Finance Learnsmart Chapter 11

The computation of variance requires 4 steps. Place the steps in the correct order from the first step to the last step?

1. calculate the expected return 2. calculate the deviation of each return from the expected 3. square each deviation 4. calculate the average squared deviation

If security ABC has a beta of 1.5 and security XYZ has a beta of 1, what is the beta of a portfolio that is equally invested in both securities?

1.25

What is the expected return for a security if the risk-free rate is 5%, the expected return on the market is 9%, and the security's beta is 1.5?

11%

What is the expected return of a security with a beta of 1.2 if the risk free rate is 4 percent and the expected return on the market is 12 percent?

13.6%

What is the return on a portfolio that consists of $50,000 in an index fund, $30,000 in a bond fund, and $20,000 in a foreign stock fund? The expected returns are 7 percent, -3 percent, and 18 percent, respectively.

6.2%

True or False: Since the CAPM equation can be used only for individual securities, it cannot be used with portfolios.

False

Which of the following are examples of a portfolio?

Investing $100,000 in a combination of stocks and bonds; investing $100,000 in a combination of US and Asian stocks; Investing $100,000 in the stocks of 50 publicly traded corporations

What does the security market line depict?

It is a graphical depiction of the capital asset pricing model

What does variance measure?

It measures the spread of the sample of returns; it measures the riskiness of a security's returns

Which of the following are examples of information that may impact the risky return of a stock?

The Fed's decision on interest rates at their meeting next week; the outcome of an application currently pending with the Food and Drug Administration

What is the intercept of the security market line (SML)?

The risk-free rate

Unsystematic risk will affect

firms in a single industry; a specific firm

An investment will have a negative NPV when it's expected return is _____ _____ what the financial markets offer for the same risk

less than

Systematic risk will _____ when securities are added to a portfolio.

not change

If investors are risk verse, it is reasonable to assume that the risk premium for the stock market will be

positive

When an investor is diversified only _____ risk matters.

systematic

What is the slope of the security market line (SML)?

the market-risk premium

ABC has a beta of 2.5 and XYZ has a beta of 1.5. The risk-free rate is 4 percent and the market risk premium is 9 percent. What is the expected return on a portfolio that is equally invested in ABC and XYZ?

22%

If the variance of a portfolio is .0025, what is the standard deviation?

5%

Given the following probability distribution for the returns of a portfolio, what is the standard deviation of the portfolio?

5.74%

A security has a beta of 1, a market risk premium of 8%, and a risk-free rate of 3%. What will happen to the expected return if the beta doubles?

The expected return will increase to 19% from 11%

What are the two components of risky return in the total return equation?

Unsystematic risk; market risk

_____ risk is reduced as more securities are added to the portfolio

Unsystematic; diversifiable; unique

Which of the following statements is (are) true about variance?

Variance is a measure of the squared deviations of a security's return from its expected return; standard deviation is the square root of variance

When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market:

already knew about most of the news item

The systematic risk principle argues that the market does not reward risks

that are diversifiable; that are borne unneccessarily

To determine the appropriate required return for an investment, we can use _____

the Security Market Line