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Chapter 13 Return, Risk, and the Security Market Line
Chapter 13 Quiz A
Student Name _________________________
Student ID ____________
________ 1.
Market risk is referred to as:
a. diversifiable risk.
b. total risk.
c. systematic risk.
d. asset specific risk.
________ 2.
A rate of return that plots above the security market line:
a. indicates a security is underpriced.
b. has a risk premium appropriate for the amount of risk assumed.
c. has too much risk for the amount of the return.
d. has a negative risk premium.
________
3.
Which one of the following statements is an example of unsystematic risk?
a. The number of vehicles sold by a major manufacturer was less than anticipated.
b. GDP was 0.5 percent lower than expected.
c. The inflation rate increased by 5 percent.
d. The value of the dollar declined against the other major currencies.
________
4.
Which one of the following statements is correct?
a. Beta measures total risk.
b. The higher the beta, the lower the expected return on a security.
c. A portfolio needs to contain about seventyfive diverse securities before the majority of the unsystematic
risk is eliminated from the portfolio.
d. The amount of risk premium a security should earn depends on the security’s beta.
________
5.
Asset A has an expected return of 12.5 percent and a beta of 1.15. What is the market’s rewardtorisk ratio if
the riskfree rate is 3.9 percent?
a. 7.48 percent
b. 8.62 percent
c. 9.90 percent
d. 10.96 percent
________
6.
The riskfree rate of return is 4 percent and the expected return on the market is 13.5 percent. What is the
expected return for a stock with a beta of 1.16?
a. 7.02 percent
b. 11.66 percent
c. 15.02 percent
d. 19.66 percent
________
7.
You own a portfolio which is 20 percent invested in U.S. Treasury bills, 30 percent invested in Stock
A with a beta of 1.23, 10 percent invested in stock B with a beta of .95, and the remainder is invested in stock
C. Stock C is equally as risky as the market. The riskfree rate of return is 4.2 percent and the expected return
on the market is 11 percent. What is the portfolio beta?
a. .66
b. .86
c. .96
d. 1.06
________
8.
A portfolio is expected to return 5 percent in a normal economy, lose 10 percent in a boom economy, and
return 20 percent in a recessionary economy. The probability of a recession is 30 percent while the
probability of a boom is 10 percent. What is the variance of the portfolio?
a. .0081
b. .0239
c. .0477
d. .0900
________
9.
A $2,000 portfolio is invested in three stocks and one riskfree asset. Five hundred dollars is invested in stock
A which has a beta of 1.3. Six hundred dollars is invested in Stock B which has a beta of .80. The rest of the
portfolio is divided evenly between stock C and the riskfree asset. What is the beta of stock C if the portfolio
is equally as risky as the market?
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This note was uploaded on 12/11/2010 for the course FIN FIN201 taught by Professor Mohdhassan during the Spring '10 term at American University of Sharjah.
 Spring '10
 Mohdhassan
 Finance

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