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Exam 13: Return, Risk, and the Security Market Line

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Question 101

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You are looking at two different stocks. IBX has a beta of 1.25 and Microsquish has a beta of 1.95. Which statement is true about these investments?

A) IBX is always a better addition to your portfolio.
B) Microsquish is always a better addition to your portfolio.
C) The expected return on IBX will be the higher of the two.
D) You cannot tell which of the two will have the higher expected return without further information.
E) The stock in IBX has the same reward to risk ratio as does Microsquish.

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Question 102

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The common stock of PDS has a beta of.98 and an expected return of 12.34%. The risk-free rate of return is 4.1% and the market rate of return is 11.65%. Which one of the following statements is true given this information?

A) The return on PDS stock will graph below the Security Market Line.
B) PDS stock is underpriced.
C) The expected return on PDS stock based on the Capital Asset Pricing Model is 15.52%.
D) PDS stock has more systematic risk than the overall market.
E) PDS stock is correctly priced.

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Question 103

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Your portfolio is comprised of 30% of stock X, 50% of stock Y, and 20% of stock Z. Stock X has a beta of.64, stock Y has a beta of 1.48, and stock Z has a beta of 1.04. What is the beta of your portfolio?

ABC Investment Corporation is considering a portfolio with 30% weighting in a cyclical stock and 70% weighting in a countercyclical stock. It is expected that there will be three economic states; Good, Average and Bad, each with equal probabilities of occurrence. The cyclical stock is expected to have returns of 12%, 5% and 1% in Good, Average and Bad economies respectively. The countercyclical stock is expected to have returns of -8%, 2% and 14% in Good, Average and Bad economies respectively. Given this information, calculate the portfolio variance.

Provide a definition for beta coefficient.

Which one of the following statements is correct?

You have a $9,000 portfolio which is invested in stocks A, B, and a risk-free asset. $4,000 is invested in stock A. Stock A has a beta of 1.84 and stock B has a beta of 0.68. How much needs to be invested in stock B if you want a portfolio beta of.95?

Provide a definition for unsystematic risk.

What is the standard deviation of a portfolio that is invested 60% in stock A and 40% in stock B, given the following information?

The market rate of return is 12% and the risk-free rate of return is 4%. A stock that has 5% more risk than the market has an actual return of 12%. Given this information, the stock will plot below the security market line.

Beta measures diversifiable risk.

The market rate of return is 12% and the risk-free rate of return is 4%. A stock that has 5% more risk than the market has an actual return of 12%. Given this information, the stock is overpriced.

You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return?

Which of the following describes a portfolio that plots below the security market line?

What is the expected return on this portfolio?

If the economy booms, Frank's Welding Supply stock is expected to return 19%. If the economy falls into a recession, the stock's return is projected at 5%. The probability of a boom is 80% while the probability of a recession is 20%. What is the variance of the returns on this stock?

Asset A, which has an expected return of 12% and a beta of 0.8, plots on the security market line. Which of the following is false about Asset B, another risky asset with a beta of 1.4?

Which one of the following is an example of unsystematic risk?

The ____________ portion of the total return contains news that has been "discounted" by the market.

A decrease in a firm's cost of borrowing is an example of systematic risk.