1 Investments A and B both offer an expected rate of return of 12%. If the standard deviation of A is 20% and that of B is 30%, then investors would:A) Prefer A to B B) Prefer B to A C) Prefer a portfolio of A and B D) Cannot answer without knowing investor's risk preferences 2 When stocks with the same expected return are combined into a portfolio, the expected return of the portfolio is:A) Less than the average expected return value of the stocks B) Greater than the average expected return of the stocks C) Equal to the average expected return of the stocks D) Impossible to predict 3 Efficient portfolios are those that offer:A) Highest expected return for a given level of risk B) Highest risk for a given level of expected return C) The maximum risk and expected return D) All of the above 4 The beta of a Treasury bill portfolio is:A) Zero B) +0.5 C) −1.0 D) +1.0 5 The security market line (SML) is the graph of:A) Expected return on investment (Y-axis) vs. variance of return. B) Expected return on investment vs. standard deviation of return. C) Expected rate of return on investment vs. beta. D) A and B. 6 If the beta of Freon is 0.73, risk-free rate is 5.5% and the market rate of return is 13.5%, calculate the expected rate of return from Freon:A) 12.6% B) 15.6% C) 13.9% D) 11.3% 7 If a stock is overpriced it will plot:A) Above the security market line B) On the security market line C) Below the security market line D) On the Y-axis 8 A "factor" in APT is a variable that:A) Affects the return of risky assets in a systematic manner B) Correlates with risky asset returns in an unsystematic manner C) Is purely "noise" D) Affects the return of a risky asset in a random manner 9 The drawback of the CAPM is that it:A) Ignores the return on the market portfolio B) Requires a single measure of systematic risk C) Ignores the risk-free return D) Utilizes too many factors 10 If returns are normally distributed, the only two measures that an investor should consider are:A) Beta and covariance B) Correlation coefficient and beta C) Expected return and standard deviation D) Standard deviation and beta 11 The expected rate of return of Stock (X), given a beta of 1.3, risk free rate of 6%, and a market risk premium of 7%, is:A) 12.0% B) 13.3% C) 14.2% D) 15.1% 12 What is the risk free rate given a beta of .8, a market risk premium of 6%, and an expected return of 9.8%?A) 3.2% B) 5.0% C) 5.2% D) 6.8% 13 The capital asset pricing model states that the expected market risk premium of each investment is proportional to its:A) Beta B) Standard Deviation C) Variance D) Alpha 14 The risk premium for Treasury bills is always equal to:A) −1 B) 1 C) Zero D) The risk free rate 15 The Three-Factor Model proposed by Fama and French suggests that expected returns can be determined by:A) The return on the market index minus the risk-free rate B) The return on small-firm stocks minus the return on large-firm stocks C) The return on high book-to-market-ratio stocks minus the return on low book-to-market-ratio stocks D) All of the above