Q&A Hero

Q: The Sharpe ratio measures a security's return relative to which one of the following? A. total risk B. diversifiable risk C. market rate of return D. risk-free rate E. systematic risk

Q: Which one of the following measures a security's return in relation to the total risk associated with that security? A. beta B. Jensen's alpha C. Sharpe ratio D. Treynor ratio E. Value at Risk

Q: Which one of the following is a statistical model, defined by its mean and standard deviation, that is used to assess probabilities? A. variance B. normal distribution C. efficient frontier D. Value at Risk E. Jensen's alpha

Q: Which one of the following assesses risk by stating the probability of a loss a portfolio might incur within a stated time period given a specific probability? A. Sharpe ratio B. Jensen's alpha C. Treynor ratio D. raw return measurement E. Value-at-Risk

Q: Which one of the following concerns a money manager's control over investment risks, particularly potential short-run losses? A. Alpha management B. Normal distribution management C. Investment risk management D. Raw return distributions E. Volatility performance measures

Q: Which one of the following measures a portfolio's raw return against the expected return based on the Capital Asset Pricing Model? A. Sharpe ratio B. Treynor ratio C. Jensen's alpha D. beta E. Value at Risk

Q: Which one of the following is computed by dividing a portfolio's risk premium by the portfolio beta? A. raw return B. Value at Risk C. Jensen's alpha D. Sharpe ratio E. Treynor ratio

Q: The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the following performance measures? A. raw return B. Value at Risk C. Jensen's alpha D. Sharpe ratio E. Treynor ratio

Q: The unadjusted total percentage return on a security that has not been compared to any benchmark is referred to as which one of the following? A. raw return B. indexed return C. real return D. marginal return E. absolute return

Q: Which one of the following assesses the ability of a money manager to balance high returns with an acceptable level of risk? A. probability analysis B. raw return ratio C. risk assessment D. performance evaluation E. market analysis

Q: Alfonso Rodriquez has served as the president of Imports United for the past six years. During his tenure, the company has grown significantly and provided above-average returns to its shareholders. Thus, Mr. Rodriquez is highly admired. Yesterday, he announced that he will be retiring at the end of this quarter. You expected the stock price of Imports United to decline on this news because of the admiration investors have for this gentleman. Contrary to your expectations, the price of the stock remained unchanged. There was no other relevant market news related to this firm and the overall market also remained relatively unchanged for the day. What explanation can be given for the market not reacting as you expected to Mr. Rodriquez's announcement?

Q: Identify and describe each of the three components of a security's expected return according to the capital asset pricing model.

Q: Explain the relationship between the security market line and market efficiency.

Q: The market has a standard deviation of 10.8 percent (0.108) while a risky security has a standard deviation of 22.5 (0.225) percent. The covariance of the stock with the market is .0149. What is the beta of the stock?A. 1.09B. 1.11C. 1.15D. 1.19E. 1.28

Q: A stock has a standard deviation of 25.4 percent and a covariance with the market of .0160. The market has a standard deviation of 12.2 percent. What is the beta of this stock?A. .294B. .572C. .926D. .973E. 1.075

Q: The common stock of Blasco Books has a standard deviation of 16.4 percent as compared to the market standard deviation of 12.7 percent. The covariance of this stock with the market is .0217. What is the beta of Blasco Books' stock?A. .96B. 1.05C. 1.07D. 1.35E. 1.42

Q: Western Exports stock has a standard deviation of 15.6 percent and a covariance with the market of .0150. The market has a standard deviation of 13.7 percent. What is the correlation of this stock with the market?A. .58B. .61C. .68D. .70E. .77

Q: Uptown Markets stock has a standard deviation of 16.8 percent and a covariance with the market of .0178. The market has a standard deviation of 13.6 percent. What is the correlation of this stock with the market?A. .74B. .78C. .87D. .89E. .91

Q: A risky security has a variance of .036190 and a covariance with the market of .0222. The variance of the market is .01975. What is the correlation of the risky security to the market?A. .51B. .65C. .72D. .83E. .85

