Finance Learnsmart Chapter 11
The computation of variance requires 4 steps. Place the steps in the correct order from the first step to the last step?
1. calculate the expected return 2. calculate the deviation of each return from the expected 3. square each deviation 4. calculate the average squared deviation
If security ABC has a beta of 1.5 and security XYZ has a beta of 1, what is the beta of a portfolio that is equally invested in both securities?
1.25
What is the expected return for a security if the risk-free rate is 5%, the expected return on the market is 9%, and the security's beta is 1.5?
11%
What is the expected return of a security with a beta of 1.2 if the risk free rate is 4 percent and the expected return on the market is 12 percent?
13.6%
What is the return on a portfolio that consists of $50,000 in an index fund, $30,000 in a bond fund, and $20,000 in a foreign stock fund? The expected returns are 7 percent, -3 percent, and 18 percent, respectively.
6.2%
True or False: Since the CAPM equation can be used only for individual securities, it cannot be used with portfolios.
False
Which of the following are examples of a portfolio?
Investing $100,000 in a combination of stocks and bonds; investing $100,000 in a combination of US and Asian stocks; Investing $100,000 in the stocks of 50 publicly traded corporations
What does the security market line depict?
It is a graphical depiction of the capital asset pricing model
What does variance measure?
It measures the spread of the sample of returns; it measures the riskiness of a security's returns
Which of the following are examples of information that may impact the risky return of a stock?
The Fed's decision on interest rates at their meeting next week; the outcome of an application currently pending with the Food and Drug Administration
What is the intercept of the security market line (SML)?
The risk-free rate
Unsystematic risk will affect
firms in a single industry; a specific firm
An investment will have a negative NPV when it's expected return is _____ _____ what the financial markets offer for the same risk
less than
Systematic risk will _____ when securities are added to a portfolio.
not change
If investors are risk verse, it is reasonable to assume that the risk premium for the stock market will be
positive
When an investor is diversified only _____ risk matters.
systematic
What is the slope of the security market line (SML)?
the market-risk premium
ABC has a beta of 2.5 and XYZ has a beta of 1.5. The risk-free rate is 4 percent and the market risk premium is 9 percent. What is the expected return on a portfolio that is equally invested in ABC and XYZ?
22%
If the variance of a portfolio is .0025, what is the standard deviation?
5%
Given the following probability distribution for the returns of a portfolio, what is the standard deviation of the portfolio?
5.74%
A security has a beta of 1, a market risk premium of 8%, and a risk-free rate of 3%. What will happen to the expected return if the beta doubles?
The expected return will increase to 19% from 11%
What are the two components of risky return in the total return equation?
Unsystematic risk; market risk
_____ risk is reduced as more securities are added to the portfolio
Unsystematic; diversifiable; unique
Which of the following statements is (are) true about variance?
Variance is a measure of the squared deviations of a security's return from its expected return; standard deviation is the square root of variance
When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market:
already knew about most of the news item
The systematic risk principle argues that the market does not reward risks
that are diversifiable; that are borne unneccessarily
To determine the appropriate required return for an investment, we can use _____
the Security Market Line
