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46) A stock with an actual return that lies above the security market line has:
A) more systematic risk than the overall market.
B) more risk than that warranted by CAPM.
C) a higher return than expected for the level of risk assumed.
D) less systematic risk than the overall market.
E) a return equivalent to the level of risk assumed.
47) Standard deviation measures which type of risk?
A) Total
B) Non-diversifiable
C) Unsystematic
D) Systematic
E) Economic
48) Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2
percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return
of 10.2 percent. This stock:
A) is underpriced.
B) is correctly priced.
C) will plot below the security market line.
D) will plot on the security market line.
E) will plot to the right of the overall market on a security market line graph.
49) Which one of the following will be constant for all securities if the market is efficient and
securities are priced fairly?
A) Variance
B) Standard deviation
C) Reward-to-risk ratio
D) Beta
E) Risk premium
50) The reward-to-risk ratio for Stock A is less than the reward-to-risk ratio of Stock B. Stock A
has a beta of .82 and Stock B has a beta of 1.29. This information implies that:
A) Stock A is riskier than Stock B and both stocks are fairly priced.
B) Stock A is less risky than Stock B and both stocks are fairly priced.
C) either Stock A is underpriced or Stock B is overpriced or both.
D) either Stock A is overpriced or Stock B is underpriced or both.
E) both Stock A and Stock B are correctly priced since Stock A is less risky than Stock B.
51) The market risk premium is computed by:
A) adding the risk-free rate of return to the inflation rate.
B) adding the risk-free rate of return to the market rate of return.
C) subtracting the risk-free rate of return from the inflation rate.
D) subtracting the risk-free rate of return from the market rate of return.
E) multiplying the risk-free rate of return by a beta of 1.0.
52) The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free
asset is referred to as the:
A) market risk premium.
B) risk premium.
C) systematic return.
D) total return.
E) real rate of return.
53) The ________ of a security divided by the beta of that security is equal to the slope of the
security market line if the security is priced fairly.
A) real return
B) actual return
C) nominal return
D) risk premium
E) expected return
54) The capital asset pricing model (CAPM) assumes which of the following?
I. A risk-free asset has no systematic risk.
II. Beta is a reliable estimate of total risk.
III. The reward-to-risk ratio is constant.
IV. The market rate of return can be approximated.
A) I and III only
B) II and IV only
C) I, III, and IV only
D) II, III, and IV only
E) I, II, III, and IV
55) According to CAPM, the amount of reward an investor receives for bearing the risk of an
individual security depends upon the:
A) amount of total risk assumed and the market risk premium.
B) market risk premium and the amount of systematic risk inherent in the security.
C) risk-free rate, the market rate of return, and the standard deviation of the security.
D) beta of the security and the market rate of return.
E) standard deviation of the security and the risk-free rate of return.
56) Which one of the following should earn the highest risk premium based on CAPM?
A) Diversified portfolio with returns similar to the overall market
B) Stock with a beta of 1.38
C) Stock with a beta of .74
D) U.S. Treasury bill
E) Portfolio with a beta of 1.01
57) Treynor Industries is investing in a new project. The minimum rate of return the firm
requires on this project is referred to as the:
A) average arithmetic return.
B) expected return.
C) market rate of return.
D) internal rate of return.
E) cost of capital.
58) Consider the following information on three stocks:
State of
Economy
Probability of
State of Economy
Rate of Return
if State Occurs
Stock A
Stock B
Stock C
Boom
.25
.27
.15
.11
Normal
.65
.14
.11
.09
Bust
.10
−.19
−.04
.05
A portfolio is invested 45 percent each in Stock A and Stock B and 10 percent in Stock C. What
is the expected risk premium on the portfolio if the expected T-bill rate is 3.2 percent?
A) 11.47 percent
B) 12.38 percent
C) 1.67 percent
D) 4.29 percent
E) 8.71 percent
59) You recently purchased a stock that is expected to earn 19 percent in a booming economy, 12
percent in a normal economy, and lose 8 percent in a recessionary economy. The probability of a
boom economy is 16 percent while the probability of a normal economy is 78 percent. What is
your expected rate of return on this stock?
A) 12.40 percent
B) 10.25 percent
C) 11.92 percent
D) 12.54 percent
E) 13.50 percent
60) The common stock of Manchester & Moore is expected to earn 14 percent in a recession, 7
percent in a normal economy, and lose 4 percent in a booming economy. The probability of a
boom is 15 percent while the probability of a recession is 5 percent. What is the expected rate of
return on this stock?
A) 8.5 percent
B) 8.7 percent
C) 5.7 percent
D) 7.5 percent
E) 6.2 percent
61) If the economy is normal, Charleston Freight stock is expected to return 14.3 percent. If the
economy falls into a recession, the stock's return is projected at a negative 8.7 percent. The
probability of a normal economy is 80 percent. What is the variance of the returns on this stock?
A) .100346
B) .008464
C) .007420
D) .073927
E) .094315
62) The rate of return on the common stock of Lancaster Woolens is expected to be 18 percent in
a boom economy, 8 percent in a normal economy, and only 2 percent in a recessionary economy.
The probabilities of these economic states are 12 percent for a boom and 10 percent for a
recession. What is the variance of the returns on this common stock?
