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79) The probability the economy will boom is 10 percent while the probability of a recession is
20 percent. Stock A is expected to return 15 percent in a boom, 9 percent in a normal economy,
and lose 14 percent in a recession. Stock B should return 10 percent in a boom, 6 percent in a
normal economy, and 2 percent in a recession. Stock C is expected to return 5 percent in a boom,
7 percent in a normal economy, and 8 percent in a recession. What is the standard deviation of a
portfolio invested 20 percent in Stock A, 30 percent in Stock B, and 50 percent in Stock C?
A) .6 percent
B) .9 percent
C) 1.8 percent
D) 2.2 percent
E) 4.9 percent
80) Angelo has decided to invest $24,500 in a portfolio with an expected return of 9.8 percent
and invest $10,000 in a risk-free asset that he expects to return 3.6 percent. What rate of return is
he expecting on this portfolio?
A) 6.92 percent
B) 8.00 percent
C) 7.84 percent
D) 8.59 percent
E) 9.01 percent
81) Stu has decided to invest $6,800 in a risky asset that has an expected return of 11.3 percent
and a standard deviation of 21.2 percent. He will also invest $3,200 in a risk-free asset with an
expected return of 4.2 percent. The market risk premium is 7.1 percent. What is the standard
deviation of his portfolio?
A) 3.30 percent
B) 11.94 percent
C) 6.87 percent
D) 9.25 percent
E) 14.42 percent
82) You would like to combine a risky stock with a beta of 1.87 with U.S. Treasury bills in such
a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What
percentage of the portfolio should be invested in the risky stock?
A) 54.15 percent
B) 53.48 percent
C) 55.09 percent
D) 52.91 percent
E) 54.67 percent
83) Stock A has an expected return of 12 percent and a variance of .0203. The market has an
expected return of 11 percent and a variance of .0093. What is the beta of Stock A if the
covariance of Stock A with the market is .0137?
A) .68
B) .76
C) 1.55
D) 1.47
E) 1.32
84) Stock A has a beta of 1.2, Stock B's beta is 1.46, and Stock C's beta is .72. If you invest
$2,000 in Stock A, $3,000 in Stock B, and $5,000 in Stock C, what will be the beta of your
portfolio?
A) 1.008
B) 1.014
C) 1.038
D) 1.067
E) 1.127
85) Your portfolio is comprised of 30 percent of Stock X, 50 percent of Stock Y, and 20 percent
of Stock Z. Stock X has a beta of .64, Stock Y has a beta of 1.48, and Stock Z has a beta of 1.04.
What is the portfolio beta?
A) 1.01
B) 1.05
C) 1.09
D) 1.14
E) 1.18
86) Your portfolio has a beta of 1.18 and consists of 15 percent U.S. Treasury bills, 30 percent
Stock A, and 55 percent Stock B. Stock A has a risk level equivalent to that of the overall
market. What is the beta of Stock B?
A) .55
B) 1.10
C) 1.24
D) 1.40
E) 1.60
87) You would like to combine a highly risky stock with a beta of 2.6 with U.S. Treasury bills in
such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.
What percentage of the portfolio should be invested in Treasury bills?
A) 57.91 percent
B) 61.54 percent
C) 50.00 percent
D) 38.46 percent
E) 42.09 percent
88) The market has an expected rate of return of 9.8 percent. The long-term government bond is
expected to yield 4.5 percent and the U.S. Treasury bill is expected to yield 3.4 percent. The
inflation rate is 3.1 percent. What is the market risk premium?
A) 2.2 percent
B) 3.3 percent
C) 5.3 percent
D) 6.4 percent
E) 6.7 percent
89) The risk-free rate of return is 3.68 percent and the market risk premium is 7.84 percent. What
is the expected rate of return on a stock with a beta of 1.32?
A) 9.17 percent
B) 9.24 percent
C) 13.12 percent
D) 14.03 percent
E) 14.36 percent
90) The common stock of CTI has an expected return of 14.48 percent. The return on the market
is 11.6 percent and the risk-free rate of return is 3.42 percent. What is the beta of this stock?
A) .95
B) 1.49
C) 1.31
D) 1.42
E) 1.35
91) The stock of Big Joe's has a beta of 1.38 and an expected return of 16.26 percent. The risk-
free rate of return is 3.42 percent. What is the expected return on the market?
A) 7.60 percent
B) 8.04 percent
C) 9.30 percent
D) 12.72 percent
E) 12.16 percent
92) The expected return on HiLo stock is 14.08 percent while the expected return on the market
is 11.5 percent. The beta of HiLo is 1.26. What is the risk-free rate of return?
A) .41 percent
B) 2.01 percent
C) .69 percent
D) 1.58 percent
E) 1.62 percent
93) The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6 percent
and the market risk premium is 9 percent. What is the expected rate of return?
