Chapter 11

The security market line is a linear function that is graphed by plotting data points based on the relationship between the

expected return and beta.

The slope of the security market line represents the:

market risk premium.

If the economy booms, RTF, Incorporated, stock is expected to return 13 percent. If the economy goes into a recessionary period, then RTF is expected to only return 3 percent. The probability of a boom is 81 percent while the probability of a recession is 19 percent. What is the variance of the returns on RTF, Incorporated, stock?

.001539

A portfolio consists of 190 shares of Stock C that sells for $35 and 155 shares of Stock D that sells for $40. What is the portfolio weight of Stock C?

.5175

You have a portfolio that is invested 11 percent in Stock A, 56 percent in Stock B, and 33 percent in Stock C. The betas of the stocks are .84, 1.39, and 1.68, respectively. What is the beta of the portfolio?

1.43

A portfolio consists of $15,000 in Stock M and $22,900 invested in Stock N. The expected return on these stocks is 8.80 percent and 12.40 percent, respectively. What is the expected return on the portfolio?

10.98%

The risk-free rate is 2.5 percent and the market expected return is 12.2 percent. What is the expected return of a stock that has a beta of .89?

11.13%

You recently purchased a stock that is expected to earn 26 percent in a booming economy, 15 percent in a normal economy, and lose 4 percent in a recessionary economy. There is 27 percent probability of a boom, 63 percent chance of a normal economy, and 10 percent chance of a recession. What is your expected rate of return on this stock?

16.07%

A stock has a beta of 1.29 and an expected return of 11.57 percent. If the risk-free rate is 4.4 percent, what is the stock's reward-to-risk ratio?

5.56%

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?

A decrease in the probability of an economic boom

Which one of the following is the best example of unsystematic risk?

A warehouse fire

Which one of the following statements is correct?

If a risky security is correctly priced, its expected risk premium will be positive.

Consider a portfolio comprised of four risky securities. Assume the economy has three economic states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero?

The portfolio expected rate of return must be the same for each economic state.

The expected rate of return on Delaware Shores stock is based on three possible states of the economy. These states are boom, normal, and recession which have probabilities of occurrence of 20 percent, 75 percent, and 5 percent, respectively. Which one of the following statements is correct concerning the variance of the returns on this stock?

The variance must be positive provided that each state of the economy produces a different expected rate of return.

Which statement is true?

The weights of the securities held in any portfolio must equal 1.0.