A) .001150
B) .001306
C) .001524
D) .001389
E) .001421
63) The returns on the common stock of New Image Products are quite cyclical. In a boom
economy, the stock is expected to return 23 percent in comparison to 14 percent in a normal
economy and a negative 18 percent in a recessionary period. The probability of a recession is 18
percent while the probability of a boom is 22 percent. What is the standard deviation of the
returns on this stock?
A) 13.71 percent
B) 11.56 percent
C) 15.83 percent
D) 12.08 percent
E) 14.77 percent
64) What is the standard deviation of the returns on a stock given the following information?
State of
Economy
Probability of
State of Economy
Rate of Return
if State Occurs
Boom
.28
.175
Normal
.67
.128
Recession
.05
.026
A) 3.57 percent
B) 3.28 percent
C) 3.89 percent
D) 3.42 percent
E) 4.01 percent
65) What is the expected return and standard deviation for the following stock?
State of
Economy
Probability of
State of Economy
Rate of Return
if State Occurs
Boom
.06
−
.06
Normal
.74
.07
Recession
.20
.18
A) 8.53 percent; 5.69 percent
B) 8.53 percent; 5.74 percent
C) 8.42 percent; 5.69 percent
D) 8.80 percent; 5.74 percent
E) 8.42 percent; 5.74 percent
66) You are comparing Stock A to Stock B. Given the following information, what is the
difference in the expected returns of these two securities?
State of
Economy
Probability of
State of Economy
Rate of Return
if State Occurs
Stock A
Stock B
Normal
.75
.13
.16
Recession
.25
−
.05
−
.21
A) 5.25 percent
B) 1.75 percent
C) 3.05 percent
D) 2.45 percent
E) 1.55 percent
67) You own a portfolio that has $2,800 invested in Stock A and $3,250 invested in Stock B. The
expected returns on these stocks are 14.7 percent and 9.3 percent, respectively. What is the
expected return on the portfolio?
A) 12.06 percent
B) 12.36 percent
C) 11.80 percent
D) 11.13 percent
E) 11.41 percent
68) You have $21,600 to invest in a stock portfolio. Your choices are Stock X with an expected
return of 14.3 percent and Stock Y with an expected return of 8.1 percent. Your goal is to create
a portfolio with an expected return of 12.5 percent. All money must be invested. How much will
you invest in Stock X?
A) $15,800
B) $18,273
C) $14,600
D) $15,329
E) $19,208
69) What is the expected return of an equally weighted portfolio comprised of the following
three stocks?
State of
Economy
Probability of
State of Economy
Rate of Return
if State Occurs
Stock A
Stock B
Stock C
Boom
.25
.19
.13
.07
Normal
.72
.15
.05
.13
Bust
.03
−
.29
−
.14
.22
A) 9.82 percent
B) 10.96 percent
C) 9.67 percent
D) 10.48 percent
E) 11.33 percent
70) Your portfolio is invested 25 percent each in Stocks A and C, and 50 percent in Stock B.
What is the standard deviation of your portfolio given the following information?
State of
Economy
Probability of
State of Economy
Rate of Return
if State Occurs
Stock A
Stock B
Stock C
Boom
.07
.28
.14
.11
Good
.55
.19
.12
.09
Poor
.36
−
.21
.07
.06
Bust
.02
−
.65
.03
−
.03
A) 6.52 percent
B) 9.64 percent
C) 12.72 percent
D) 10.89 percent
E) 7.39 percent
71) You have a portfolio consisting solely of Stock A and Stock B. The portfolio has an expected
return of 10.2 percent. Stock A has an expected return of 11.7 percent while Stock B is expected
to return 8.3 percent. What is the portfolio weight of Stock A?
A) 57.01 percent
B) 55.88 percent
C) 63.13 percent
D) 61.20 percent
E) 59.97 percent
72) You own the following portfolio of stocks. What is the portfolio weight of Stock C?
Stock
Number
of Shares
Price
per Share
A
650
$
15.82
B
320
$
11.09
C
400
$
39.80
D
100
$
7.60
A) 52.18 percent
B) 53.86 percent
C) 53.41 percent
D) 51.09 percent
E) 52.65 percent
73) You own a portfolio with the following expected returns given the various states of the
economy. What is the overall portfolio expected return?
State of
Economy
Probability of
State of Economy
Rate of Return
if State Occurs
Boom
.25
.185
Normal
.60
.143
Bust
.15
.032
A) 14.49 percent
B) 14.64 percent
C) 13.87 percent
D) 13.69 percent
E) 14.23 percent
74) What is the expected return on a portfolio that is invested 22 percent in Stock A, 36 percent
in Stock B, and the remainder in Stock C?
State of
Economy
Probability of
State of Economy
Rate of Return
if State Occurs
Stock A
Stock B
Stock C
Boom
.05
.18
.11
.13
Normal
.92
.09
.08
.06
Bust
.03
−
.07
.05
−
.14
A) 7.06 percent
B) 7.38 percent
C) 6.99 percent
D) 7.29 percent
E) 6.84 percent
75) What is the expected return on this portfolio?
Stock
Expected
Return
Number
of Shares
Price
per Share
A
.11
200
$
18.60
B
.06
400
$
12.85
C
.17
300
$
43.90
A) 11.48 percent
B) 13.42 percent
C) 12.03 percent
D) 11.56 percent
E) 13.97 percent
