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:
3. The expected return on a stock that is computed using economic probabilities is:
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:
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 riskfree rate of return.
C. adding the riskfree 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.
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FIN134 Exercises
2
6. When computing the expected return on a portfolio of stocks the portfolio weights are
based on the:
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 Spring '08
 Travis
 Finance, Modern portfolio theory, B.

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