FIN 101 Exam Part 2

21. A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is .74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta:

E. will be greater than or equal to .74 but less than or equal to 1.51.

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

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

20. The beta of a risky portfolio cannot be less than _____ nor greater than ____.

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

34. Beasley Enterprises stock has an expected return of 8.86 percent. The stock is expected to return 12.5 percent in a normal economy and 16 percent in a boom. The probabilities of a recession, normal economy, and a boom are 11 percent, 88 percent, and 1 percent, respectively. What is the expected return if the economy is in a recession?

A. -20.91 percent

What is the variance of a portfolio invested 25 percent each in Stocks A and B and 50 percent in Stock C?

A. .001427

50. Given the following information, what is the standard deviation of the returns on a portfolio that is invested 35 percent in both Stocks A and C, and 30 percent in Stock B?

A. 1.95 percent

47. Given the following information, what is the expected return on a portfolio that is invested 30 percent in both Stocks A and C, and 40 percent in Stock B?

A. 11.08 percent

31. PL Lumber stock is expected to return 22 percent in a booming economy, 15 percent in a normal economy, and lose 2 percent in a recession. The probabilities of an economic boom, normal state, or recession are 5 percent, 92 percent, and 3 percent, respectively. What is the expected rate of return on this stock?

A. 14.84 percent

41. You own a $58,600 portfolio comprised of four stocks. The values of Stocks A, B, and C are $11,200, $17,400, and $20,400, respectively. What is the portfolio weight of Stock D?

A. 16.38 percent

58. Stock Y has a beta of 1.28 and an expected return of 13.7 percent. Stock Z has a beta of 1.02 and an expected return of 11.4 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

A. 2.38 percent

e portfolio is invested 40 percent in each Stock A and Stock B and20 percent in Stock C. If the expected T-bill rate is 4.03 percent, what is the expected risk premium on the portfolio?

A. 5.80 percent

1. Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?

A. Expected return

29. If a security plots to the right and below the security market line, then the security has ____ systematic risk than the market and is ____.

A. more; overpriced

16. The expected return on a security is not affected by the:

A. security's unique risks.

46. You would like to invest $24,000 and have a portfolio expected return of 11.5 percent. You are considering two securities, A and B. Stock A has an expected return of 18.6 percent and B has an expected return of 7.4 percent. Approximately how much should you invest in Stock A if you invest the balance in Stock B?

B. $8,786

36. Bruno's stock should return 14 percent in a boom, 11 percent in a normal economy, and 4 percent in a recession. The probabilities of a boom, normal economy, and recession are 8 percent, 90 percent, and 2 percent, respectively. What is the variance of the returns on this stock?

B. .000169

44. You have compiled the following information on your investments. What rate of return should you expect to earn on this portfolio?

B. 10.09 percent

40. You own a portfolio that is invested as follows: $13,700 of Stock A, $4,800 of Stock B, $16,200 of Stock C, and $9,100 of Stock D. What is the portfolio weight of Stock B?

B. 10.96 percent

48. Given the following information, what is the expected return on a portfolio that is invested 35 percent in Stock A, 45 percent in Stock B, and the balance in Stock C?

B. 12.16 percent

18. Which statement is correct?

B. A security with a beta of 1.54 will plot on the security market line if it is correctly priced.

6. The slope of the security market line represents the:

B. market risk premium.

51. You want to create a $72,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 13.6 percent and Stock B has an expected return of 14.7 percent. You want to own $25,000 of Stock B. The risk-free rate is 3.6 percent and the expected return on the market is 12.1 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest in the risk-free security?

C. $13,550

52. A portfolio has an expected return of 13.4 percent. This portfolio contains two stocks and one risk-free security. The expected return on Stock X is 12.2 percent and on Stock Y it is 19.3 percent. The risk-free rate is 4.1 percent. The portfolio value is $48,000 of which $10,000 is the risk-free security. How much is invested in Stock X?

C. $18,478.87

39. Blue Bell stock is expected to return 8.4 percent in a boom, 8.9 percent in a normal economy, and 9.2 percent in a recession. The probabilities of a boom, normal economy, and a recession are 6 percent, 92 percent, and 2 percent, respectively. What is the standard deviation of the returns on this stock?

C. .13 percent

54. You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.86 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

C. 1.14

35. Fiddler's Music Stores' stock has a risk premium of 8.3 percent while the inflation rate is 3.1 percent and the risk-free rate is 3.8 percent. What is the expected return on this stock?

