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Unformatted text preview: t. What is the portfolio weight of the risk-free security? [ ] .30 [ ] .36 [ ] .41 v [ ] .64 [ ] .70 72) What is the expected return on Louisiana Electric stock if the stock has a beta of .74, the expected market return is 13.8 percent, and the risk-free rate is 3.6 percent? [ ] 7.55 percent [ ] 10.21 percent v [ ] 11.15 percent [ ] 12.67 percent [ ] 13.81 percent 73) Which one of the following statements related to the security market line (SML) is correct? [ ] A stock with a beta of zero will plot at the same point on the SML as the market as long as the stock is correctly priced. [ ] A stock which lies below the SML is underpriced. [ ] The higher the beta, the lower the expected return as graphically illustrated by the SML. [ ] A portfolio which is overpriced and has a beta of 1.2 will lie below the SML and to the left of the market position on the SML. v [ ] A stock which is correctly priced and has a beta of .87 will lie on the SML to the left of the market position. 74) The assumption of homogeneous expectations assumes that all investors have the same: I. aversion to risk. II. estimates of expected return. III. estimates of covariances. IV. estimates of variances. [ ] I only [ ] I and II only [ ] II and IV only v [ ] II, III, and IV only [ ] I, II, III, and IV 75) Assume that two stocks have a negative covariance. Given this, the return on Stock B will most likely be _____ its average when the return on Stock A is above its average return. [ ] above [ ] equal to v [ ] below [ ] double [ ] You cannot make this determination based on the information provided. 76) What is the risk premium on the following stock if the risk-free rate is 3.5 percent? State of Probability of State Rate of Economy Of Economy Return Boom .10 .28 Good .75 .14 Recession .15 -.06 v [ ] 0.089 [ ] 0.099 [ ] 0.156 [ ] 0.117 [ ] 0.124 77) A financial hedge is best described by which one of the following? [ ] negative standard deviation [ ] positive variance [ ] positive correlation [ ] high expected rate of return v [ ] negative covariance 78) The covariance between two securities is equal to the correlation between the securities: [ ] divided by (sAsB). v [ ] multiplied by (sAsB). [ ] divided by the average standard deviation of the individual securities. [ ] plus (sAsB). [ ] divided by (2sAsB)....
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- Spring '08