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| 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 over B |
| | B) | Prefer B over A |
| | C) | Prefer a portfolio of A and B |
| | D) | Cannot answer without knowing investor's risk preferences |
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| 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 weighted-average expected return of the stocks |
| | D) | Impossible to predict |
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| 3 | |
Efficient portfolios are those that offer: |
| | A) | The highest expected return for a given level of risk |
| | B) | The highest risk for a given level of expected return |
| | C) | The maximum risk and expected return |
| | D) | All of these options |
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| 4 | |
The beta of a Treasury bill portfolio is: |
| | A) | Zero |
| | B) | +0.5 |
| | C) | −1.0 |
| | D) | +1.0 |
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| 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) | Both A and B |
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| 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% |
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| 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 |
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| 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 |
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| 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 |
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| 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 |
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| 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% |
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| 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% |
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| 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 |
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| 14 | |
The risk premium for Treasury bills is always equal to: |
| | A) | −1 |
| | B) | 1 |
| | C) | Zero |
| | D) | The risk free rate |
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| 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 these options |
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