41) Which one of the following is most commonly used as the measure of the overall market rate
of return?
A) DJIA
B) S&P 500
C) NASDAQ 100
D) Wilshire 5000
E) Wilshire 3000
42) Which one of the following statements is true?
A) Risk and return are inversely related.
B) Investors are compensated only for diversifiable risk.
C) The beta of a portfolio may be lower than the lowest beta of any individual security held
within the portfolio.
D) How a security affects the risk of a portfolio is less important than the actual risk of the
security itself.
E) Investing has two dimensions: risk and return.
43) Which of the following correctly identifies the factors included in the Fama-French three-
factor model?
A) standard deviation, beta, and company size
B) the risk-free rate, beta, and the market risk premium
C) company size, company industry, and beta
D) price-earnings ratios, beta, and book-to-market ratios
E) beta, company size, and book-to-market ratios
44) Which one of the following combinations will tend to produce the highest rate of return
according to the Fama-French three-factor model? Assume beta is constant in all cases.
A) large market capitalization and high book-to-market ratio
B) large market capitalization and low book-to-market ratio
C) small market capitalization and high book-to-market ratio
D) small market capitalization and a book-to-market ratio of 1.0
E) small market capitalization and a low book-to-market ratio
45) Pat realized a total return of 11.8 percent which is less than his expected return of 12.5
percent. What is the amount of his unexpected return?
A) -1.4 percent
B) -0.7 percent
C) 0.7 percent
D) 1.4 percent
E) 1.8 percent
46) Brooke invested $4,500 in the stock market with the expectation of earning 6.25 percent. She
actually earned 7.15 percent for the year. What is the amount of her unexpected return?
A) -1.2 percent
B) -0.6 percent
C) 0.9 percent
D) 1.9 percent
E) 2.4 percent
47) Reed Plastics just announced the earnings per share for the quarter just ended were $.45 a
share. Analysts were expecting $.51. What is the amount of the surprise portion of the
announcement?
A) -$0.12
B) -$0.06
C) $0.06
D) $0.00
E) $0.03
48) The risk-free rate is 4.0 percent and the expected return on the market is 8 percent. Stock A
has a beta of 1.35. For a given year, Stock A returned 12.0 percent while the market returned
8.80 percent. The systematic portion of Stock A’s unexpected return was ________ percent and
the unsystematic portion was ________ percent.
A) 0.80; 1.30
B) 0.90; 1.40
C) 1.08; 1.52
D) 1.40; 0.90
E) 4.62; 1.41
49) The risk-free rate is 3.4 percent and the expected return on the market is 10.8 percent. Stock
A has a beta of 1.18. For a given year, stock A returned 13.6 percent while the market returned
11.8 percent. The systematic portion of the unexpected return was ________ percent and the
unsystematic portion was ________ percent.
A) 1.045; 0.207
B) 1.145; 0.126
C) 1.180; 0.288
D) 1.344; 1.443
E) 1.500; 1.449
50) A portfolio is comprised of two stocks. Stock A comprises 65 percent of the portfolio and
has a beta of 1.31. Stock B has a beta of .98. What is the portfolio beta?
A) 0.98
B) 1.03
C) 1.08
D) 1.19
E) 1.22
51) A portfolio consists of two stocks and has a beta of 1.20. The first stock has a beta of 1.02
and comprises 30 percent of the portfolio. What is the beta of the second stock?
A) 0.41
B) 0.66
C) 0.82
D) 1.28
E) 1.35
52) What is the beta of a portfolio which consists of the following?
Security
$ Invested
Beta
A
$
5,000
0.79
B
$
3,000
1.36
C
$
5,000
1.01
D
$
7,000
1.89
A) 1.01
B) 1.24
C) 1.26
D) 1.29
E) 1.32
Weight (i)
B × w(i)
$
%
$
%
$
%
$
%
$
20,000
53) What is the beta of a portfolio which consists of the following?
