Chapter 13 Finance 312 quiz

Of the options listed below, which is the best example of unsystematic risk?

A national decrease in consumer spending on entertainment

What is Risk premium

Expected Return − Risk free rate

________ measures total risk, and ________ measures systematic risk.

Standard deviation; beta

You decide to invest $20,500 in Bank of America and $14,500 in Twitter. What is the portfolio's beta? Bank of America beta: 1.27 Twitter beta: 1.96

Wa (Bank of America) = $20,500/($20,500 + $14,500) =59% Wb (Twitter) = 1 − 59% = 41% βp = (Wa × β) + (Wb × β) βp = (.59 × 1.27) + (.41 × 1.96) βp = .7493 + .8036 = 1.553

Portfolio Beta is the ______________ average of the Betas of the investments included in the portfolio.

Weighted

The slope of the security market line is the:

market risk premium.

What would the beta of this combination be if Monster Beverage has a beta of 1.52 and Pepsi has a beta of .55?

(Wa × β) + (Wb × β) = (.50 × 1.52) + (.50 × .55)

What is the expected return for Stock A?

.40 × − .15 + .60 × .40

The security market line is a positively sloped straight line that displays the relationship between expected return and ____________.

Beta

A stock has an expected return of 6.5 percent, the risk-free rate is 1.1 percent, and the market risk premium is 5 percent. What is the stock's beta?

E(Ri) = .065 = .011 + βi(.05)βi = 1.08

The stock of Rullo Rigs has a beta of 1.34. The risk-free rate of return is 1.9 percent, the inflation rate is 2.2 percent, and the market risk premium is 6.9 percent. What is the expected rate of return on this stock?

E(r) = .019 + 1.34(.069)E(r) = .111, or 11.1%

The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. Which one of the following statements is true given this information?

E(r) = .037 + 1.24(.1178 − .037) E(r) = .1372, or 13.72%The stock is overpriced because its actual expected return is less than the CAPM return.

Of the options listed below, which is the best example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously.

Which of the following statements is true of a portfolio's standard deviation?

It can be less than the standard deviation of the least risky security in the portfolio.

The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk.

capital asset pricing model

Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock:

is underpriced.

The market risk premium equals the:

market rate of return minus the risk-free rate of return.

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.

risk-free rate

Expected return is the return on a _______ asset expected in the future.

risky

The ________ is a positively sloped linear function that plots securities' expected returns against their betas.

security market line

Risk-free assets have a beta of 0 and the market portfolio has a beta of 1.

true

The expected return of a stock, based on the likelihood of various economic outcomes, equals the:

weighted average of the returns for each economic state.