Q: What is the covariance of security A to the market given the following information? A. 23.14B. 29.88C. 48.83D. 99.18E. 114.01

Q: What is the covariance of security A to the market given the following information?A. 507.9B. 514.1C. 517.5D. 523.5

Q: What is the covariance of security A to the market given the following information?A. 75.0B. 80.1C. 83.8D. 87.0E. 91.1

Q: Dinner Foods stock has a beta of 1.45 and an expected return of 13.43 percent. Edwards' Meals stock has a beta of .95 and an expected return of 10.27 percent. Assume that both stocks are correctly priced. Given this, the risk-free rate is _____ percent and the market rate of return is _____ percent. A. 4.02; 11.53 B. 4.09; 12.35 C. 4.10; 11.53 D. 4.27; 10.59 E. 4.41; 10.25

Q: The market has an expected return of 11.4 percent and a risky asset with a beta of 1.18 has an expected return of 13 percent. Based on this information, what is the pure time value of money? A. 1.84 percent B. 1.90 percent C. 2.38 percent D. 2.51 percent E. 2.90 percent

Q: The risk-free rate is 4.1 percent, the market rate is 13.2 percent, and the expected return on a stock is 15.84 percent. What is the beta of the stock? A. .52 B. .81 C. 1.13 D. 1.19 E. 1.29

Q: A stock has a beta of 1.58 and an expected return of 16.2 percent. The risk-free rate is 3.8 percent. What is the market risk premium?A. 7.85 percentB. 10.01 percentC. 11.72 percentD. 12.50 percentE. 13.40 percent

Q: Home Interior's stock has an expected return of 13.2 percent and a beta of 1.28. The market return is 10.7 percent and the risk-free rate is 2.8 percent. This stock is _____ because the CAPM return for the stock is _____ percent. A. greatly overvalued; 16.50 B. slightly overvalued; 12.91 C. priced correctly; 12.89 D. slightly undervalued; 12.91 E. greatly undervalued; 16.50

Q: Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent. The risk-free rate is 2.6 percent and the market risk premium is 6 percent. This stock is _____ because the CAPM return for the stock is _____ percent. A. undervalued; 7.34 B. undervalued; 7.49 C. undervalued; 7.64 D. overvalued; 7.34 E. overvalued; 7.49

Q: Farm Tractors, Inc., stock has a beta of 1.12 and an expected return of 12.8 percent. The risk-free rate is 3.84 percent. What is the market rate of return?A. 6.67 percentB. 8.90 percentC. 9.08 percentD. 11.84 percentE. 12.63 percent

Q: A stock has an expected return of 14.59 percent and a beta of 1.35. What is the risk-free rate if the market rate is 12.7 percent?A. 6.48 percentB. 6.92 percentC. 7.01 percentD. 7.30 percentE. 7.90 percent

Q: The common stock of Industrial Technologies has an expected return of 12.4 percent. The market return is 9.2 percent and the risk-free return is 3.87 percent. What is the stock's beta? A. 0.42 B. 1.00 C. 1.32 D. 1.42 E. 1.60

Q: The stock of Healthy Eating, Inc., has a beta of .88. The risk-free rate is 3.8 percent and the market return is 9.6 percent. What is the expected return on Healthy Eating's stock? A. 6.25 percent B. 6.07 percent C. 8.90 percent D. 11.15 percent E. 11.47 percent

Q: Stock X has a beta of .95 and an expected return of 10.8 percent. Stock Y has a beta of 1.2 and an expected return of 13.1 percent. What is the risk-free rate of return assuming that both stock X and stock Y are correctly priced? A. 1.10 percent B. 1.20 percent C. 2.06 percent D. 3.30 percent E. 3.50 percent

Q: Stock A is a risky asset that has a beta of 1.4 and an expected return of 13.2 percent. Stock B is also a risky asset and has a beta of 1.25. The risk-free rate is 5.5 percent. Assuming both stocks are correctly priced, what is the expected return on stock B?A. 11.90 percentB. 12.11 percentC. 12.29 percentD. 12.38 percentE. 12.46 percent

