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Unformatted text preview: FIN134 Exercises 1 Chapter 11 Exercise Questions 1. The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk. A. Efficient Markets Hypothesis (EMH) B. systematic risk principle C. Open Markets Theorem D. Law of One Price E. principle of diversification 2. You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period. The overall expected rate of return on this stock will: A. be equal to one-half of 8% if there is a 50% chance of an economic boom. B. vary inversely with the growth of the economy. C. increase as the probability of a recession increases. D. be equal to 75% of 8% if there is a 75% chance of a boom economy. E. increase as the probability of a boom economy increases. 3. The expected return on a stock that is 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 will receive. 4. If investors possess homogeneous expectations over all assets in the market portfolio, when riskless lending and borrowing is allowed, the market portfolio is defined to: A. be the same portfolio of risky assets chosen by all investors. B. have the securities weighted by their market value proportions. C. be a diversified portfolio. D. All of the above. E. None of the above. 5. The risk premium for an individual security is computed by: A. multiplying the security's beta by the market risk premium. B. multiplying the security's beta by the risk-free rate of return. C. adding the risk-free rate to the security's expected return. D. dividing the market risk premium by the quantity (1 - beta). E. dividing the market risk premium by the beta of the security. FIN134 Exercises 2 6. When computing the expected return on a portfolio of stocks the portfolio weights are based on the: A. number of shares owned in each stock. B. price per share of each stock. C. market value of the total shares held in each stock. D. original amount invested in each stock. E. cost per share of each stock held. 7. The portfolio expected return considers which of the following factors? I. the amount of money currently invested in each individual security II. various levels of economic activity III. the performance of each stock given various economic scenarios IV. the probability of various states of the economy A. I and III only B. II and IV only C. I, III, and IV ony D. II, III, and IV only E. I, II, III, and IV 8. Systematic risk is measured by: A. the mean....
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This note was uploaded on 03/16/2011 for the course FIN 135 taught by Professor Travis during the Spring '08 term at CSU Sacramento.
- Spring '08