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Explain the relationships among the reward-to-risk ratio, risk-free rate of return, market rate of return, market risk premium, beta, and the security market line.

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The reward-to-risk ratio is the market r...

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The risk premium for an individual security is based on which one of the following types of risk?


A) Total
B) Surprise
C) Diversifiable
D) Systematic
E) Unsystematic

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

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A stock has a beta of 1.24, an expected return of 13.68 percent, and lies on the security market line. A risk-free asset is yielding 2.8 percent. You want to create a $6,000 portfolio consisting of Stock A and the risk-free security such that the portfolio beta is 0.65. What rate of return should you expect to earn on your portfolio?


A) 8.50 percent
B) 9.16 percent
C) 9.33 percent
D) 9.41 percent
E) 9.56 percent

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

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Hal Enterprises stock has an expected return of 10.2 percent. Given the information below, what is the expected return if the economy is in a recession? Hal Enterprises stock has an expected return of 10.2 percent. Given the information below, what is the expected return if the economy is in a recession? A) -12.94 percent B) -11.71 percent C) -11.28 percent D) -10.76 percent E) -10.03 percent


A) -12.94 percent
B) -11.71 percent
C) -11.28 percent
D) -10.76 percent
E) -10.03 percent

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

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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 market place
D) Increase in the market risk-to-reward ratio
E) Decrease in the market rate of return

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

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Using a security market line graph, illustrate a security that is overpriced and has a beta of 0.89. Label all relevant points, including those that represent the overall market. Explain why the security plots as you have illustrated it.

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Student should draw a SML with beta on t...

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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 B)

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

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A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is 0.74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta:


A) must be 1.0 because of the large number of securities in the portfolio.
B) is the geometric average of the individual security betas.
C) must be less than the market beta.
D) will be between 0 and 1.0.
E) will be greater than or equal to 0.74 but less than or equal to 1.51.

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

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What is the significance of the slope of the security market line? Should investors prefer a steeper slope or a flatter slope?

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The slope of the security market line is...

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The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a beta of 0.87 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not?


A) No; Stock A is underpriced and stock B is overpriced.
B) No; Stock A is overpriced and stock B is underpriced.
C) No; Stock A is overpriced but stock B is correctly priced.
D) No; Stock A is underpriced but stock B is correctly priced.
E) Yes; Both stocks are correctly priced.

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

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Which one of the following describes systemic risk?


A) Risk that affects a large number of assets
B) An individual security's total risk
C) Diversifiable risk
D) Asset specific risk
E) Risk unique to a firm's management

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

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What is the beta of the following portfolio? What is the beta of the following portfolio? A) 0.98 B) 1.02 C) 1.11 D) 1.14 E) 1.20


A) 0.98
B) 1.02
C) 1.11
D) 1.14
E) 1.20

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

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Which one of the following is the best example of unsystematic risk?


A) Inflation exceeding market expectations
B) A warehouse fire
C) Decrease in corporate tax rates
D) Decrease in the value of the dollar
E) Increase in consumer spending

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

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Which one of the following portfolios will have a beta of zero?


A) A portfolio that is equally as risky as the overall market.
B) A portfolio that consists of a single stock.
C) A portfolio comprised solely of U. S. Treasury bills.
D) A portfolio with a zero variance of returns.
E) No portfolio can have a beta of zero.

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

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Which one of the following is the best example of systematic risk?


A) Discovery of a major gas field
B) Decrease in textile imports
C) Increase in agricultural exports
D) Decrease in gross domestic product
E) Decrease in management bonuses for banking executives

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

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A stock has an expected return of 14.3 percent, the risk-free rate is 3.2 percent, and the market risk premium is 8.1 percent. What must the beta of this stock be?


A) 0.88
B) 0.94
C) 1.08
D) 1.21
E) 1.37

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

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Candy and More stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock? Candy and More stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock? A) 7.89 percent B) 8.56 percent C) 9.43 percent D) 9.90 percent E) 10.02 percent


A) 7.89 percent
B) 8.56 percent
C) 9.43 percent
D) 9.90 percent
E) 10.02 percent

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

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You own a portfolio consisting of the securities listed below. The expected return for each security is as shown. What is the expected return on the portfolio? You own a portfolio consisting of the securities listed below. The expected return for each security is as shown. What is the expected return on the portfolio? A) 9.97 percent B) 10.86 percent C) 11.23 percent D) 12.09 percent E) 14.20 percent


A) 9.97 percent
B) 10.86 percent
C) 11.23 percent
D) 12.09 percent
E) 14.20 percent

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

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Stock J has a beta of 1.17 and an expected return of 14.4 percent, while Stock K has a beta of 0.68 and an expected return of 7.6 percent. You want a portfolio with the same risk as the market. What is the expected return of your portfolio?


A) 10.67 percent
B) 11.18 percent
C) 11.62 percent
D) 12.04 percent
E) 13.13 percent

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

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