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Exam 6: Portfolio Theory

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Question 31

Multiple Choice

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A friend brags that she expects to earn a return of 10.25% on her portfolio with a beta of 0.825.Can you match her performance with Stock X (12% return and a beta of 1.1) and the risk free asset that earns a 5% return? With what portfolio weights?

A) Yes, 0.75 Stock X and 0.25 Risk Free Asset
B) Yes, 0.25 Stock X and 0.75 Risk Free Asset
C) Yes, 0.5 Stock X and 0.5 Risk Free Asset
D) No

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Question 32

Multiple Choice

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The required return on a security is 10%,the risk-free rate is 5%,and the return on the market is 14%.What is the beta of the firm?

A) 0.14
B) 0.55
C) 0.83
D) 1.00
E) 1.40

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Question 33

Multiple Choice

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The table below gives the historic return over the past five months for the market portfolio and two assets: A and B.Which of the answers below best describes the historic beta for A and B?

Risk that affects all firms is called

Can the risk (variance) of a portfolio ever be less than the smallest risk (variance) of an individual security in the portfolio?

Beta is the slope of the security market line.

Altria Group Inc.(ticker: MO on NYSE) is an American manufacturer of tobacco products.Selected Financial information for Altria is provided in the table below.What is the expected return on shares of Altria using the SML?

An individual's portfolio consists of three separate assets.Asset 1 has a beta of 1.4,asset 2 has a beta of .84 and asset 3 has a beta of 1.05.The investor has invested $240 in asset 1,$500 in asset 2,and $260 in asset 3.Calculate the portfolio beta.

If Geek Computer has a beta of .8,the return from Treasury bills is 3% and the return from the market portfolio is 20%,what is the required return from Geek stock?

The company that prints unemployment insurance checks is named Countercyclical Printing,Inc.Countercyclical Printing's beta is -0.75,the risk free rate is 8%,and the risk premium on the market is 7%.What is the equilibrium expected rate of return on Countercyclical Printing's stock?

The table below presents performance data for the Socially Responsible mutual fund over the last five years.The table also includes information on the returns of the market index and T-Bills over the same period.What is the Treynor Index for Socially Responsible?

If two stocks have a correlation of +1,then the standard deviation of a portfolio between them is given by: σ_p = wσ₁ + (1 - w)σ₂

Asset p has a beta of 1.1.The risk-free rate of return is 4 percent,while the return on the market portfolio of assets is 12 percent.The asset's required rate of return is:

Analysts state that the required return from Plummet Soft Drinks stock is 25%,and the returns from Treasury bills and the market portfolio are 4% and 20%,respectively.What is Plummet's beta?

The equilibrium expected return on an asset is 14%,the risk-free rate is 4% and the return on the market portfolio is 12%.What is the beta of the asset?

You want to buy $20,000 worth of shares in Tootsie Roll Industries Inc.on margin,but you only have $10,000 of your own money to invest.The remaining $10,000 is borrowed by issuing T-Bills; assume the cost of borrowing is the risk-free rate.The weight of Tootsie Roll Industries in your portfolio is 2.0.The weight of T-Bills in your portfolio is -1.0.Assume that the expected return on Tootsie Roll is 12% and the expected return on the risk free asset (T-Bills) is 5%.What is the return on your portfolio?

You own two mutual funds.Fund A has an expected return of 12% and a beta of 0.8.Fund B has an expected return of 18% and a beta of 1.4.If your portfolio beta is the same as the market portfolio,what proportion of your portfolio is invested in fund A?

If Geek Computer has a beta of 1.1,the return from Treasury bills is 3% and the return from the market portfolio is 20%,what is the required return from Geek stock?

Consider the data on expected returns and betas for a variety of assets in the table below.What is the expected return on shares of Bank of America using the SML?

An increase in nondiversifiable risk