13) A stock market comprises 4600 shares of stock A and 1600 shares of stock B. Assume
the share prices for stocks A and B are $15 and $30, respectively. If you have $15,000 to
invest and you want to hold the market portfolio, how much of your money will you invest
in Stock A?
A) $10,615.38
B) $8846.15
C) $6153.85
D) $5307.69
AACSB Objective: Analytic Skills
Author: JP
Question Status: New
14) The expected return is usually ________ the baseline risk-free rate of return that we
demand to compensate for inlation and the time value of money.
A) lower than
B) higher than
C) similar to
D) none of the above
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
15) Historically, the average excess return of the S&P 500 over the return of U.S. Treasury
bonds has been ________ and is proxy for the market risk premium.
A) between 10% and 12%
B) between 14% and 16%
C) between 5% and 7%
D) between 11% and 13%
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
37
16) The Capital Asset Pricing Model asserts that the expected return ________.
A) is equal to the risk-free rate plus a risk premium for unsystematic risk
B) is equal to the risk-free rate plus a risk premium for systematic risk
C) is equal to the risk premium plus a risk-free rate for systematic risk
D) is equal to the risk premium plus a risk-free rate for unsystematic risk
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
17) The systematic risk (beta) of a portfolio is ________ by holding more stocks, even if they
each had the same systematic risk.
A) unchanged
B) increased
C) decreased
D) turned to 0
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
18) Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a(n)
6% interest rate to invest in the stock market. You invest the entire $20,000 in an
exchange-traded fund (ETF) with a 11% expected return and a 20% volatility. The expected
return on your of your investment is closest to ________.
A) 7%
B) 8%
C) 4%
D) 9.1%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
38
19) Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a(n)
6% interest rate to invest in the stock market. You invest the entire $20,000 in an
exchange-traded fund (ETF) with a 10% expected return and a 20% volatility. Assume that
the ETF you invested in returns -10%. Then the realized return on your investment is
closest to ________.
A) -18%
B) -10%
C) -23%
D) -26%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
20) Which of the following statements is FALSE?
A) Because all investors should hold risky securities in the same proportions as the eicient
portfolio, their combined portfolio will also relect the same proportions as the eicient
portfolio.
B) The Capital Asset Pricing Model (CAPM) assumptions hold that the return on any
portfolio is the combination of the risk-free rate of return plus a risk premium proportional
to the amount of systematic risk in the investment.
C) Graphically, when the tangent line goes through the market portfolio, it is called the
security market line (SML).
D) A portfolio’s risk premium and volatility are determined by the fraction that is invested
in the market.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
39
21) Which of the following statements is FALSE?
A) The risk premium of a security is equal to the market risk premium divided by the
amount of market risk present in the security’s returns measured by its beta with the
market.
B) The beta of a portfolio is the weighted average beta of the securities in the portfolio.
C) There is a linear relationship between a stock’s beta and its expected return.
D) A security with a negative beta has a negative correlation with the market, which means
that this security tends to perform well when the rest of the market is doing poorly.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
22) Which of the following statements is FALSE?
A) The expected return of a portfolio should correspond to the portfolio’s beta.
B) Graphically, the line through the risk-free investment and the market portfolio is called
the capital market line (CML).
C) The beta of a portfolio is the weighted average beta of the securities in the portfolio.
D) By holding a negative-beta security, an investor can reduce the overall market risk of
her portfolio.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
23) While we are using historic return to estimate a stock’s beta, why can’t we use historic
data to forecast the expected return for the stock?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Revised
40
24) Why should an investor invest in a negative-beta stock knowing that it will have an
expected return lower than the risk-free rate?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
41