A) 11.32 percent
B) 14.17 percent
C) 16.47 percent
D) 17.48 percent
E) 18.03 percent
94) Stock A has a beta of .68 and an expected return of 8.1 percent. Stock B has a beta of 1.42
and an expected return of 13.9 percent. Stock C has beta of 1.23 and an expected return of 12.4
percent. Stock D has a beta of 1.31 and an expected return of 12.6 percent. Stock E has a beta of
.94 and an expected return of 9.8 percent. Which one of these stocks is the most accurately
priced if the risk-free rate of return is 2.5 percent and the market risk premium is 8 percent?
A) Stock A
B) Stock B
C) Stock C
D) Stock D
E) Stock E
95) Stock A has a beta of .69 and an expected return of 9.27 percent. Stock B has a beta of 1.13
and an expected return of 11.88 percent. Stock C has a beta of 1.48 and an expected return of
15.31 percent. Stock D has a beta of .71 and an expected return of 8.79 percent. Lastly, Stock E
has a beta of 1.45 and an expected return of 14.04 percent. Which one of these stocks is most
accurately priced if the risk-free rate of return is 3.6 percent and the market rate of return is 10.8
percent?
A) Stock A
B) Stock B
C) Stock C
D) Stock D
E) Stock E
96) A portfolio contains two securities and has a beta of 1.08. The first security comprises 54
percent of the portfolio and has a beta of 1.27. What is the beta of the second security?
A) .79
B) .86
C) .62
D) .82
E) .93
97) You have a $1,250 portfolio which is invested in Stocks A and B plus a risk-free asset. $350
is invested in Stock A which has a beta of 1.36 and Stock B has a beta of .84. How much needs
to be invested in Stock B if you want a portfolio beta of .95?
A) $803
B) $951
C) $782
D) $847
E) $791
98) Stock M has a beta of 1.2. The market risk premium is 7.8 percent and the risk-free rate is
3.6 percent. Assume you compile a portfolio equally invested in Stock M, Stock N, and a risk-
free security; the portfolio has a beta equal to the overall market. What is the expected return on
the portfolio?
A) 11.2 percent
B) 10.8 percent
C) 10.4 percent
D) 11.4 percent
E) 11.7 percent
99) Zoom stock has a beta of 1.46. The risk-free rate of return is 3.07 percent and the market rate
of return is 11.81 percent. What is the amount of the risk premium on Zoom stock?
A) 8.09 percent
B) 12.76 percent
C) 9.59 percent
D) 10.25 percent
E) 17.24 percent
100) You want to design a portfolio that has a beta of zero. Stock A has a beta of 1.69 and Stock
B's beta is also greater than 1. You are willing to include both stocks as well as a risk-free
security in your portfolio. If your portfolio will have a combined value of $5,000, how much
should you invest in Stock B?
A) $2,630
B) $0
C) $2,959
D) $3,008
E) $1,487
101) You desire a portfolio beta of 1.1. Currently, your portfolio consists of $100 invested in
Stock A with a beta of 1.4 and $300 in Stock B with a beta of .6. You have another $400 to
invest and want to divide it between Stock C with a beta of 1.6 and a risk-free asset. How much
should you invest in the risk-free asset to obtain your desired beta?
A) $50
B) $100
C) $125
D) $350
E) $300
102) Zelo stock has a beta of 1.23. The risk-free rate of return is 2.86 percent and the market rate
of return is 11.47 percent. What is the amount of the risk premium on Zelo stock?
A) 9.47 percent
B) 12.60 percent
C) 11.54 percent
D) 10.59 percent
E) 12.30 percent
103) You want to compile a portfolio valued at $1,000 which will be invested in Stocks A and B
plus a risk-free asset. Stock A has a beta of 1.2 and Stock B has a beta of .7. If you invest $300 in
Stock A and want a portfolio beta of .9, how much should you invest in Stock B?
A) $700.00
B) $268.40
C) $300.00
D) $771.43
E) $608.15
104) Draw a graph that represents an opportunity set for a two-asset combination. Indicate four
points on the graph as follows: (1) the minimum variance portfolio. (2) point (A) which
represents the best return to risk combination, (3) point (B) which provides the same return but
with more risk than point (A) and, (4) point (C) which has the same risk but a lower return than
point (A). Lastly, indicate the efficient frontier.
105) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
106) We routinely assume that investors are risk-averse return-seekers; i.e., they like returns and
dislike risk. If so, why do we contend that only systematic risk and not total risk is important?
107) Explain in words what beta is and why it is an important tool of security valuation.
108) According to the CAPM, the expected return on a risky asset depends on three components.
Describe each component, and explain its role in determining expected return.
109) Draw the SML and plot Asset C such that it has less risk than the market but plots above the
SML, and Asset D such that it has more risk than the market and plots below the SML. (Be sure
to indicate where the market portfolio is on your graph.) Explain how assets like C or D can plot
as they do and explain why such pricing cannot persist in a market that is in equilibrium.