Security
$ Invested
Beta
A
$
2,000
1.38
B
5,000
0.47
C
9,000
1.7
D
4,000
1.08
A) 1.18
B) 1.22
C) 1.24
D) 1.32
E) 1.37
$
10.0
%
25.0
%
45.0
%
20.0
%
$
20,000
54) A portfolio consists of one risky asset and one risk-free asset. The risky asset has an expected
return of 11.2 percent and a beta of 1.39. The risk-free asset has an expected return of 3.4
percent. How much of the portfolio is invested in the risk-free asset if the portfolio beta is 1.07?
A) 16 percent
B) 23 percent
C) 32 percent
D) 45 percent
E) 54 percent
55) The following portfolio has an expected return of ________ percent and a beta of ________.
Security
Amount
Invested
Expected
Return
Beta
X
$17,000
14.2%
0.98
Y
$12,000
7.8
1.33
Z
$11,000
9.5
1.07
A) 10.53; 1.13
B) 10.99; 1.11
C) 11.03; 1.28
D) 11.16; 1.11
E) 11.11; 1.16
56) The following portfolio has an expected return of ________ percent and a beta of ________.
Security
$ Invested
E(R)
Beta
A
$30,000
16.20%
1.12
B
$24,000
10.50%
1.38
C
$26,000
11.80%
1.33
A) 12.45; 1.38
B) 12.84; 1.39
C) 13.06; 1.27
D) 13.39; 1.40
E) 13.45; 1.32
57) Laura has one risk-free asset and one risky stock in her portfolio. The risk-free asset has an
expected return of 3.2 percent. The risky asset has a beta of 1.3 and an expected return of 14.9
percent. What is the expected return on the portfolio if the portfolio beta is 0.975?
A) 7.65 percent
B) 9.83 percent
C) 10.73 percent
D) 11.98 percent
E) 12.37 percent
58) A risky asset has a beta of 0.90 and an expected return of 7.4 percent. What is the reward-to–
risk ratio if the risk-free rate is 2.69 percent?
A) 4.04 percent
B) 5.23 percent
C) 6.51 percent
D) 8.41 percent
E) 11.59 percent
59) The reward-to-risk ratio is 7.0 percent and the risk-free rate is 4.4 percent. What is the
expected return on a risky asset if the beta of that asset is 1.10?
A) 7.00 percent
B) 12.00 percent
C) 12.02 percent
D) 12.10 percent
E) 12.30 percent
60) A risky asset has a beta of 1.40 and an expected return of 17.6 percent. What is the risk-free
rate if the risk-to-reward ratio is 8.4 percent?
A) 2.74 percent
B) 4.03 percent
C) 4.33 percent
D) 5.32 percent
E) 5.84 percent
61) Stock A is a risky asset that has a beta of 1.4 and an expected return of 13.2 percent. Stock B
is also a risky asset and has a beta of 1.25. The risk-free rate is 5.5 percent. Assuming both
stocks are correctly priced, what is the expected return on stock B?
A) 11.90 percent
B) 12.11 percent
C) 12.29 percent
D) 12.38 percent
E) 12.46 percent
62) Stock X has a beta of 0.88 and an expected return of 10.8 percent. Stock Y has a beta of 1.15
and an expected return of 13.1 percent. What is the risk-free rate of return assuming that both
stock X and stock Y are correctly priced?
A) 1.10 percent
B) 1.20 percent
C) 2.06 percent
D) 3.30 percent
E) 3.50 percent
63) The stock of Healthy Eating, Inc., has a beta of 0.88. The risk-free rate is 3.8 percent and the
market return is 9.6 percent. What is the expected return on Healthy Eating’s stock?
A) 6.25 percent
B) 6.07 percent
C) 8.90 percent
D) 11.15 percent
E) 11.47 percent
64) The common stock of Industrial Technologies has an expected return of 12.4 percent. The
market return is 9.2 percent and the risk-free return is 3.87 percent. What is the stock’s beta?
A) 0.42
B) 1.00
C) 1.32
D) 1.42
E) 1.60
65) A stock has an expected return of 15.10 percent and a beta of 1.30. What is the risk-free rate
if the market rate is 13.1 percent?
A) 6.43 percent
B) 6.92 percent
C) 7.01 percent
D) 7.30 percent
E) 7.90 percent