Q: A risky asset has a beta of 1.40 and an expected return of 17.6 percent. What is the risk-free rate if the risk-to-reward ratio is 8.4 percent?A. 2.74 percentB. 4.03 percentC. 4.33 percentD. 5.32 percentE. 5.84 percent

Q: The reward-to-risk ratio is 6.8 percent and the risk-free rate is 5.3 percent. What is the expected return on a risky asset if the beta of that asset is 1.03?A. 7.00 percentB. 12.00 percentC. 12.02 percentD. 12.07 percentE. 12.30 percent

Q: A risky asset has a beta of .90 and an expected return of 7.4 percent. What is the reward-to-risk ratio if the risk-free rate is 2.69 percent? A. 4.04 percent B. 5.23 percent C. 6.51 percent D. 8.41 percent E. 11.59 percent

Q: Laura has one risk-free asset and one risky stock in her portfolio. The risk-free asset has an expected return of 3.2 percent. The risky asset has a beta of 1.3 and an expected return of 14.9 percent. What is the expected return on the portfolio if the portfolio beta is .975? A. 7.65 percent B. 9.83 percent C. 10.73 percent D. 11.98 percent E. 12.37 percent

Q: The following portfolio has an expected return of _____ percent and a beta of _____.A. 12.45; 1.38B. 12.84; 1.39C. 13.39; 1.23D. 13.39; 1.40E. 13.45; 1.32

Q: The following portfolio has an expected return of _____ percent and a beta of _____.A. 10.53; 1.13B. 10.99; 1.11C. 11.03; 1.28D. 11.16; 1.11E. 11.11; 1.16

Q: A portfolio consists of one risky asset and one risk-free asset. The risky asset has an expected return of 11.2 percent and a beta of 1.39. The risk-free asset has an expected return of 3.4 percent. How much of the portfolio is invested in the risk-free asset if the portfolio beta is 1.07?A. 16 percentB. 23 percentC. 32 percentD. 45 percentE. 54 percent

Q: What is the beta of a portfolio which consists of the following?A. 1.18B. 1.22C. 1.23D. 1.32E. 1.37

Q: What is the beta of a portfolio which consists of the following?A. 1.01B. 1.24C. 1.26D. 1.29E. 1.32

Q: A portfolio consists of two stocks and has a beta of 1.07. The first stock has a beta of 1.48 and comprises 38 percent of the portfolio. What is the beta of the second stock?A. .41B. .66C. .82D. 1.28E. 1.35

Q: A portfolio is comprised of two stocks. Stock A comprises 65 percent of the portfolio and has a beta of 1.31. Stock B has a beta of .98. What is the portfolio beta? A. .98 B. 1.03 C. 1.08 D. 1.19 E. 1.22

Q: The risk-free rate is 3.4 percent and the expected return on the market is 10.8 percent. Stock A has a beta of 1.18. For a given year, stock A returned 13.6 percent while the market returned 11.8 percent. The systematic portion of the unexpected return was _____ percent and the unsystematic portion was _____ percent.A. 1.045; 0.207B. 1.145; 0.126C. 1.180; 0.288D. 1.344; 1.443E. 1.500; 1.449

Q: The risk-free rate is 3.0 percent and the expected return on the market is 9 percent. Stock A has a beta of 1.20. For a given year, Stock A returned 12.5 percent while the market returned 9.75 percent. The systematic portion of Stock A's unexpected return was _____ percent and the unsystematic portion was _____ percent. A. 0.80; 1.30 B. 0.90; 1.40 C. 1.11; 2.30 D. 1.40; 0.90 E. 4.62; 1.41

Q: Reed Plastics just announced the earnings per share for the quarter just ended were $.45 a share. Analysts were expecting $.51. What is the amount of the surprise portion of the announcement? A. -$.12 B. -$.06 C. $.06 D. $.00 E. $.03

