Chapter 12

B) beta

A linear regression to estimate the relation between General Motorsʹ stock returns and the marketʹs return gives the best fitting line that represents the relation between the stock and the market. The slope of this line is our estimate of ________. A) alpha B) beta C) risk-free rate D) volatility

B) Sprintʹs beta is 1.47.

A linear regression was done to estimate the relation between Sprintʹs stock returns and the marketʹs return. The intercept of the line was found to be 0.23 and the slope was 1.47. Which of the following statements is true regarding Sprintʹs stock? A) Sprintʹs beta is 0.23. B) Sprintʹs beta is 1.47. C) The risk-free rate is 1.47%. D) The standard deviation of Sprintʹs excess returns is 23%.

D) 14.2%, 27.1%

A portfolio has three stocks N 110 shares of Yahoo (YHOO), 210 Shares of General Motors (GM), and 70 shares of Standard and Poorʹs Index Fund (SPY). If the price of YHOO is $20, the price of GM is $20, and the price of SPY is $130, calculate the portfolio weight of YHOO and GM. A) 10.6%, 13.5% B) 9.9%, 25.7% C) 13.5%, 24.4% D) 14.2%, 27.1%

A) 42.6%, 26.6%

A portfolio has three stocks N 240 shares of Yahoo (YHOO), 150 Shares of General Motors (GM), and 40 shares of Standard and Poorʹs Index Fund (SPY). If the price of YHOO is $30, the price of GM is $30, and the price of SPY is $130, calculate the portfolio weight of YHOO and GM. A) 42.6%, 26.6% B) 23.4%, 49.3% C) 12.8%, 16.0% D) 40.5%, 28.0%

C) 22.2%, 33.3%

A portfolio has three stocks N 300 shares of Yahoo (YHOO), 300 Shares of General Motors (GM), and 80 shares of Standard and Poorʹs Index Fund (SPY). If the price of YHOO is $20, the price of GM is $30, and the price of SPY is $150, calculate the portfolio weight of YHOO and GM. A) 11.1%, 20.0% B) 16.7%, 28.3% C) 22.2%, 33.3% D) 22.2%, 43.3%

A) Stock A is 62.5% and Stock B is 37.5%

A stock market comprises 2100 shares of stock A and 2100 shares of stock B. The share prices for stocks A and B are $25 and $15, respectively. What proportion of the market portfolio is comprised of each stock? A) Stock A is 62.5% and Stock B is 37.5%. B) Stock A is 37.5% and Stock B is 62.5%. C) Stock A is 50% and Stock B is 50%. D) Stock A is 200% and Stock B is 100%.

D) at the outset

As we add more uncorrelated stocks to a portfolio where the stocks are held in equal weights, the benefit of diversification is most dramatic ________. A) after 20 stocks have been added B) when there are more than 500 stocks C) when there are more than 1,000 stocks D) at the outset

B) low

Companies that sell household products and food have very little relation to the state of the economy because such basic needs do not go away. These stocks tend to have ________ betas. A) high B) low C) negative D) infinite

A) stocks do not move identically

Diversification reduces the risk of a portfolio because ________, and some of the risks are averaged out of the portfolio. A) stocks do not move identically B) stocks have common risks C) stocks are fully predictable D) stocks are not affected by the market

A) beta

For each 1% change in the market portfolioʹs excess return, the investmentʹs excess return is expected to change by ________ due to risks that it has in common with the market. A) beta B) alpha C) 0% D) 1%

C) between 5% and 7%

Historically, the average excess return of the S&P 500 over the return of U.S. Treasury bonds has been ________ and is proxy for the market risk premium. A) between 10% and 12% B) between 14% and 16% C) between 5% and 7% D) between 11% and 13%

C) AT&Tʹs beta is positive

If this pattern of stock returns is typical of AT&T stock, and you calculated a beta against the S&P 500, which of the following is true? A) AT&Tʹs beta is negative. B) AT&Tʹs beta is zero. C) AT&Tʹs beta is positive. D) Cannot be determined from information given.

