FIN 310 Ch.11 HW

You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.31 and the total portfolio is equally as risky as the market. What must the beta be for the other stock in your portfolio?

1.69

A stock has an expected return of 19.38 percent, the risk-free rate is 6.40 percent, and the market risk premium is 7.3 percent. What must the beta of this stock be?

1.778

You own a portfolio that has $3,145 invested in Stock A and $4,300 invested in Stock B. Assume the expected returns on these stocks are 12 percent and 18 percent, respectively. What is the expected return on the portfolio?

15.47

A stock has a beta of 0.74, the expected return on the market is 10.3 percent, and the risk-free rate is 4.80 percent. What must the expected return on this stock be?

8.87

Based on the capital asset pricing model, investors are compensated based on which of the following? I. market risk premium II. portfolio standard deviation III. portfolio beta IV. risk-free rate

I, III, and IV only

Which one of the following is an example of systematic risk? - Major layoff by a regional manufacturer of power boats - Increase in consumption created by a reduction in personal tax rates - Surprise firing of a firm's chief financial officer - Closure of a major retail chain of stores - Product recall by one manufacturer

Increase in consumption created by a reduction in personal tax rates

The systematic risk principle states that the expected return on a risky asset depends only on which one of the following? Unique risk Diversifiable risk Asset-specific risk Market risk Unsystematic risk

Market risk

Which one of the following is the slope of the security market line? Risk-free rate Market risk premium Beta coefficient Risk premium on an individual asset Market rate of return

Market risk premium

Which one of the following describes systemic risk? Risk that affects a large number of assets An individual security's total risk Diversifiable risk Asset specific risk Risk unique to a firm's management

Risk that affects a large number of assets

The risk premium for an individual security is based on which one of the following types of risk?

Systematic

Which one of the following best exemplifies unsystematic risk? - Unexpected economic collapse - Unexpected increase in interest rates - Unexpected increase in the variable costs for a firm - Sudden decrease in inflation - Expected increase in tax rates

Unexpected increase in the variable costs for a firm

Portfolio diversification eliminates which one of the following? - Total investment risk - Portfolio risk premium - Market risk - Unsystematic risk - Reward for bearing risk

Unsystematic risk

Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security? - Security beta multiplied by the market rate of return - Market risk premium - Security beta multiplied by the market risk premium - Risk-free rate of return - Zero

Zero

Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio:

of each security must equal the slope of the security market line.

The beta of a risky portfolio (assuming no borrowing or shortselling) cannot be less than _____ nor greater than _____.

the lowest individual beta in the portfolio; the highest individual beta in the portfolio

Standard deviation measures _____ risk while beta measures _____ risk.

total; systematic

Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk? Systematic Unsystematic Diversification Security market line Capital asset pricing model

Diversification

The security market line is a linear function which is graphed by plotting data points based on the relationship between which two of the following variables? Risk-free rate and beta Market rate of return and beta Market rate of return and the risk-free rate Risk-free rate and the market rate of return Expected return and beta

Expected return and beta