Q: Brooke invested $4,500 in the stock market with the expectation of earning 6.25 percent. She actually earned 7.15 percent for the year. What is the amount of her unexpected return? A. -1.2 percent B. -0.6 percent C. 0.9 percent D. 1.9 percent E. 2.4 percent

Q: Phil realized a total return of 13.2 percent which is less than his expected return of 14.4 percent. What is the amount of his unexpected return? A. -1.2 percent B. -0.6 percent C. 0.6 percent D. 1.2 percent E. 1.3 percent

Q: Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases. A. large market capitalization and high book-to-market ratio B. large market capitalization and low book-to-market ratio C. small market capitalization and high book-to-market ratio D. small market capitalization and a book-to-market ratio of 1.0 E. small market capitalization and a low book-to-market ratio

Q: Which of the following correctly identifies the factors included in the Fama-French three-factor model? A. standard deviation, beta, and company size B. the risk-free rate, beta, and the market risk premium C. company size, company industry, and beta D. price-earnings ratios, beta, and book-to-market ratios E. beta, company size, and book-to-market ratios

Q: Which one of the following statements is true? A. Risk and return are inversely related. B. Investors are compensated only for diversifiable risk. C. The beta of a portfolio may be lower than the lowest beta of any individual security held within the portfolio. D. How a security affects the risk of a portfolio is less important than the actual risk of the security itself. E. Investing has two dimensions: risk and return.

Q: Which one of the following is most commonly used as the measure of the overall market rate of return? A. DJIA B. S&P 500 C. NASDAQ 100 D. Wilshire 5000 E. Wilshire 3000

Q: Which of the following will affect the beta value of an individual security? I. interval of time frequency used for the data sample II. length of the time period used for the data sample III. particular time period selected for the sampling IV. choice of index used as the measure of the market A. I and II only B. I and III only C. II and IV only D. II, III, and IV only E. I, II, III, and IV

Q: A security has a zero covariance with the market. This means that: A. the return on the security is always equal to that of the market. B. the return on the security moves in the same direction as the market return. C. the security is a risk-free security. D. there is no identifiable relationship between the return on the security and that of the market. E. the return on the security must vary more than that of the market.

Q: Which of the following are needed to compute the beta of an individual security? I. average return on the market for the period II. standard deviation of the security and the market III. returns on the security and the market for multiple time periods IV. correlation of the security to the market A. I and III only B. I and IV only C. II and III only D. II and IV only E. I, II, and III only

Q: Which two of the following determine how sensitive a security is relative to movements in the overall market? I. the standard deviation of the security II. correlation between the security's return and the market return III. the volatility of the security relative to the market IV. the amount of unsystematic risk inherent in the security A. I and III only B. I and IV only C. II and III only D. II and IV only E. III and IV only

Q: Which one of the following will increase the slope of the security market line? Assume all else constant. A. increasing the beta of an efficiently-priced portfolio B. increasing the risk-free rate C. increasing the market risk premium D. decreasing the market rate of return E. replacing a low-beta stock with a high-beta stock within a portfolio

Q: Stocks D, E, and F have actual reward-to-risk ratios of 7.1, 6.8, and 7.4, respectively. Given this, you know for certain that: A. stock E is preferable to stock F. B. stock D has a higher beta than stock F. C. the market risk premium is greater than 6.8 and less than 7.4. D. stock F is riskier than stock D. E. at least two of the securities are mispriced.

Q: Which one of the following must be equal for two individual securities with differing betas if those securities are correctly priced according to the capital asset pricing model? A. standard deviation B. rate of return C. beta D. risk premium E. reward-to-risk ratio

Q: Which one of the following has the highest expected risk premium? A. stock portfolio with a beta of 1.06 B. U.S. Treasury bill C. individual stock with a beta of 1.46 D. a stock mutual fund with a beta of .89 E. individual stock with a beta of .94

Q: According to the capital asset pricing model, which of the following will increase the expected rate of return on a security that has a beta that is less than that of the market? Assume the market rate of return is greater than the risk-free rate and both rates are positive. I. increase in the risk-free rate II. decrease in the risk-free rate III. increase in the market risk premium IV. decrease in the market rate of return A. I and III only B. II and III only C. I and IV only D. II and IV only E. II, III, and IV only