B) unsystematic, systematic

If you build a large enough portfolio, you can diversify away all ________ risk, but you will be left with ________ risk. A) diversifiable, unsystematic B) unsystematic, systematic C) systematic, undiversifiable D) undiversifiable, diversifiable

B) common economic events

Stocks tend to move together if they are affected by ________. A) company specific events B) common economic events C) events unrelated to the economy D) idiosyncratic shocks

B) is equal to the risk-free rate plus a risk premium for systematic risk

The Capital Asset Pricing Model asserts that the expected return ________. A) is equal to the risk-free rate plus a risk premium for unsystematic risk B) is equal to the risk-free rate plus a risk premium for systematic risk C) is equal to the risk premium plus a risk-free rate for systematic risk D) is equal to the risk premium plus a risk-free rate for unsystematic risk

A) value weighted

The S&P 500 index traditionally is a(n) ________ portfolio of the 500 largest U.S. stocks. A) value weighted B) equally weighted C) chain weighted D) price weighted

D) depends on the portfolio that you add it to

The amount of a stockʹs risk that is diversified away ________. A) is independent of the portfolio that you add it to B) depends on market risk premium C) depends on risk-free rate of interest D) depends on the portfolio that you add it to

D) 1

The beta of the market portfolio is ________. A) 0 B) -1 C) 2 D) 1

A) 0.10

The covariance between Lowesʹ and Home Depotʹs returns is closest to ________. A) 0.10 B) 0.31 C) 0.12 D) 0.73

B) higher than

The expected return is usually ________ the baseline risk-free rate of return that we demand to compensate for inflation and the time value of money. A) lower than B) higher than C) similar to D) none of the above

C) 30%

The expected return of a portfolio that is equally invested in Duke Energy and Microsoft is closest to ________. A) 15% B) 14% C) 30% D) 45%

C) in proportion to their value

The market portfolio is the portfolio of all risky investments held ________. A) in descending weights B) in ascending weights C) in proportion to their value D) based on previous year performance

B) 22.67%, 16.30%

The price of Microsoft is $25 per share and that of Apple is $50 per share. The price of Microsoft increases to $36 per share after one year and to $41 after two years. Also, shares of Apple increase to $56 after one year and to $66 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return over year 1 and year 2? Assume no dividends are paid. A) 21.53%, 14.67% B) 22.67%, 16.30% C) 24.93%, 18.75% D) 22.21%, 18.26%

A) 19.32%, 7.62%

The price of Microsoft is $30 per share and that of Apple is $58 per share. The price of Microsoft increases to $39 per share after one year and to $42 after two years. Also, shares of Apple increase to $66 after one year and to $71 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return over year 1 and year 2? Assume no dividends are paid. A) 19.32%, 7.62% B) 28.01%, 8.38% C) 23.18%, 11.43% D) 22.22%, 13.71%

C) 13.75%, 16.48%

The price of Microsoft is $37 per share and that of Apple is $43 per share. The price of Microsoft increases to $42 per share after one year and to $47 after two years. Also, shares of Apple increase to $49 after one year and to $59 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return in year 1 and year 2? Assume no dividends are paid. A) 13.06%, 14.84% B) 10.31%, 18.96% C) 13.75%, 16.48% D) 11.69%, 19.78%

A) unchanged

The systematic risk (beta) of a portfolio is ________ by holding more stocks, even if they each had the same systematic risk. A) unchanged B) increased C) decreased D) turned to 0

B) less than 50%

The volatility of Home Depot Share prices is 50% and that of General Motors shares is 50%. When I hold both stocks in my portfolio and the stocks returns have zero correlation, the overall volatility of returns of the portfolio is ________. A) more than 25% B) less than 50% C) more than 50% D) less than 25%

