Concordia University

FINANCE 395

1. Market risk is referred to as: a. diversifiable risk. b. total risk. c. systematic risk. d. asset specific risk. ________ 2. A rate of return that plots above the security market line: a. indicates a security is underpriced. b. has a risk premium appropriate for the amount of risk assumed. c. has too much risk for the amount of the return. d. has a negative risk premium. ________ 3. Which one of the following statements is an example of unsystematic risk? a. The number of vehicles sold by a major manufacturer was less than anticipated. b. GDP was 0.5 percent lower than expected. c. The inflation rate increased by 5 percent. d. The value of the dollar declined against the other major currencies. ________ 4. Which one of the following statements is correct? a. Beta measures total risk. b. The higher the beta, the lower the expected return on a security. c. A portfolio needs to contain about seventy-five diverse securities before the majority of the unsystematic risk is eliminated from the portfolio. d. The amount of risk premium a security should earn depends on the security’s beta. ________ 5. Asset A has an expected return of 12.5 percent and a beta of 1.15. What is the market’s reward-to-risk ratio if the risk-free rate is 3.9 percent? a. 7.48 percent b. 8.62 percent c. 9.90 percent d. 10.96 percent ________ 6. The risk-free rate of return is 4 percent and the expected return on the market is 13.5 percent. What is the expected return for a stock with a beta of 1.16? a. 7.02 percent b. 11.66 percent c. 15.02 percent d. 19.66 percent ________ 7. You own a portfolio which is 20 percent invested in U.S. Treasury bills, 30 percent invested in Stock A with a beta of 1.23, 10 percent invested in stock B with a beta of .95, and the remainder is invested in stock C. Stock C is equally as risky as the market. The risk-free rate of return is 4.2 percent and the expected return on the market is 11 percent. What is the portfolio beta? a. .66 b. .86 c. .96 d. 1.06 ________ 8. A portfolio is expected to return 5 percent in a normal economy, lose 10 percent in a boom economy, and return 20 percent in a recessionary economy. The probability of a recession is 30 percent while the probability of a boom is 10 percent. What is the variance of the portfolio? a. .0081 b. .0239 c. .0477 d. .0900 ________ 9. A $2,000 portfolio is invested in three stocks and one risk-free asset. Five hundred dollars is invested in stock A which has a beta of 1.3. Six hundred dollars is invested in Stock B which has a beta of .80. The rest of the portfolio is divided evenly between stock C and the risk-free asset. What is the beta of stock C if the portfolio is equally as risky as the market? a. 1.00 b. 1.28 c. 1.44 d. 1.93