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The security market line is defined as a positively sloped straight line that displays the relationship between which two of the following variables?


A) Beta and standard deviation
B) Systematic and unsystematic risk
C) Nominal and real returns
D) Expected return and beta
E) Risk premium and beta

F) None of the above
G) B) and D)

Correct Answer

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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
B) more; underpriced
C) less; overpriced
D) less; underpriced
E) less; correctly priced

F) A) and C)
G) C) and D)

Correct Answer

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Fiddler's Music Stores' stock has a risk premium of 9.6 percent while the inflation rate is 4.1 percent and the risk-free rate is 3.9 percent.What is the expected return on this stock?


A) 12.3 percent
B) 12.7 percent
C) 13.5 percent
D) 13.7 percent
E) 16.5 percent

F) A) and E)
G) D) and E)

Correct Answer

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You are assigned the task of computing the expected return on a portfolio containing several individual stocks.Which one of the following statements is correct concerning this task?


A) The expected rate of return on the portfolio must be positive.
B) The arithmetic average of the betas for each security held in the portfolio must equal 1.0.
C) The portfolio beta must be 1.0.
D) The summation of the return deviation from the portfolio expected return for each economic state must equal zero.
E) The standard deviation of the portfolio must equal 1.0.

F) A) and B)
G) A) and C)

Correct Answer

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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?


A) Security beta multiplied by the market rate of return
B) Market risk premium
C) Security beta multiplied by the market risk premium
D) Risk-free rate of return
E) Zero

F) A) and E)
G) A) and D)

Correct Answer

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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
B) 2.76 percent
C) 3.23 percent
D) 3.69 percent
E) 4.08 percent

F) A) and C)
G) B) and C)

Correct Answer

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Which one of the following statements is correct?


A) A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0.
B) Any portfolio that is correctly valued will have a beta of 1.0.
C) A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a security market line graph.
D) A risk-free security plots at the origin on a security market line graph.
E) An underpriced security will plot above the security market line.

F) A) and E)
G) D) and E)

Correct Answer

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Which one of the following best exemplifies unsystematic risk?


A) Unexpected economic collapse
B) Unexpected increase in interest rates
C) Unexpected increase in the variable costs for a firm
D) Sudden decrease in inflation
E) Expected increase in tax rates

F) B) and E)
G) B) and D)

Correct Answer

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You want to create a $65,000 portfolio comprised of two stocks plus a risk-free security.Stock A has an expected return of 14.2 percent and Stock B has an expected return of 17.8 percent.You want to own $20,000 of Stock B.The risk-free rate is 4.8 percent and the expected return on the market is 13.1 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?


A) $11,921
B) $13,509
C) $15,266
D) $17,315
E) $18,775

F) B) and E)
G) A) and D)

Correct Answer

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What is the beta of the following portfolio? What is the beta of the following portfolio? A) 1.13 B) 1.15 C) 1.17 D) 1.21 E) 1.23


A) 1.13
B) 1.15
C) 1.17
D) 1.21
E) 1.23

F) A) and E)
G) All of the above

Correct Answer

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Southern Wear stock has an expected return of 14.6 percent.Given the information below,what is the expected return on this stock if the economy is normal? Round your answer to the nearest whole percentage. Southern Wear stock has an expected return of 14.6 percent.Given the information below,what is the expected return on this stock if the economy is normal? Round your answer to the nearest whole percentage. A) 13 percent B) 17 percent C) 18 percent D) 21 percent E) 23 percent


A) 13 percent
B) 17 percent
C) 18 percent
D) 21 percent
E) 23 percent

F) All of the above
G) None of the above

Correct Answer

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A risky security has less risk than the overall market.What must the beta of this security be?


A) 0
B) > 0 but < 1
C) 1
D) > 1
E) The beta cannot be determined based on the information provided.

F) B) and C)
G) A) and D)

Correct Answer

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Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?


A) Systematic
B) Unsystematic
C) Diversification
D) Security market line
E) Capital asset pricing model

F) B) and C)
G) A) and D)

Correct Answer

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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? 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) 11.97 percent B) 12.94 percent C) 13.33 percent D) 13.84 percent E) 14.42 percent


A) 11.97 percent
B) 12.94 percent
C) 13.33 percent
D) 13.84 percent
E) 14.42 percent

F) All of the above
G) C) and D)

Correct Answer

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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?


A) An increase in the risk-free rate
B) Decrease in the security's beta
C) Overpricing of the stock in the marketplace
D) Increase in the market risk-to-reward ratio
E) Decrease in the market rate of return

F) A) and B)
G) A) and C)

Correct Answer

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Which one of the following statements is correct?


A) The risk premium on a risk-free security is generally considered to be 1 percent.
B) The expected rate of return on any security, given multiple states of the economy, must be positive.
C) There is an inverse relationship between the level of risk and the risk premium given a risky security.
D) If a risky security is correctly priced, its expected risk premium will be positive.
E) If a risky security is priced correctly, it will have an expected return equal to the risk-free rate.

F) B) and E)
G) A) and E)

Correct Answer

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The expected return on a security is currently based on a 22 percent chance of a 15 percent return given an economic boom and a 78 percent chance of a 12 percent return given a normal economy.Which of the following changes will decrease the expected return on this security? I.An increase in the probability of an economic boom II.A decrease in the rate of return given a normal economy III.An increase in the probability of a normal economy IV.An increase in the rate of return given an economic boom


A) I and II only
B) I and IV only
C) II and III only
D) I, III, and IV only
E) I, II, III, and IV

F) C) and E)
G) B) and D)

Correct Answer

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A $36,000 portfolio is invested in a risk-free security and two stocks.The beta of Stock A is 1.29 while the beta of Stock B is 0.90.One-half of the portfolio is invested in the risk-free security.How much is invested in Stock A if the beta of the portfolio is 0.58?


A) $6,000
B) $9,000
C) $12,000
D) $15,000
E) $18,000

F) B) and D)
G) A) and B)

Correct Answer

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Standard deviation measures _____ risk while beta measures _____ risk.


A) systematic; unsystematic
B) unsystematic; systematic
C) total; unsystematic
D) total; systematic
E) asset-specific; market

F) C) and D)
G) B) and C)

Correct Answer

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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? 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? A) 0.002102 B) 0.002490 C) 0.002513 D) 0.005746 E) 0.006143


A) 0.002102
B) 0.002490
C) 0.002513
D) 0.005746
E) 0.006143

F) C) and D)
G) A) and E)

Correct Answer

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