D) not possible to calculate as information is inadequate

The volatility of Home Depot share prices is 20% and that of General Motors shares is 20%. When I hold both stocks in my portfolio, the overall volatility of the portfolio is ________. A) 20% B) 16% C) 18% D) not possible to calculate as information is inadequate

C) unchanged at 30%

The volatility of Home Depot share prices is 30% and that of General Motors shares is 15%. When I hold both stocks in my portfolio and the stocks returns have a correlation of 1, the overall volatility of returns of the portfolio is ________. A) more than 15% B) less than 30% C) unchanged at 30% D) equal to 15%

C) zero

The volatility of Home Depot share prices is 30% and that of General Motors shares is 30%. When I hold both stocks in my portfolio with an equal amount in each, and the stocks returns have a correlation of minus 1, the overall volatility of returns of the portfolio is ________. A) more than 30% B) unchanged at 30% C) zero D) equal to 60%

B) 9.0%

The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to ________. A) 8.1% B) 9.0% C) 10.8% D) 5.4%

C) 6.7%

The volatility of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to ________. A) 4.0% B) 0.7% C) 6.7% D) 20.1%

C) 42%

The volatility on Home Depotʹs returns is closest to ________. A) 35% B) 32% C) 42% D) 17%

A) 35%

The volatility on Lowesʹ returns is closest to ________. A) 35% B) 11% C) 14% D) 42%

C) is less than the weighted average volatility

We can reduce volatility by investing in less than perfectly correlated assets through diversification because the expected return of a portfolio is the weighted average of the expected returns of its stocks, but the volatility of a portfolio ________. A) is higher than the weighted average volatility B) is independent of weights in the stocks C) is less than the weighted average volatility D) depends on the expected return

C) Microsoft and Duke Energy

Which of the following combinations of two stocks would give you the biggest reduction in risk? A) Duke Energy and Wal-Mart B) Wal-Mart and Microsoft C) Microsoft and Duke Energy D) No combination will reduce risk.

C) Corr(Ri,Rj) = Cov(Ri,Rj) Var(Ri)Var(Rj)

Which of the following equations is INCORRECT? A) Cov(Ri,Rj) = 1 T - 1 ̕(Ri - Ri)(Rj - Rj) B) Var(Rp) = w12SD(R1) + w22SD(R2) + 2w1w2Corr(R1,R2)SD(R1)SD(R2) C) Corr(Ri,Rj) = Cov(Ri,Rj) Var(Ri)Var(Rj) D) Cov(Ri,Rj) = E[(Ri - E[Ri])(Rj - E[Rj])]

A) xi = Total value of portfolio Value of investment i

Which of the following equations is INCORRECT? A) xi = Total value of portfolio Value of investment i B) Rp = ̕i xiPi C) Rp = x1P1 + x2P2 + ... + xnPn D) E[Rp] = E[̕i xiRi]

D) The variance of a portfolio depends only on the variance of the individual stocks.

Which of the following statements is FALSE? A) A stockʹs return is perfectly positively correlated with itself. B) When the covariance equals 0, the stocks have no tendency to move either together or in opposition of one another. C) The closer the correlation is to -1, the more the returns tend to move in opposite directions. D) The variance of a portfolio depends only on the variance of the individual stocks.

C) Graphically, when the tangent line goes through the market portfolio, it is called the security market line (SML)

Which of the following statements is FALSE? A) Because all investors should hold risky securities in the same proportions as the efficient portfolio, their combined portfolio will also reflect the same proportions as the efficient portfolio. B) The Capital Asset Pricing Model (CAPM) assumptions hold that the return on any portfolio is the combination of the risk-free rate of return plus a risk premium proportional to the amount of systematic risk in the investment. C) Graphically, when the tangent line goes through the market portfolio, it is called the security market line (SML). D) A portfolioʹs risk premium and volatility are determined by the fraction that is invested in the market.

