Unformatted text preview: nd Stock B has a beta of 1.32. Which one of the following statements is correct concerning these investments? [ ] Stock A is a better addition to your portfolio. [ ] Stock B is a better addition to your portfolio. [ ] The expected return on stock A is higher than the expected return on Stock B. [ ] You cannot tell which of the two stocks will have the higher expected return without additional information. v [ ] Stock A should have the same risk premium per unit of beta, or rewardtorisk ratio, as stock B. 56) Brian has a portfolio valued at $15,300. Forty percent of the portfolio is invested in Stock A while Stock C comprises 25 percent of the portfolio. The balance of the portfolio is evenly divided between Stocks B and D. The betas of the four stocks are 1.21, 1.46, .99, and 2.18 for stocks A through D, respectively. What is the portfolio beta? [ ] 1.29 [ ] 1.33 v [ ] 1.37 [ ] 1.42 [ ] 1.45 57) The measure of the squared deviations of a security's returns from its expected return is called the: [ ] mean. [ ] correlation coefficient. [ ] standard deviation. [ ] covariance. v [ ] variance. 58) In a bull market, the market produces an 18.0 percent rate of return as compared to a 6.0 percent in a bear market. Caxco stock earns a 21.0 percent rate of return in a bull market and a 12.6 percent return in a bear market. Assume that each state of the economy is equally likely to occur. What is the beta of Caxco stock? [ ] 0.71 [ ] .084 [ ] 1.36 v [ ] 1.40 [ ] 1.52 59) Which one of the following statements is correct? [ ] The future risk premium on a particular stock will be equal to the stock's historical risk premium. [ ] The expected return on a stock is equal to the riskfree rate plus beta times the market rate of return. v [ ] The expected risk premium on a security is positively related to the security's beta. [ ] If a stock has a beta of zero then the expected return on that stock is equal to the expected market rate of return. [ ] The beta of the market is set at zero. 60) Julie wants to construct a portfolio of two securities such that the standard deviation of the portfolio is zero. To achieve this, the correlation coefficient of the two securities must be: v [ ] 1. [ ] between 1 and zero. [ ] zero. [ ] between zero and +1. [ ] +1. 61) Beta measures the: [ ] risk premium of an individual security. [ ] riskfree rate of return. [ ] return on the market given either a bear or a bull market. v [ ] responsiveness of the returns on a stock to changes in the return on the market. [ ] responsiveness of the returns on the market in response to changes in the return on a stock. 62) Diversification works because: [ ] the variance of a portfolio can be decreased to zero. [ ] market risk can be eliminated by combining securities into one portfolio. v [ ] unique risks can be eliminated by combining various stocks into one portfolio. [ ] s...
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 Spring '08
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 Variance, Capital Asset Pricing Model, Financial Markets, Modern portfolio theory

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