41) An investor can design a risky portfolio based on two stocks, A and B. The standard
deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The
correlation coefficient between the returns on A and B is 0%. The rate of return for stocks A and
B is 20% and 10% respectively. The expected return on the minimum-variance portfolio is
approximately ________.
A) 10%
B) 13.6%
C) 15%
D) 19.41%
42) An investor can design a risky portfolio based on two stocks, A and B. The standard
deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The
correlation coefficient between the returns on A and B is 0%. The rate of return for stocks A and
B is 20% and 10% respectively. The standard deviation of return on the minimum-variance
portfolio is ________.
A) 0%
B) 6%
C) 12%
D) 17%
43) A measure of the riskiness of an asset held in isolation is ________.
A) beta
B) standard deviation
C) covariance
D) alpha
44) Semitool Corp. has an expected excess return of 6% for next year. However, for every
unexpected 1% change in the market, Semitool’s return responds by a factor of 1.2. Suppose it
turns out that the economy and the stock market do better than expected by 1.5% and Semitool’s
products experience more rapid growth than anticipated, pushing up the stock price by another
1%. Based on this information, what was Semitool’s actual excess return?
A) 7%
B) 8.5%
C) 8.8%
D) 9.25%
45) The part of a stock’s return that is systematic is a function of which of the following
variables?
I. Volatility in excess returns of the stock market
II. The sensitivity of the stock’s returns to changes in the stock market
III. The variance in the stock’s returns that is unrelated to the overall stock market
A) I only
B) I and II only
C) II and III only
D) I, II, and III
46) Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ________
sensitive to changes in the market than are the returns of stock B.
A) 20% more
B) slightly more
C) 20% less
D) slightly less
47) Which risk can be partially or fully diversified away as additional securities are added to a
portfolio?
I. Total risk
II. Systematic risk
III. Firm-specific risk
A) I only
B) I and II only
C) I, II, and III
D) I and III
48) According to Tobin’s separation property, portfolio choice can be separated into two
independent tasks consisting of ________ and ________.
A) identifying all investor imposed constraints; identifying the set of securities that conform to
the investor’s constraints and offer the best risk-return trade-offs
B) identifying the investor’s degree of risk aversion; choosing securities from industry groups
that are consistent with the investor’s risk profile
C) identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the
optimal risky portfolio based on the investor’s degree of risk aversion
D) choosing which risky assets an investor prefers according to the investor’s risk-aversion level;
minimizing the CAL by lending at the risk-free rate
49) You are constructing a scatter plot of excess returns for stock A versus the market index. If
the correlation coefficient between stock A and the index is -1, you will find that the points of
the scatter diagram ________ and the line of best fit has a ________.
A) all fall on the line of best fit; positive slope
B) all fall on the line of best fit; negative slope
C) are widely scattered around the line; positive slope
D) are widely scattered around the line; negative slope
50) The term excess return refers to ________.
A) returns earned illegally by means of insider trading
B) the difference between the rate of return earned and the risk-free rate
C) the difference between the rate of return earned on a particular security and the rate of return
earned on other securities of equivalent risk
D) the portion of the return on a security that represents tax liability and therefore cannot be
reinvested
51) You are recalculating the risk of ACE stock in relation to the market index, and you find that
the ratio of the systematic variance to the total variance has risen. You must also find that the
________.
A) covariance between ACE and the market has fallen
B) correlation coefficient between ACE and the market has fallen
C) correlation coefficient between ACE and the market has risen
D) unsystematic risk of ACE has risen
52) A stock has a correlation with the market of .45. The standard deviation of the market is
21%, and the standard deviation of the stock is 35%. What is the stock’s beta?
A) 1
B) .75
C) .60
D) .55
53) The values of beta coefficients of securities are ________.
A) always positive
B) always negative
C) always between positive 1 and negative 1
D) usually positive but are not restricted in any particular way
54) A security’s beta coefficient will be negative if ________.
A) its returns are negatively correlated with market-index returns
B) its returns are positively correlated with market-index returns
C) its stock price has historically been very stable
D) market demand for the firm’s shares is very low
55) The market value weighted-average beta of firms included in the market index will always
be ________.
A) 0
B) between 0 and 1
C) 1
D) none of these options (There is no particular rule concerning the average beta of firms
included in the market index.)
56) Diversification can reduce or eliminate ________ risk.
A) all
B) systematic
C) nonsystematic
D) only an insignificant
57) To construct a riskless portfolio using two risky stocks, one would need to find two stocks
with a correlation coefficient of ________.
A) -0.5
B) 0.0
C) 0.5
D) -1.0
58) Some diversification benefits can be achieved by combining securities in a portfolio as long
as the correlation between the securities is ________.
A) 1
B) less than 1
C) between 0 and 1
D) less than or equal to 0
59) If an investor does not diversify his portfolio and instead puts all of his money in one stock,
the appropriate measure of security risk for that investor is the ________.
A) stock’s standard deviation
B) variance of the market
C) stock’s beta
D) covariance with the market index
60) Which of the following provides the best example of a systematic-risk event?
A) A strike by union workers hurts a firm’s quarterly earnings.
B) Mad Cow disease in Montana hurts local ranchers and buyers of beef.
C) The Federal Reserve increases interest rates 50 basis points.
D) A senior executive at a firm embezzles $10 million and escapes to South America.
61) Which of the following statements is (are) true regarding time diversification?
I. The standard deviation of the average annual rate of return over several years will be smaller
than the 1-year standard deviation.
II. For a longer time horizon, uncertainty compounds over a greater number of years.
III. Time diversification does not reduce risk.
A) I only
B) II only
C) II and III only
D) I, II, and III
62) You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding
period, the Sharpe ratio would equal ________.
A) 1.8
B) 2.48
C) 3.12
D) 5.49
63) You run a regression for a stock’s return on a market index and find the following Excel
output:
Multiple R
0.35
R-Square
0.12
Adjusted R-Square
0.02
Standard Error
38.45
Observations
12
Coefficients
t-Stat
p-Value
Intercept
4.05
15.44
0.26
0.80
Market
1.32
0.97
1.36
0.10
The beta of this stock is ________.
A) .12
B) .35
C) 1.32
D) 4.05
64) You run a regression for a stock’s return on a market index and find the following Excel
output:
Multiple R
0.35
R-Square
0.12
Adjusted R-Square
0.02
Standard Error
38.45
Observations
12
Coefficients
t-Stat
p-Value
Intercept
4.05
15.44
0.26
0.80
Market
1.32
0.97
1.36
0.10
This stock has greater systematic risk than a stock with a beta of ________.
A) .50
B) 1.5
C) 2
D) 3