FIN 310 EXAM 3 HOMEWORK 11

Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio: for the portfolio must equal 1.0. for the portfolio must be less than the market risk premium. for each security must equal zero. of each security is equal to the risk-free rate. of each security must equal the slope of the security market line.

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

Standard deviation measures _____ risk while beta measures _____ risk. systematic; unsystematic unsystematic; systematic total; unsystematic total; systematic asset-specific; market

total; systematic

A stock has an expected return of 16 percent, the risk-free rate is 6.40 percent, and the market risk premium is 7.3 percent. Required:What must the beta of this stock be? (Round your answer to 3 decimal places (e.g., 32.161).)

1.315

You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.4 and the total portfolio is equally as risky as the market. Required: What must the beta be for the other stock in your portfolio? (Round your answer to 2 decimal places (e.g., 32.16).) Beta:

1.60

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

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 and III only II and IV only I, II, and III only I, III, and IV only I, II, III, and IV

I, III, and IV only

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

A stock has a beta of 1.11, the expected return on the market is 10.3 percent, and the risk-free rate is 4.80 percent. Required: What must the expected return on this stock be? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

10.91

Consider the following information: Rate of Return If State OccursState ofProbability ofEconomyState of EconomyStock AStock BStock C Boom 0.22 0.369 0.469 0.349 Good 0.38 0.139 0.119 0.189 Poor 0.28 0.029 0.039 −0.094 Bust 0.12 −0.129 −0.269 −0.109 Requirement 1: Your portfolio is invested 28 percent each in A and C and 44 percent in B. What is the expected return of the portfolio? 18.3514.5912.1911.090.033660.02129% Requirement 2: (a) What is the variance of this portfolio? 18.3514.5912.1911.090.033660.02129 (b) What is the standard deviation of this portfolio? 18.3514.5912.1911.090.033660.02129%

12.19% 0.03366 18.35%

You own a portfolio that has $3,083 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. Required: What is the expected return on the portfolio? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

15.49%

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

Stock Y has a beta of 1.30 and an expected return of 14.6 percent. Stock Z has a beta of 0.75 and an expected return of 11.3 percent. Required: If the risk-free rate is 5.00 percent and the market risk premium is 7.50 percent, are these stocks correctly priced? Stock Y: UndervaluedOvervaluedCorrectly Valued Stock Z: UndervaluedOvervaluedCorrectly Valued

Overvalued Undervalued

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? Total Surprise Diversifiable Systematic Unsystematic

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

The beta of a risky portfolio (assuming no borrowing or shortselling) cannot be less than _____ nor greater than _____. 0; 1 1; the market beta the lowest individual beta in the portfolio; market beta the market beta; the highest individual beta in the portfolio the lowest individual beta in the portfolio; the highest individual beta in the portfolio

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