FINA 4200 Investments UNT Midterm

What doesn't change when price changes in short position?

P0 of SS

Which of the following statistics cannot be negative?

Variance

Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________.

overpriced

Market risk is also called __________ and _________.

systematic risk, nondiversifiable

In a well diversified portfolio, __________ risk is negligible.

unsystematic

Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio?

.4

The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________.

.6

The market portfolio has a beta of _________.

1.0

You have a $50,000 portfolio consisting of Intel, GE and Con Edison. You put $20,000 in Intel, $12,000 in GE and the rest in Con Edison. Intel, GE and Con Edison have betas of 1.3, 1.0 and 0.8 respectively. What is your portfolio beta?

1.048

The historical average rate of return on the large company stocks since 1926 has been

12%

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________.

19.76%

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B.

20% more

Consider the CAPM. The risk-free rate is 6% and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3?

21.6%

Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the stock is _________.

3.7%

Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years.

A new financial assets was created in this transaction

Debt securities promise _________. I. a fixed stream of income II. a stream of income that is determined according to a specific formula III. a share in the profits of the issuing entity

I or II only

Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities

I, II, and III

What doesn't change when price changes in Margined long position?

Margin loan

__________ assets generate net income to the economy and __________ assets define allocation of income among investors.

Real, Financial

The graph of the relationship between expected return and beta in the CAPM context is called the _________.

SML

Asset allocation refers to the _________.

allocation of the investment portfolio across broad asset classes

According to the capital asset pricing model, a fairly priced security will plot _________.

along the security market line

In the context of the capital asset pricing model, the systematic measure of risk is captured by _________.

beta

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12 percent, then you should _________.

buy stock X because it's underpriced

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12 percent, then you should _________.

buy the stock because its underpriced

Security selection refers to the ________.

choice of specific securities within each asset class

__________ are examples of financial intermediaries.

commercial banks, insurance companies, and investment companies

Real assets in the economy include all but which one of the following? a) consumer durables b) common stock c) buildings d) land

common stock

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.

less than 1

Beta is a measure of security responsiveness to _________.

market risk

Diversification is most effective when security returns are _________.

negatively correlated

According to the capital asset pricing model, a security with a _________.

positive alpha is considered underpriced

The material wealth of society is determined by the economy's _________, which is a function of the economy's _________.

productive capacity, real assets

What is reward to variability ratio?

risk premium/ standard deviation

The beta of a security is equal to _________.

the covariance between the security and market returns divided by the variance of the market's returns

The term excess return refers to ______________.

the difference between the rate of return earned and the risk-free rate

Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.

the returns on the stock and bond portfolios tend to vary independently of each other

Risk that can be eliminated through diversification is called ______ risk.

unique, diversifiable, and firm-specific