24) Consider the following returns:
Year-End
Lowes
Realized
Return
Home Depot
Realized
Return
IBM
Realized
Return
2000 20.3% -14.6% 0.2%
2001 72.7% 4.8% -3.2%
2002 -25.7% -58.1% -27.0%
2003 56.3% 71.7% 27.9%
2004 6.7% 17.3% -5.1%
2005 17.9% 0.9% -11.3%
The volatility on Home Depot’s returns is closest to ________.
A) 35%
B) 32%
C) 42%
D) 17%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
21
25) Consider the following expected returns, volatilities, and correlations:
Stock
Expecte
d
Return
Standar
d
Deviatio
n
Correlation with
Duke Energy
Correlation with
Microsoft
Correlation with
Wal-Mart
Duke
Energy 14% 6% 1.0 -1.0 0.0
Microsoft 44% 24% -1.0 1.0 0.7
Wal-Mart 23% 14% 0.0 0.7 1.0
The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest
to ________.
A) 8.1%
B) 9.0%
C) 10.8%
D) 5.4%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
26) Consider the following expected returns, volatilities, and correlations:
Stock
Expecte
d
Return
Standar
d
Deviatio
n
Correlation with
Duke Energy
Correlation with
Microsoft
Correlation with
Wal-Mart
Duke
Energy 13% 6% 1.0 -1.0 0.0
Microsoft 47% 24% -1.0 1.0 0.7
Wal-Mart 23% 14% 0.0 0.7 1.0
The expected return of a portfolio that is equally invested in Duke Energy and Microsoft is
closest to ________.
A) 15%
B) 14%
C) 30%
D) 45%
AACSB Objective: Analytic Skills
Author: JP
Question Status: New
22
27) Consider the following expected returns, volatilities, and correlations:
Stock
Expecte
d
Return
Standar
d
Deviatio
n
Correlation with
Duke Energy
Correlation with
Microsoft
Correlation with
Wal-Mart
Duke
Energy 14% 6% 1.0 -1.0 0.0
Microsoft 44% 24% -1.0 1.0 0.7
Wal-Mart 23% 12% 0.0 0.7 1.0
The volatility of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest
to ________.
A) 4.0%
B) 0.7%
C) 6.7%
D) 20.1%
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
Stock
Expected
Return
Standard
Deviation
Correlation
with Duke
Energy
Correlation
with
Microsoft
Correlation
with Wal-Mart
Duke
Energy 14% 6% 1.0 -1.0 0.0
Microsoft 44% 24% -1.0 1.0 0.7
Wal-Mart 23% 14% 0.0 0.7 1.0
28) Which of the following combinations of two stocks would give you the biggest reduction
in risk?
A) Duke Energy and Wal-Mart
B) Wal-Mart and Microsoft
C) Microsoft and Duke Energy
D) No combination will reduce risk.
AACSB Objective: Relective Thinking Skills
Author: JP
Question Status: New
29) What diversiication, if any, is achieved if two stocks in a portfolio are perfectly
23
positively correlated?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
30) What is the lowest risk possible by selecting two stocks that are perfectly negatively
correlated?
AACSB Objective: Relective Thinking Skills
Author: SS
Question Status: Previous Edition
12.3 Measuring Systematic Risk
1) If you build a large enough portfolio, you can diversify away all the risks of a portfolio.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) A stock market comprises 4600 shares of stock A and 2000 shares of stock B. Assume
the share prices for stocks A and B are $25 and $35, respectively. What is the capitalization
of the market portfolio?
A) $185,000
B) $157,250
C) $175,750
D) $203,500
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
24
3) A stock market comprises 4700 shares of stock A and 2300 shares of stock B. Assume
the share prices for stocks A and B are $25 and $30, respectively. What proportion of the
market portfolio is comprised of stock A?
A) 63.0%
B) 62.0%
C) 61.3%
D) 79%
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
4) A stock market comprises 2400 shares of stock A and 2400 shares of stock B. The share
prices for stocks A and B are $15 and $5, respectively. What is the capitalization of the
market portfolio?
A) $43,200
B) $48,000
C) $55,200
D) $52,800
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
25
5) A stock market comprises 2100 shares of stock A and 2100 shares of stock B. The share
prices for stocks A and B are $25 and $15, respectively. What proportion of the market
portfolio is comprised of each stock?
A) Stock A is 62.5% and Stock B is 37.5%.
B) Stock A is 37.5% and Stock B is 62.5%.
