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Exam 12: Systematic Risk and the Equity Risk Premium

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Question 1

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Use the table for the question(s) below. Consider the following returns: -The covariance between Lowes' and Home Depot's returns is closest to:

A) 0.10
B) 0.29
C) 0.12
D) 0.69

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A

Question 2

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In a two asset portfolio,what happens to the portfolio weight of the better performing asset?

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The portfolio weight...

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Question 3

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The Capital Asset Pricing Model asserts that the ________ return is equal to the risk-free rate plus a risk premium for systematic risk.

Why should an investor invest in a negative-beta stock knowing that it will have an expected return lower than the risk-free rate?

Your retirement portfolio comprises 100 shares of the Standard & Poor's 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG) .The price of SPY is $120 and that of AGG is $98.If you expect the return on SPY to be 10% in the next year and the return on AGG to be 5%,what is the expected return for your retirement portfolio?

Which of the following statements is FALSE?

Use the table for the question(s) below. Consider the following expected returns,volatilities,and correlations: -Which of the following combinations of two stocks would give you the biggest reduction in risk?

For large portfolios,investors should expect a higher return for higher volatility,but this does not hold true for individual stocks.

Your estimate of the market risk premium is 7%.The risk-free rate of return is 3.5% and General Motors has a beta of 1.3.According to the Capital Asset Pricing Model (CAPM) ,what is its expected return?

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.If you have $15,000 to invest and you want to hold the market portfolio,how much of your money will you invest in Stock A?

Which of the following statements is FALSE?

A portfolio has 40% of its value in IBM shares and the rest in Microsoft (MSFT) .The volatility of IBM and MSFT are 40% and 30%,respectively,and the correlation between IBM and MSFT is -0.3.What is the standard deviation of the portfolio?

Use the information for the question(s) below. Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share,200 shares of Lowes (LOW) at $30 per share,and 100 shares of Ball Corporation (BLL) at $40 per share. -The weight of Ball Corporation in your portfolio is:

Since total risk is greater than systematic risk,should standard deviation be always greater than beta?

Which of the following statements is FALSE?

We can reduce volatility by investing in less than perfectly correlated assets through diversification because the expected return of a portfolio is the weighted average of the expected returns of its stocks,but the volatility of a portfolio

You expect General Motors (GM) to have a beta of 1.5 over the next year and the beta of Exxon Mobil (XOM) to be 1.9 over the next year.Also,you expect the volatility of General Motors to be 50% and that of Exxon Mobil to be 35% over the next year.Which stock has more systematic risk? Which stock has more total risk?

A stock market comprises 2000 shares of stock A and 2000 shares of stock B.The share prices for stocks A and B are $20 and $10,respectively.What is the capitalization of the market portfolio?

Your retirement portfolio comprises 200 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG) .The price of SPY is $130 and that of AGG is $ 105.If you expect the return on SPY to be 9% in the next year and the return on AGG to be 7%,what is the expected return for your retirement portfolio?

If two stocks are perfectly negatively correlated,a portfolio with equal weighting in each stock will always have a volatility (standard deviation)of 0.