
B) 7.6%
9
C) 3.8%
D) 5.7%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
22) Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per
share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation
(BLL) at $40 per share. Suppose over the next year Ball has a return of 12.3%, Lowes has a
return of 23%, and Abbott Labs has a return of -10%. The value of your portfolio over the
year is ________.
A) $21,916
B) $19,828
C) $20,872
D) $22,959
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
10