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

A) Variance.
B) Alpha.
C) Standard deviation.
D) Theta.
E) Beta.

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A) Stock X is undervalued as compared to Stock Y.
B) Stock Y is undervalued as compared to Stock X.
C) Stock X is overvalued and has more risk than stock Y.
D) Stock X is undervalued and has less risk than stock Y.
E) Stock X will plot above the security market line and Stock Y will plot below the line.

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A) 5.40%
B) 5.70%
C) 6.40%
D) 7.80%
E) 8.10%

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A) The unique risks inherent to a particular industry or firm.
B) Unexpected events which affect the price of a limited number of securities.
C) Risks which are eliminated in a diversified portfolio.
D) Unexpected events which affect almost all assets.
E) Risks which go unrewarded by the marketplace.

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A) The inflation rate increases unexpectedly.
B) The federal government lowers income taxes.
C) An oil tanker runs aground and spills its cargo.
D) Interest rates decline by one-half of one percent.
E) The GDP rises by 2% more than anticipated.

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A) 1.2%
B) 4.0%
C) 8.0%
D) 8.8%
E) 9.3%

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A) Return on the market plus the risk-free rate of return.
B) Amount of return received for accepting unsystematic risk.
C) Beta multiplied by the risk-free rate of return.
D) Slope of the market portfolio's security market line.
E) Intercept point of the security market line.

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A) 0.7%
B) 1.4%
C) 2.6%
D) 6.8%
E) 8.1%

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A) A theory showing that the expected return on any risky asset is a linear combination of various factors.
B) A risk that affects at most a small number of assets. Also called unique or asset-specific risks.
C) A risk that influences a large number of assets. Also called market risk.
D) Positively sloped straight line displaying the relationship between expected return and beta.
E) Principle stating that spreading an investment across a number of assets eliminates some, but not all, of the risk.

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A) 7.33%
B) 6.33%
C) 5.33%
D) 4.33%
E) 3.33%

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A) 11.40%
B) 14.79%
C) 15.87%
D) 18.27%
E) 22.46%

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A) Has more systematic risk than the overall market.
B) Has more risk than warranted based on the realized rate of return.
C) Has yielded a higher return than expected for the level of risk assumed.
D) Has less systematic risk than the overall market.
E) Has yielded a return equivalent to the level of risk assumed.

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A) Will earn a rate of return that is greater than the risk-free rate but less than the market rate.
B) Will have a beta greater than 0 but less than 1.
C) Should have a reward-to-risk ratio which is greater than that of the market.
D) Should earn a rate of return which places it on the security market line.
E) Should earn a rate of return which places it above the security market line.

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A) Unexpected.
B) Expected.
C) Actual.
D) Systematic.
E) Non-diversifiable.

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A) market risk plus firm-specific risk,
B) firm-specific risk plus diversifiable risk,
C) systematic risk minus unsystematic risk,
D) diversifiable risk plus unsystematic risk,
E) market risk plus non-diversifiable risk,

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A) 1.22%
B) 3.93%
C) 5.28%
D) 8.03%
E) 11.47%

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