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Unformatted text preview: [ ] The price of stock X is too high. v [ ] The price of stock Y is too high. 9) Which one of the following securities is overpriced according to the Capital Asset Pricing Model given a risk-free rate of 4 percent and a market risk premium of 8 percent? Stock Beta Expected Return A 1.33 14.67 percent B .76 10.08 percent C 1.09 12.81 percent D .98 11.78 percent E 1.14 13.14 percent [ ] stock A [ ] stock B [ ] stock C v [ ] stock D [ ] stock E 10) You own five different stocks in your portfolio, one of which is Wal-Mart. The portfolio beta currently is 1.03. Both the portfolio and Wal-Mart stock tend to move in direct relation with the overall economy. You decide to sell part of your shares in Wal-Mart so that you can add Gold Mining stock to the portfolio. This stock tends to rise when the economy falls and fall when the economy rises. As a result of these changes, your portfolio's beta will: [ ] increase. v [ ] decrease. [ ] remain unchanged. [ ] either increase or decrease, but you can not tell which. [ ] exceed the beta of the market. 11) Travis owns a portfolio containing fifty individual securities. The variance of the return on this portfolio is most dependent upon the: [ ] variance of the most risky individual security within the portfolio. [ ] range of variances of the individual securities. [ ] correlation coefficient between the highest and the lowest rate of return securities. v [ ] covariances between the individual securities. [ ] deviations in the returns of the individual securities. 12) The investment manager of Babson Securities is studying the relationship of stock A to stock B. Given the various states of the economy, the expected returns for each stock are shown below. Each state of the economy has an equal chance of occurring. What is the covariance of the returns on these two stocks? Economic Expected Expected State Return on A Return on B Boom .143 .160 Normal .085 .132 Recession -.034 -.065 Depression -.092 -.240 [ ] .008023 [ ] .011419 v [ ] .014680 [ ] .016071 [ ] .017414 13) What is the beta of a portfolio that is invested 25 percent in the market portfolio, 25 percent in an asset with twice as much systematic risk as the market portfolio, and the rest in a risk-free asset? [ ] 0.25 [ ] 0.50 v [ ] 0.75 [ ] 1.00 [ ] 1.25 14) Which of the following statements is correct concerning the security market line (SML)? I. An asset that has a return located above the SML, given the asset's beta, is overpriced. II. An asset that has a reward-to-risk ratio equivalent to that of the market will lie on the SML. III. The steeper the security market line, the greater the reward-to-risk ratio. IV. The return on a risk-free asset lies on the SML at the vertical intercept point. [ ] I and III only [ ] II and IV only [ ] I, II, and III only v [ ] II, III, and IV only [ ] I, II, III, and IV 15) Which one of the following describes a security that plots below the security market line (SML)?...
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- Spring '08