D) The covariance allows us to gauge the strength of the relationship between stocks

Which of the following statements is FALSE? A) If two stocks move in opposite directions, the covariance will be negative. B) The correlation between two stocks has the same sign as their covariance, so it has a similar interpretation. C) The covariance of a stock with itself is simply its variance. D) The covariance allows us to gauge the strength of the relationship between stocks.

C) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together.

Which of the following statements is FALSE? A) Stock returns will tend to move together if they are affected similarly by economic events. B) Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. C) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. D) With a positive amount invested in each stock, the more the stocks move together and the higher their covariance or correlation, the more volatile the portfolio will be.

B) Correlation is the expected product of the deviations of two returns.

Which of the following statements is FALSE? A) The covariance and correlation allow us to measure the co-movement of returns. B) Correlation is the expected product of the deviations of two returns. C) Because the stocksʹ prices do not move identically, some of the risk is averaged out in a portfolio. D) The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face common risks and their prices move together.

B) Graphically, the line through the risk-free investment and the market portfolio is called the capital market line (CML).

Which of the following statements is FALSE? A) The expected return of a portfolio should correspond to the portfolioʹs beta. B) Graphically, the line through the risk-free investment and the market portfolio is called the capital market line (CML). C) The beta of a portfolio is the weighted average beta of the securities in the portfolio. D) By holding a negative-beta security, an investor can reduce the overall market risk of her portfolio.

A) The risk premium of a security is equal to the market risk premium divided by the amount of market risk present in the securityʹs returns measured by its beta with the market.

Which of the following statements is FALSE? A) The risk premium of a security is equal to the market risk premium divided by the amount of market risk present in the securityʹs returns measured by its beta with the market. B) The beta of a portfolio is the weighted average beta of the securities in the portfolio. C) There is a linear relationship between a stockʹs beta and its expected return. D) A security with a negative beta has a negative correlation with the market, which means that this security tends to perform well when the rest of the market is doing poorly.

A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility.

Which of the following statements is FALSE? A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. B) We can rule out inefficient portfolios because they represent inferior investment choices. C) The volatility of the portfolio will differ, depending on the correlation between the securities in the portfolio. D) Correlation has no effect on the expected return on a portfolio.

D) Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

Which of the following statements is FALSE? A) When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. B) An investor seeking high returns and low volatility should only invest in an efficient portfolio. C) When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification. D) Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

A) While the sign of a correlation is easy to interpret, its magnitude is not.

Which of the following statements is FALSE? A) While the sign of a correlation is easy to interpret, its magnitude is not. B) Independent risks are uncorrelated. C) When the covariance equals 0, the returns are uncorrelated. D) To find the risk of a portfolio, we need to know more than the risk and return of the component stocks; we need to know the degree to which the stocksʹ returns move together.

A) Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return.

Which of the following statements is FALSE? A) Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. B) The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio. C) Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. D) A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.

C) XOM, XOM

You expect General Motors (GM) to have a beta of 1 over the next year and the beta of Exxon Mobil (XOM) to be 1.2 over the next year. Also, you expect the volatility of General Motors to be 30% and that of Exxon Mobil to be 40% over the next year. Which stock has more systematic risk? Which stock has more total risk? A) GM, GM B) GM, XOM C) XOM, XOM D) XOM, GM

D) GM, GM

You expect General Motors (GM) to have a beta of 1.3 over the next year and the beta of Exxon Mobil (XOM) to be 0.9 over the next year. Also, you expect the volatility of General Motors to be 40% and that of Exxon Mobil to be 30% over the next year. Which stock has more systematic risk? Which stock has more total risk? A) XOM, GM B) XOM, XOM C) GM, XOM D) GM, GM

A) XOM, GM

You expect General Motors (GM) to have a beta of 1.5 over the next year and the beta of Exxon Mobil (XOM) to be 1.9 over the next year. Also, you expect the volatility of General Motors to be 50% and that of Exxon Mobil to be 35% over the next year. Which stock has more systematic risk? Which stock has more total risk? A) XOM, GM B) GM, XOM C) GM, GM D) XOM, XOM