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

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Question 101

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

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Question 102

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Beta measures diversifiable risk.

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Question 103

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

What is the expected return on this portfolio?

Which one of the following statements is correct?

Provide a definition for unsystematic risk.

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.

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?

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

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?

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?

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

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

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?

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?

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.

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.

Provide a definition for beta coefficient.

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?

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