Chapter 8 Quiz, Risk and Return




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. If the covariance of Stock A with Stock B is –100, what is the covariance of Stock B with Stock A?
A.+100
B.-100
C.1/100
D.Need additional information


4. Maximum diversification is obtained by combining two stocks with a correlation coefficient equal to:
A.+1.0
B.0.0
C.-1.0
D.+0.5


5. Efficient portfolios are those which 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


6. Beta of Treasury bills portfolio is:
A.Zero
B.+0.5
C.-1.0
D.+1.0


7. The market risk premium is:
A.The difference between the rate of return on an asset and the risk-free rate
B.The difference between the rate of return on the market portfolio and the risk-free rate
C.The risk-free rate
D.The market rate of return


8. The capital asset pricing model (CAPM) states that:
A.The expected risk premium on an investment is proportional to its beta
B.The expected rate of return on an investment is proportional to its beta
C.The expected rate of return on an investment depends on the risk-free rate and the market rate of return
D.The expected rate of return on an investment is dependent on the risk-free rate


9. The security market line (SML) is the graph of:
A.Expected rate 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


10. 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%


11. A stock with a beta of 1.2 would be expected to:
A.Increase 20% faster than the market in up markets
B.Increase 20% faster than the market in down markets
C.Increase 120% faster than the market in up markets
D.Increase 120% faster than the market in down markets


12. If a stock is overpriced it would plot:
A.Above the security market line
B.On the security market line
C.Below the security market line
D.On the Y-axis


13. 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


14. The drawback of the CAPM is that it:
A.Ignores the return on the market portfolio
B.Required a single measure of systematic risk
C.Ignores risk-free return
D.Utilizes too many factors


15. If two investments offer the same expected return, most investors would prefer the one with higher variance.
A.True
B.False



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