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Financial Management - Chapter 13 Return, Risk, and the Security Market Line, Exams of Financial Management

Harvard UniversityFinancial Management

You have a $12,000 portfolio which is invested in stocks A and B, and a risk-free asset. $5,000 is invested in stock A. Stock A has a beta of 1.76 and stock B has a beta of 0.89. How much needs to be invested in stock B if you want a portfolio beta of 1.10?

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2021/2022

Available from 12/16/2022

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Financial Management - Chapter 13 Return, Risk, and the Security Market
Line
Chapter 13 Return, Risk, and the Security Market Line
1. You own a stock that you think will produce a return of 11 percent in
a good economy and 3 percent in a poor economy. Given the
probabilities of each state of the economy occurring, you anticipate
that your stock will earn 6.5 percent next year. Which one of the
following terms applies to this 6.5 percent?
A.arithmetic
return
B.historical
return
C.expected
return
D.geometric
return
E.required
return
Refer to section 13.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 How to calculate expected returns.
Section: 13.1
Topic: Expected return
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Financial Management - Chapter 13 Return, Risk, and the Security Market

Line

Chapter 13 Return, Risk, and the Security Market Line

  1. You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? A. arithmetic return B. historical return C. expected return D. geometric return E. required return Refer to section 13. AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-01 How to calculate expected returns. Section: 13. Topic: Expected return
  1. Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments? A. inde x B. portfol io C. collectio n D. groupin g E. risk- free Refer to section 13. AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-02 The impact of diversification. Section: 13. Topic: Portfolio

Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-03 The systematic risk principle. Section: 13. Topic: Systematic risk

  1. A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent. What type of risk does this news flash represent? A. portfol io B. nondiversifia ble C. mark et D. unsystema tic E. tot al Refer to section 13. AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 13-03 The systematic risk principle. Section: 13. Topic: Unsystematic risk
  1. The principle of diversification tells us that: A. concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. B. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. C. spreading an investment across five diverse companies will not lower the total risk. D. spreading an investment across many diverse assets will eliminate all of the systematic risk. E. spreading an investment across many diverse assets will eliminate some of the total risk. Refer to section 13. AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-02 The impact of diversification. Section: 13. Topic: Diversification
  2. The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk. A. efficient markets hypothesis B. systematic risk principle C. open markets theorem D. law of one price E. principle of diversification Refer to section 13. AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-03 The systematic risk principle.
  1. Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas? A. reward-to-risk matrix B. portfolio weight graph C. normal distribution D. security market line E. market real returns Refer to section 13. AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-04 The security market line and the risk-return trade-off. Section: 13. Topic: Security market line
  2. Which one of the following is represented by the slope of the security market line? A. reward-to-risk ratio B. market standard deviation C. beta coefficient D. risk-free interest rate E. market risk premium Refer to section 13. AACSB: Analytic Blooms: Understand Difficulty: 1 Easy

Learning Objective: 13-04 The security market line and the risk-return trade-off. Section: 13. Topic: Security market line

  1. Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk? A. capital asset pricing model B. time value of money equation C. unsystematic risk equation D. market performance equation E. expected risk formula Refer to section 13. AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-04 The security market line and the risk-return trade-off. Section: 13. Topic: Capital asset pricing model

Learning Objective: 13-01 How to calculate expected returns. Section: 13. Topic: Expected return

  1. The expected return on a stock computed using economic probabilities is: A. guaranteed to equal the actual average return on the stock for the next five years. B. guaranteed to be the minimal rate of return on the stock over the next two years. C. guaranteed to equal the actual return for the immediate twelve month period. D. a mathematical expectation based on a weighted average and not an actual anticipated outcome. E. the actual return you should anticipate as long as the economic forecast remains constant. Refer to section 13. AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 13-01 How to calculate expected returns. Section: 13. Topic: Expected return
  1. The expected risk premium on a stock is equal to the expected return on the stock minus the: A. expected market rate of return. B. risk-free rate. C. inflation rate. D. standard deviation. E. varianc e. Refer to section 13. AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-01 How to calculate expected returns. Section: 13. Topic: Risk premium
  2. Standard deviation measures which type of risk? A. tot al B. nondiversifia ble C. unsystema tic D. systemat ic E. economi c Refer to section 13. AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-03 The systematic risk principle.
  1. The expected return on a portfolio considers which of the following factors? I. percentage of the portfolio invested in each individual security II. projected states of the economy III. the performance of each security given various economic states IV. probability of occurrence for each state of the economy A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV Refer to section 13. AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-01 How to calculate expected returns. Section: 13. Topic: Expected return
  1. The expected return on a portfolio: I. can never exceed the expected return of the best performing security in the portfolio. II. must be equal to or greater than the expected return of the worst performing security in the portfolio. III. is independent of the unsystematic risks of the individual securities held in the portfolio. IV. is independent of the allocation of the portfolio amongst individual securities. A. I and III only B. II and IV only C. I and II only D. I, II, and III only E. I, II, III, and IV Refer to sections 13.2 and 13. AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-01 How to calculate expected returns. Section: 13.2 and 13. Topic: Expected return
  1. The standard deviation of a portfolio: A. is a measure of that portfolio's systematic risk. B. is a weighed average of the standard deviations of the individual securities held in that portfolio. C. measures the amount of diversifiable risk inherent in the portfolio. D. serves as the basis for computing the appropriate risk premium for that portfolio. E. can be less than the weighted average of the standard deviations of the individual securities held in that portfolio. Refer to section 13. AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-02 The impact of diversification. Section: 13. Topic: Standard deviation
  1. Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights? A. Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. B. The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. C. Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. D. The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified. E. Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero. Refer to section 13. AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 13-02 The impact of diversification. Section: 13. Topic: Standard deviation

Blooms: Understand Difficulty: 1 Easy Learning Objective: 13-01 How to calculate expected returns. Section: 13. Topic: Unexpected returns

  1. Which one of the following statements related to unexpected returns is correct? A. All announcements by a firm affect that firm's unexpected returns. B. Unexpected returns over time have a negative effect on the total return of a firm. C. Unexpected returns are relatively predictable in the short-term. D. Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. E. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term. Refer to section 13. AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 13-01 How to calculate expected returns. Section: 13. Topic: Unexpected returns
  1. Which one of the following is an example of systematic risk? A. investors panic causing security prices around the globe to fall precipitously B. a flood washes away a firm's warehouse C. a city imposes an additional one percent sales tax on all products D. a toymaker has to recall its top- selling toy E. corn prices increase due to increased demand for alternative fuels Refer to section 13. AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 13-03 The systematic risk principle. Section: 13. Topic: Systematic risk
  2. Unsystematic risk: A. can be effectively eliminated by portfolio diversification. B. is compensated for by the risk premium. C. is measured by beta. D. is measured by standard deviation. E. is related to the overall economy. Refer to section 13. AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-03 The systematic risk principle. Section: 13. Topic: Unsystematic risk