• A news flash just appeared that caused about a dozen stocks to suddenly drop in value by
  about 20 percent. What type of risk does this news flash represent?    Unsystematic
• According to CAPM, the amount of reward an investor receives for bearing the risk of an
  individual security depends upon the:   market risk premium and the amount of systematic risk inherent in the security.
• According to CAPM, the expected return on a risky asset depends on which three components?   the risk-free rate of return the market risk premium beta
• At a minimum, which of the following would you need to know to estimate the amount of
  additional reward you will receive for purchasing a risky asset instead of a risk-free asset?               II. asset’s beta
  IV. market risk premium
• How many diverse securities are required to eliminate the majority of the diversifiable risk
  from a portfolio?   25
• If a stock portfolio is well diversified, then the portfolio variance:   may be less than the variance of the least risky stock in the portfolio.
• Jerilu Markets has a beta of 1.09. The risk-free rate of return is 2.75 percent and the
  market rate of return is 9.80 percent. What is the risk premium on this stock?  7.68 percent
• Systematic risk is measured by:   beta
• Thayer Farms stock has a beta of 1.12. The risk-free rate of return is 4.34 percent and the
  market risk premium is 7.92 percent. What is the expected rate of return on this stock?                13.21 percent
• The _____ of a security divided by the beta of that security is equal to the slope of the
  security market line if the security is priced fairly.    risk premium
• The _____ tells us that the expected return on a risky asset depends only on that asset’s   systematic risk principle
• The capital asset pricing model (CAPM) assumes which of the following?       I. a risk-free asset has no systematic risk
  III. the reward-to- risk ratio is constant.
  IV. the market rate of return can be approximated.
• The common stock of Jensen Shipping has an expected return of 16.3 percent. The return
  on the market is 10.8 percent and the risk-free rate of return is 3.8 percent. What is the beta of
  this stock?   1.79
• The common stock of United Industries has a beta of 1.34 and an expected return of 14.29
  percent. The risk-free rate of return is 3.7 percent. What is the expected market risk
  premium?    7.90 percent
• The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free
  asset is referred to as the:   risk premium.
• The expected return on JK stock is 15.78 percent while the expected return on the market
  is 11.34 percent. The stock’s beta is 1.62. What is the risk-free rate of return?   4.18 percent
• The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant
  stock has 3 percent less systematic risk than the market and has an actual return of 12 percent.
  This stock:    is underpriced.
• The primary purpose of portfolio diversification is to:   eliminate asset-specific risk.
• The principle of diversification tells us that:   spreading an investment across many diverse assets will eliminate some of the total risk.
• The principle of diversification tells us that:  spreading an investment across many diverse assets will eliminate some of the total risk.
• The reward-to- risk ratio for stock A is less than the reward-to- risk ratio of stock B. Stock
  A has a beta of 0.82 and stock B has a beta of 1.29. This information implies that:       either stock A is overpriced or stock B is underpriced or both.
• The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent.
  What is the expected rate of return on a stock with a beta of 1.21?   11.40 percent
• The systematic risk of the market is measured by: a beta of 1.0.
• Total risk is measured by _____ and systematic risk is measured by _____.   standard deviation; beta
• What is the beta of the following portfolio?
  Amount Invested/Security Beta
  A $6700/1.58
  B $4900/1.23
  C $8500/0.79    1.16
• Which of the following statements are correct concerning diversifiable risks?                       I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities.
  II. There is no reward for accepting diversifiable risks.
  III. Diversifiable risks are generally associated with an individual firm or industry.
• Which of the following statements concerning risk are correct?     I. Nondiversifiable risk is measured by beta
  III. Systematic risk is another name for nondiversifiable risk.
• Which one of the following indicates a portfolio is being effectively diversified?    a decrease in the portfolio standard deviation
• Which one of the following is a positively sloped linear function that is created when
  expected returns are graphed against security betas?   security market line
• Which one of the following is a risk that applies to most securities?   Systematic
• Which one of the following is an example of systematic risk?  investors panic causing security prices around the globe to fall precipitously
• Which one of the following is an example of unsystematic risk?  consumer spending on entertainment decreased nationally
• Which one of the following is least apt to reduce the unsystematic risk of a portfolio?                   reducing the number of stocks held in the portfolio
• Which one of the following is most directly affected by the level of systematic risk in a
  security?    expected rate of return
• Which one of the following is the best example of a diversifiable risk?   a firm’s sales decrease
• Which one of the following is the formula that explains the relationship between the
  expected return on a security and the level of that security’s systematic risk?   capital asset pricing model
• Which one of the following measures the amount of systematic risk present in a particular
  risky asset relative to the systematic risk present in an average risky asset?  Beta
• Which one of the following risks is irrelevant to a well-diversified investor?   unsystematic risk
• Which one of the following should earn the most risk premium based on CAPM?   stock with a beta of 1.38
• Which one of the following statements is correct concerning a portfolio beta?   A portfolio beta is a weighted average of the betas of the individual securities contained in
• Which one of the following statements is correct concerning unsystematic risk?   Eliminating unsystematic risk is the responsibility of the individual investor.
• Which one of the following statements related to risk is correct?   The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio
• Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7
  percent and the market risk premium is 8.8 percent?   0.037 + (1.22 x 0.088) = 0.1444 Stock C is correctly priced.
• You have a $12,000 portfolio which is invested in stocks A and B, and a risk-free asset.
  $5,000 is invested in stock A. Stock A has a beta of 1.76 and stock B has a beta of 0.89. How
  much needs to be invested in stock B if you want a portfolio beta of 1.10?   $4,943.82
• Your portfolio has a beta of 1.12. The portfolio consists of 20 percent U.S. Treasury bills,
  50 percent stock A, and 30 percent stock B. Stock A has a risk-level equivalent to that of the
  overall market. What is the beta of stock B?    2.07
• Your portfolio is comprised of 40 percent of stock X, 15 percent of stock Y, and 45
  percent of stock Z. Stock X has a beta of 1.16, stock Y has a beta of 1.47, and stock Z has a
  beta of 0.42. What is the beta of your portfolio?    0.87

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