Q: Where will a security plot in relation to the security market line (SML) if it is considered to be a good purchase because it is underpriced? A. above the SML B. either on or above the SML C. on the SML D. on or below the SML E. below the SML

Q: Where will a security plot in relation to the security market line (SML) if it has a beta of 1.1 and is overvalued? A. to the right of the overall market and above the SML B. to the right of the overall market and below the SML C. to the left of the overall market and above the SML D. to the left of the overall market and below the SML E. on the SML

Q: The slope of the security market line is equal to the: A. market risk premium. B. risk-free rate of return. C. market rate of return. D. market rate of return multiplied by any security's beta, given an inefficient market. E. market rate of return multiplied by the risk-free rate.

Q: All else held constant, which of the following will increase the expected return on a security based on CAPM? Assume the market return exceeds the risk-free rate and both values are positive. Also assume the beta exceeds 1.0. I. decrease in the security beta II. increase in the market risk premium III. decrease in the risk-free rate IV. increase in the market rate of return A. I and III only B. II and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

Q: What is the beta of an average asset? A. 0 B. > 0 but < 1 C. < 1 D. 1 E. > 1

Q: The amount of risk premium allocated to Security A is dependent upon which one of the following? A. unsystematic risk associated only with Security A B. total risk associated with Security A's classification C. total surprise associated with Security A D. the difference between the expected return and the actual return on Security A E. systematic risk associated with Security A

Q: You own three stocks which have betas of 1.16, 1.34, and 1.02. You would like to add a fourth security such that your portfolio beta will match that of the market. Given this situation, the new security: A. must have a beta of 1.0. B. must have a beta of zero. C. could be a U.S. Treasury bill. D. could have any beta greater than 1.0. E. must have a portfolio weight of 50 percent or more.

Q: A portfolio of securities has a beta of 1.14. Given this, you know that: A. adding another security to the portfolio must lower the portfolio beta. B. the portfolio has more risk than a risk-free asset but less risk than the market. C. each of the securities in the portfolio has more risk than an average security. D. the portfolio has 14 percent more risk than a risk-free security. E. the expected return on the portfolio is greater than the expected market return.

Q: You own a portfolio which is invested equally in two stocks and a risk-free security. The stock betas are .89 for Stock A and 1.26 for Stock B. Which one of the following will increase the portfolio beta, all else constant? A. increasing the amount invested in the risk-free security B. decreasing the weight of Stock B and increasing the weight of Stock A C. replacing Stock A with a security that has a beta of .77 D. increasing the weight of Stock A and decreasing the weight of the risk-free security E. replacing Stock B with Stock C, which has a beta equal to that of the market

Q: A portfolio beta is computed as which one of the following? A. weighted average B. arithmetic average C. geometric average D. correlated value E. covariance value

Q: Of the following, Stock _____ has the greatest level of total risk and Stock _____ has the highest risk premium. A. A; B B. B; E C. C; D D. D; C E. C; E

Q: Which one of the following stocks has the highest expected risk premium?A. AB. BC. CD. DE. E

Q: What is the beta of a risk-free security? A. .00 B. .50 C. 1.00 D. 1.50 E. 2.00

Q: A stock with which one of the following betas has an expected return that most resembles the overall market expected rate of return? A. .33 B. .74 C. .99 D. 1.06 E. 1.22

Q: Which one of the following betas represents the greatest level of systematic risk? A. .05 B. .68 C. 1.00 D. 1.19 E. 1.27

Q: Which one of the following qualifies as diversifiable risk? A. market risk B. systematic risk associated with an individual security C. market crash D. the systematic portion of an expected return E. the unsystematic portion of an unexpected return

Q: Which one of the following is the best example of unsystematic risk? A. decrease in company sales B. increase in market interest rates C. change in corporate tax rates D. increase in inflation E. This risk is related to expected portfolio returns