Some Exercise questions:
1.What is the expected market return if the expected return on asset A is 19% and the risk-free
rate is 5%? Asset A has a beta of 1.4.
2. Stock A has a beta coefficient of 0.9, and stock B has a beta coefficient of 1.2. Which of
the following statements is false regarding these two stocks?
A) Stock A is less risky from the market's perspective than a typical stock, and stock B is
more risky than a typical stock.
B) Stock B, if purchased, will increase the market risk of a portfolio more than stock A
would (if purchased).
C) Stock A necessarily must have a lower standard deviation of returns than stock B.
D) Stock B must have a higher expected return than stock A if markets are efficient.
E) Stock A has the same reward to risk ratio as stock B.
3. You own two risky assets, both of which plot on the security market line. Asset A has an
expected return of 11% and a beta of 0.7. Asset B has an expected return of 20% and a
beta of 1.5. If your portfolio beta is the same as the market portfolio, what proportion of
your funds is invested in asset A?
5. A particular risky asset's risk premium, measured relative to its beta coefficient, is its:
A) Diversifiable risk.
B) Systematic risk.
C) Reward to risk ratio.
D) Security market line.
E) Market risk premium.
6. Which of the following is a true statement regarding risky assets?
A) The risk premium is the difference between the return on a risky asset and the return
on the market portfolio.
B) The expected return on an asset is equal to the sum of the possible returns divided by
C) The risk premium is the expected return on a risky asset less the return on a risk-free
D) Comparison of two different risky assets cannot be simplified by calculating the
expected return for each.
E) Expected returns depend on the states of the economy but not the associated
7. Which of the following would be considered an example of systematic risk?
A) Intel reports record sales.
B) Quarterly profit for GM equals expectations.
C) Lower quarterly sales for IBM than expected.
D) Greater new jobless claims than expected.
E) Fed leaves interest rates unchanged, as expected.
8. The return priced into a stock in an efficient market is the _____ return.
9. The risk premium depends only on _________ risk.
D) asset-specific and market-based
10. What is the variance of the following returns?
S ta te P ro b a b ility R e tu rn
B oom .2 0 .7 5
G ood .5 5 .2 5
R e c e s s io n .1 5 -.1 0
D e p re s s io n .1 0 -.5 0
11. You hold three stocks in your portfolio: A, B, and C. The portfolio beta is 1.40. Stock A
comprises 15% of the dollar value of your holdings and has a beta of 1.0. If you sell all of
your investment in A and invest the proceeds in the risk-free asset, your new portfolio
beta will be:
12. Given the following information, what is the portfolio standard deviation?
S ta te P ro b a b ility R e tu rn
B oom .2 5 .4 0
G ood .5 0 .1 5
R e c e s s io n .2 5 .0 5
13. In market equilibrium:
A) All assets will have the same degree of systematic risk.
B) Assets will have the same reward to risk ratio.
C) Each firm's reward to risk ratio will be based on a different risk-free rate of return.
D) Systematic risk can be diversified away.
E) All assets will have the same risk premium.
14. A security has an unexpected negative news announcement specific to that security. Most
likely, the _____.
A) security's required return on investment will increase.
B) security's required return on investment will remain unchanged.
C) security's required return on investment will decrease.
D) market risk premium will increase.
E) security's market price will remain unchanged.
15. The linear nature of the security market line suggests that the beta coefficient for a
security can be estimated via ________ .
A) scenario analysis
B) NPV analysis
C) means analysis
D) regression analysis
E) IRR analysis
17. You form a portfolio by investing equally in A (beta=0.6), B (beta=1.6), the risk-free
asset, and the market portfolio. What is your portfolio beta?
18. Asset-specific risk is also known as ______ risk.
19. What is the portfolio beta if 60% of your money is invested in the market portfolio, and
the remainder is invested in a risk-free asset?
Answer Key -- q2