C) Stock A is 50% and Stock B is 50%.
D) Stock A is 200% and Stock B is 100%.
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
6) A stock market comprises 1500 shares of stock A and 3000 shares of stock B. The share
prices for stocks A and B are $24 and $34, respectively. What is the capitalization of the
market portfolio?
A) $138,000
B) $117,300
C) $110,400
D) $151,800
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
7) You expect General Motors (GM) to have a beta of 1.3 over the next year and the beta of
Exxon Mobil (XOM) to be 0.9 over the next year. Also, you expect the volatility of General
Motors to be 40% and that of Exxon Mobil to be 30% over the next year. Which stock has
more systematic risk? Which stock has more total risk?
A) XOM, GM
B) XOM, XOM
C) GM, XOM
D) GM, GM
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
26
8) You expect General Motors (GM) to have a beta of 1 over the next year and the beta of
Exxon Mobil (XOM) to be 1.2 over the next year. Also, you expect the volatility of General
Motors to be 30% and that of Exxon Mobil to be 40% over the next year. Which stock has
more systematic risk? Which stock has more total risk?
A) GM, GM
B) GM, XOM
C) XOM, XOM
D) XOM, GM
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
9) You expect General Motors (GM) to have a beta of 1.5 over the next year and the beta of
Exxon Mobil (XOM) to be 1.9 over the next year. Also, you expect the volatility of General
Motors to be 50% and that of Exxon Mobil to be 35% over the next year. Which stock has
more systematic risk? Which stock has more total risk?
A) XOM, GM
B) GM, XOM
C) GM, GM
D) XOM, XOM
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
10) The amount of a stock’s risk that is diversiied away ________.
A) is independent of the portfolio that you add it to
B) depends on market risk premium
C) depends on risk-free rate of interest
D) depends on the portfolio that you add it to
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
27
11) If you build a large enough portfolio, you can diversify away all ________ risk, but you
will be left with ________ risk.
A) diversiiable, unsystematic
B) unsystematic, systematic
C) systematic, undiversiiable
D) undiversiiable, diversiiable
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
12) The market portfolio is the portfolio of all risky investments held ________.
A) in descending weights
B) in ascending weights
C) in proportion to their value
D) based on previous year performance
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
13) The S&P 500 index traditionally is a(n) ________ portfolio of the 500 largest U.S. stocks.
A) value weighted
B) equally weighted
C) chain weighted
D) price weighted
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
28
14) For each 1% change in the market portfolio’s excess return, the investment’s excess
return is expected to change by ________ due to risks that it has in common with the
market.
A) beta
B) alpha
C) 0%
D) 1%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
15) The beta of the market portfolio is ________.
A) 0
B) -1
C) 2
D) 1
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
16) Companies that sell household products and food have very little relation to the state of
the economy because such basic needs do not go away. These stocks tend to have ________
betas.
A) high
B) low
C) negative
D) ininite
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
29
17) A linear regression to estimate the relation between General Motors’ stock returns and
the market’s return gives the best itting line that represents the relation between the
stock and the market. The slope of this line is our estimate of ________.
A) alpha
B) beta
C) risk-free rate
D) volatility
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
18) A linear regression was done to estimate the relation between Sprint’s stock returns
and the market’s return. The intercept of the line was found to be 0.23 and the slope was
1.47. Which of the following statements is true regarding Sprint’s stock?
A) Sprint’s beta is 0.23.
B) Sprint’s beta is 1.47.
C) The risk-free rate is 1.47%.
D) The standard deviation of Sprint’s excess returns is 23%.
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
19) You observe that AT&T stock and the S&P 500 have the following weekly returns:
Week AT&T return S&P 500 return
1 0.005 0.001
2 0.010 0.005
3 -0.003 -0.005
4 -0.005 -0.001
If this pattern of stock returns is typical of AT&T stock, and you calculated a beta against
the S&P 500, which of the following is true?
A) AT&T’s beta is negative.
B) AT&T’s beta is zero.
C) AT&T’s beta is positive.
D) Cannot be determined from information given.
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
20) Which of the following statements is FALSE?
A) We say a portfolio is an eicient portfolio whenever it is possible to ind another portfolio
that is better in terms of both expected return and volatility.
B) We can rule out ineicient portfolios because they represent inferior investment choices.
C) The volatility of the portfolio will difer, depending on the correlation between the
securities in the portfolio.
D) Correlation has no efect on the expected return on a portfolio.