FIN 325 Ch 13
Of the options listed below, which is the best measure of systematic risk? A. The weighted average standard deviation B. Beta C. The geometric average D. The standard deviation E. The arithmetic average
B. Beta
You own a portfolio equally invested in a risk-free asset and two different stocks. One of the stocks has a beta of 1.32. The total portfolio is equally as risky as the market. What is the beta of the second stock? A. 1.46 B. 0.88 C. 1.94 D. 1.68 E. 1.54
D. 1.68 Explanation: βp = 1.0 = (1/3)(0) + (1/3)(β2) + (1/3)(1.32) β2 = 1.68
You own a portfolio that has $1,720 invested in Stock A and $3,470 invested in Stock B. The expected returns on these stocks are 13.7 percent and 8.0 percent, respectively. What is the expected return on the portfolio? A. 9.20% B. 10.23% C. 12.18% D. 7.13% E. 9.89%
E. 9.89% Explanation: E(Rp) = [$1,720/($1,720 + 3,470)](0.137) + [$3,470/($1,720 + 3,470)](0.08) E(Rp) = 0.0989, or 9.89%
Of the options listed below, which are examples of diversifiable risk? I. Wildfires damage an entire town II. The federal government imposes a $1,000 fee on all business entities III. Payroll taxes are increased nationally IV. All software providers are required to improve their privacy standards A. I and III only B. II and IV only C. II and III only D. I and IV only E. I, III, and IV only
D. I and IV only
What is the standard deviation of the returns on a portfolio that is invested 37 percent in Stock Q and 63 percent in Stock R? State of Economy: Boom, Normal Probability of State of Economy: 0.15, 0.85 Rate of Return if State Occurs: Stock Q 0.16, 0.09 Rate of Return if State Occurs: Stock R 0.15, 0.13 A. 1.37% B. 2.47% C. 1.63% D. 1.28% E. 2.09%
A. 1.37% Explanation: E(r)Boom = 0.37(0.16) + 0.63(0.15) = 0.1537 E(r)Normal = 0.37(0.09) + 0.63(0.13) = 0.1152 E(r)Portfolio = 0.15(0.1537) + 0.85(0.1152) E(r)Portfolio = 0.1210 σPortfolio = [0.15(0.1537 − 0.1210)^2 + 0.85(0.1152 − 0.1210)^2]^.5 σPortfolio = 0.0137, or 1.37%
Your portfolio is comprised of 22 percent of Stock X, 32 percent of Stock Y, and 46 percent of Stock Z. Stock X has a beta of 1.04, Stock Y has a beta of .96, and Stock Z has a beta of 1.24. What is the beta of your portfolio? A. 1.163 B. 1.092 C. 1.127 D. 1.178 E. 1.106
E. 1.106 Explanation: βPortfolio = 0.22(1.04) + 0.32(0.96) + 0.46(1.24) βPortfolio = 1.106
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% B. 55.88% C. 63.13% D. 61.20% E. 59.97%
B. 55.88% Explanation: 0.102 = 0.117x + 0.083(1 − x) x = 0.5588, or 55.88%
Consider the following information on three stocks: State of Economy: Boom, Normal, Bust Probability of State of Economy: 0.15, 0.65, 0.20 Rate of Return if State Occurs Stock A 0.27, 0.14, -0.19 Rate of Return if State Occurs Stock B 0.15, 0.11, -0.06 Rate of Return if State Occurs Stock C 0.11, 0.09, 0.05 A portfolio is invested 45 percent each in Stock A and Stock B, and 10 percent in Stock C. The expected T-bill rate is 3.2 percent. What is the expected risk premium on the portfolio? A. 5.55% B. 12.38% C. 1.67% D. 4.29% E. 8.75%
A. 5.55% Explanation: E(RP)Boom = 0.45(0.27) + 0.45(0.15) + 0.10(0.11) = 0.2000 E(RP)Normal = 0.45(0.14) + 0.45(0.11) + 0.10(0.09) = 0.1215 E(RP)Bust = 0.45(-0.19) + 0.45(-0.06) + 0.10(0.05) = −0.1075 E(RP) = 0.15(0.2000) + 0.65(0.1215) + 0.20(−0.1075) E(RP) = 0.0875, or 8.75% RPP = 0.0875 − 0.032 RPP = 0.0555, or 5.55%
Of the options listed below, which is the best example of systematic risk? A. Investors panic causing security prices around the globe to fall precipitously B. A flood washes away a firm's warehouse C. A city imposes an additional one percent sales tax on all products D. A toymaker has to recall its top-selling toy E. Corn prices increase due to increased demand for alternative fuels
A. Investors panic causing security prices around the globe to fall precipitously.
Which one of the following statements is accurate? A. Portfolio betas range between -1.0 and + 1.0 B. A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. C. A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification D. a portfolio of U.S. Treasury bills will have a beta of +1.0 E. The beta of a market portfolio is equal to zero
B. A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.
Given a well-diversified stock portfolio, the variance of the portfolio: A. Will equal the variance of the most volatile stock in the portfolio B. May be less than the variance of the least risky stock in the portfolio C. Must be equal to or greater than the variance of the least risky stock in the portfolio D. Will be a weighted average of the variances of the individual securities in the portfolio E. Will be an arithmetic average of the variances of the individual securities in the portfolio
B. May be less than the variance of the least risky stock in the portfolio
While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the: A. Arithmetic return B. Historical return C. Expected return D. Geometric return E. Required return
C. Expected return
Which of the following statements best describes the principle of diversification? A. Concentrating an investment in two or three stocks will eliminate all of the unsystematic risk B. Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk C. Spreading an investment across multiple diverse companies will not lower the total risk D. Spreading an investment across many diverse assets will eliminate all of the systematic risk E. Spreading an investment across many diverse assets will eliminate some of the total risk
E. Spreading an investment across many diverse assets will eliminate some of the total risk.
The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk. A. Capital asset pricing model B. Time value of money equation C. Unsystematic risk equation D. Market performance equation E. Expected risk formula
A. capital asset pricing model
The majority of the diversifiable risk in a portfolio can be eliminated by owning as few as ________ stocks. A. 5 B. 10 C. 2 D. 40 E. 75
B. 10
Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n): A. Index B. Portfolio C. Collection D. Grouping E. Risk-free position
B. Portfolio
Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium? A. Diversified portfolio with returns similar to the overall market B. Stock with a beta of 1.24 C. Stock with a beta of 0.63 D. U.S. Treasury bill E. Portfolio with a beta of 1.12
B. Stock with a beta of 1.24
Your portfolio has a beta of 1.24. The portfolio consists of 6 percent U.S. Treasury bills, 40 percent Stock A, and 54 percent Stock B. Stock A has a risk level equivalent to that of the overall market. What is the beta of Stock B? A. 1.44 B. 1.52 C. 1.56 D. 1.84 E. 1.96
C. 1.56 Explanation: βPortfolio = 1.24 = (0.06)(0) + (0.40)(1) + (0.54βB) βB = 1.56 The beta of a risk-free asset is zero. The beta of the market is 1.
________ measures total risk, and ________ measures systematic risk. A. Beta; alpha B. Beta; standard deviation C. Alpha; beta D. Standard deviation; beta E. Standard deviation; variance
D. Standard deviation; beta
An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of ________ risk. A. Portfolio B. Nondiversifiable C. Market D. Unsystematic E. Expected
D. Unsystematic
