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Answer: A
Explanation: A) We say a portfolio is an eicient portfolio whenever it is not possible to
ind another portfolio that is better in terms of both expected return and volatility.
Dif: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
21) You observe the following scatterplot of Ford's weekly returns against the S&P 500.
Which of the following statements is true about Ford's beta against the S&P 500?
A) Ford's beta appears to be positive.
B) Ford's beta appears to be negative.
C) Ford's beta appears to be zero.
D) Beta has nothing to do with the relationship seen in this scatterplot.
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
31
22) Which of the following statements is FALSE?
A) When stocks are perfectly positively correlated, the set of portfolios is identiied
graphically by a straight line between them.
B) An investor seeking high returns and low volatility should only invest in an eicient
portfolio.
C) When the correlation between securities is less than 1, the volatility of the portfolio is
reduced due to diversiication.
D) Eicient portfolios can be easily ranked, because investors will choose from among them
those with the highest expected returns.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
23) Since total risk is greater than systematic risk, should standard deviation be always
greater than beta?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
24) Is it possible for a stock to have high total risk but low systematic risk?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
25) How does the S&P 500 index rank in terms of number and market capitalization of U.S.
public irms?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
32
12.4 Putting It All Together: The Capital Asset Pricing Model
1) The market or equity risk premium can be estimated by computing the historical
average excess return on the market portfolio.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) The security market line is a graph of the expected return of a stock as a function of its
beta with the market.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal
to its beta times the market risk premium.
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4) Your estimate of the market risk premium is 9%. The risk-free rate of return is 3.8% and
General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM),
what is its expected return?
A) 14.8%
B) 15.6%
C) 16.4%
D) 17.2%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
33
5) Your estimate of the market risk premium is 6%. The risk-free rate of return is 4%, and
General Motors has a beta of 1.6. According to the Capital Asset Pricing Model (CAPM),
what is its expected return?
A) 12.2%
B) 12.9%
C) 13.6%
D) 14.3%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
6) Your estimate of the market risk premium is 7%. The risk-free rate of return is 4%, and
General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM),
what is its expected return?
A) 10.4%
B) 11.7%
C) 13.1%
D) 13.8%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
7) A portfolio comprises Coke (beta of 1.4) and Wal-Mart (beta of 0.8). The amount invested
in Coke is $20,000 and in Wal-Mart is $30,000. What is the beta of the portfolio?
A) 1.04
B) 1.20
C) 1.35
D) 1.25
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
34
8) A portfolio comprises Coke (beta of 1.6) and Wal-Mart (beta of 0.6). The amount invested
in Coke is $10,000 and in Wal-Mart is $20,000. What is the beta of the portfolio?
A) 0.93
B) 0.84
C) 1.03
D) 0.98
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
9) A portfolio comprises Coke (beta of 1.3) and Wal-Mart (beta of 0.7). The amount invested
in Coke is $20,000 and in Wal-Mart is $20,000. What is the beta of the portfolio?
A) 0.9
B) 0.95
C) 1.00
D) 1.10
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
10) UPS, a delivery services company, has a beta of 1.6, and Wal-Mart has a beta of 0.9. The
risk-free rate of interest is 6% and the market risk premium is 9%. What is the expected
return on a portfolio with 40% of its money in UPS and the balance in Wal-Mart?
A) 14.96%
B) 15.79%
C) 16.62%
D) 18.28%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
35
11) UPS, a delivery services company, has a beta of 1.1, and Wal-Mart has a beta of 0.7. The
risk-free rate of interest is 4% and the market risk premium is 7%. What is the expected
return on a portfolio with 30% of its money in UPS and the balance in Wal-Mart?
A) 9.74%
B) 10.23%
C) 9.25%
D) 9.55%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
12) UPS, a delivery services company, has a beta of 1.4, and Wal-Mart has a beta of 0.9. The
risk-free rate of interest is 4% and the market risk premium is 6%. What is the expected
return on a portfolio with 50% of its money in UPS and the balance in Wal-Mart?
A) 10.9%
B) 10.4%
C) 12.0%
D) 13.1%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
36