C. 12.1 percent

33. Southern Wear stock has an expected return of 15.1 percent. The stock is expected to lose 8 percent in a recession and earn 18 percent in a boom. The probabilities of a recession, a normal economy, and a boom are 2 percent, 87 percent, and 11 percent, respectively. What is the expected return on this stock if the economy is normal?

C. 15.26 percent

4. Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

C. Diversification

14. Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives?

C. Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0

3. Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?

C. Portfolio weigh

15. The capital asset pricing model:

C. considers the relationship between the fluctuations in a security's returns versus the market's returns.

28. Unsystematic risk can be defined by all of the following except:

C. market risk.

49. Given the following information, what is the variance of the returns on a portfolio that is invested 40 percent in both Stocks A and B, and 20 percent in Stock C?

D. .000205

37. The common stock of The DownTowne should return 23 percent in a boom, 16 percent in a normal economy, and lose 32 percent in a recession. The probabilities of a boom, normal economy, and recession are 5 percent, 90 percent, and 5 percent, respectively. What is the variance of the returns on this stock?

D. .011345

57. A stock has a beta of 1.48 and an expected return of 17.3 percent. A risk-free asset currently earns 4.6 percent. If a portfolio of the two assets has a beta of .98, then the weight of the stock must be ___ and the risk-free weight must be___.

D. .66; .34

59. Stock J has a beta of 1.06 and an expected return of 12.3 percent, while Stock K has a beta of .74 and an expected return of 6.7 percent. If you create portfolio with the same risk as the market, what rate of return should you expect to earn?

D. 11.25 percent

32. S&S stock is expected to return 17.5 percent in a booming economy, 12.4 percent in a normal economy, and 1.2 percent in a recession. The probabilities of an economic boom, normal state, or recession are 2 percent, 90 percent, and 8 percent, respectively. What is the expected rate of return on this stock?

D. 11.61 percent

45. You want to create a $50,000 portfolio that consists of three stocks and has an expected return of 12.6 percent. Currently, you own $14,200 of Stock A and $21,700 of Stock B. The expected return for Stock A is 16.2 percent, and for Stock B it is 10.4 percent. What is the expected rate of return for Stock C?

D. 12.36 percent

9. 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?

D. A decrease in the probability of an economic boom

26. World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stock's rate of return without affecting the risk level of the stock, all else constant?

D. Increase in the market risk-to-reward ratio

11. 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?

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

12. Which statement is true?

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

2. A portfolio is:

D. a group of assets held by an investor.

7. The security market line is defined as a positively sloped straight line that displays the relationship between the:

D. expected return and beta of either a security or a portfolio.

27. The systematic risk principle states that the expected return on a risky asset depends only on the asset's ___ risk.

D. market

17. According to the capital asset pricing model, the expected return on a security will be affected by all of the following except the:

D. security's standard deviation.

30. Portfolio diversification eliminates:

D. unsystematic risk.

10. Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security's beta, and E(RM) is the expected rate of return on the market.

D. β[E(RM) - Rf]

56. A stock has an expected return of 14.3 percent, the risk-free rate is 3.9 percent, and the market risk premium is 7.8 percent. What must the beta of this stock be?

E. 1.33

42. You own a portfolio of two stocks, A and B. Stock A is valued at $84,650 and has an expected return of 10.6 percent. Stock B has an expected return of 6.4 percent. What is the expected return on the portfolio if the portfolio value is $97,500?

E. 10.05 percent

43. You own a portfolio consisting of the securities listed below. The expected return for each security is as shown. What is the expected return on the portfolio?

E. 11.41 percent

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

E. expected return and beta.

55. A stock has a beta of 1.32, the expected return on the market is 12.72, and the risk-free rate is 4.05. What must the expected return on this stock be?

E. 15.49 percent

38. Westover stock is expected to return 36 percent in a boom, 14 percent in a normal economy, and lose 75 percent in a recession. The probabilities of a boom, normal economy, and a recession are 2 percent, 93 percent, and 5 percent, respectively. What is the standard deviation of the returns on this stock?

E. 19.74 percent

13. Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else held constant?

E. A decrease in the risk-free rate given a security beta of 1.06

23. Which statement is correct?

E. An underpriced security will plot above the security market line.

8. Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

E. Cost of capital

22. Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following?

E. Reduce the portfolio's unique risks

25. Which one of the following is the vertical intercept of the security market line?

E. Risk-free rate

24. 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?

E. Zero