C) 1.26
D) 1.19
88) A portfolio comprises Coke (beta of 1.4) and Wal–Mart (beta of 1.0). The amount invested in Coke is $10,000
and in Wal–Mart is $20,000. What is the beta of the portfolio?
A) 1.13
B) 1.03
C) 1.23
D) 1.19
89) A portfolio comprises Coke (beta of 1.3) and Wal–Mart (beta of 0.8). The amount invested in Coke is $20,000
and in Wal–Mart is $20,0000. What is the beta of the portfolio?
A) 0.97
B) 0.99
C) 1.05
D) 1.14
90) UPS, a delivery services company, has a beta of 1.2, and Wal–Mart has a beta of 0.8. The risk–free rate of
interest is 4% and the market risk premium is 7%. What is the expected return on a portfolio with 40% of its
money in UPS and the balance in Wal–Mart?
A) 9.91%
B) 10.01%
C) 10.72%
D) 11.85%
91) UPS, a delivery services company, has a beta of 1.5, and Wal–Mart has a beta of 0.9. 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) 11.56%
B) 11.98%
C) 11.07%
D) 11.23%
92) UPS, a delivery services company, has a beta of 1.1, and Wal–Mart has a beta of 1.0. 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) 10.3%
B) 9.9%
C) 11.1%
D) 12.4%
93) A stock market comprises 5000 shares of stock A and 2000 shares of stock B. Assume the share prices for
stocks A and B are $20 and $35, 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) $10,000
B) $8,823.53
C) $6,176.47
D) $5,000
94) The expected return is usually ________ the baseline risk–free rate of return that we demand to compensate
for inflation and the time value of money.
A) lower than
B) higher than
C) similar to
D) none of the above
95) 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%
96) The Capital Asset Pricing Model asserts that the ________ return is equal to the risk–free rate plus a risk
premium for systematic risk.
A) realized return
B) expected return
C) holding period return
D) ex–post return
97) 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) cannot say for sure
Use the information for the question(s) below.
Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a 6% interest rate to invest in the stock
market. You invest the entire $20,000 in an exchange–traded fund (ETF) with a 12% expected return and a 20% volatility.
98) The expected return on your of your investment is closest to:
A) 18%
B) 20%
C) 12%
D) 24%
99) The volatility of your investment is closest to:
A) 40%
B) 20%
C) 30%
D) 24%
100) Assume that the ETF you invested in returns –10%. Then the realized return on your investment is closest to:
A) –20%
B) –10%
C) –24%
D) –26%
101) Which of the following statements is FALSE?
A) Because all investors should hold risky securities in the same proportions as the efficient portfolio, their
combined portfolio will also reflect the same proportions as the efficient portfolio.
B) When the Capital Asset Pricing Model (CAPM) assumptions hold, choosing an optimal portfolio is
relatively straightforward: it is the combination of the risk–free investment and the market portfolio.
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.
102) Which of the following statements is FALSE?
A) The risk premium of a security is equal to the market risk premium (the amount by which the market’s
expected return exceeds the risk–free rate) divided by the amount of market risk present in the
security’s returns measured by its beta with the market.
B) We refer to the beta of a security with the market portfolio simply as the securities beta.
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.
103) 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.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
104) 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?
105) Why should an investor invest in a negative–beta stock knowing that it will have an expected return lower
than the risk–free rate?
