31.

An asset's return on investment has two components, one of which is ____________, which reflects the cash you
receive directly while you own the investment.
A)
the capital gain
B)
the income component
C)
your reward for bearing risk
D)
your total dollar return
E)
your gross return on that investment
Ans: B

Level: Basic

Subject: Income Component Of Return

Type: Concepts

32. Which of the following correctly completes this sentence: When calculating your return on investment
you should ignore _____________.
A)
paper gains which you could have obtained by cashing out
B)
losses you avoided by not buying a stock that has since decreased in price
C)
dividends that have been declared on the stock you own if you have not yet received the dividend
D)
paper capital losses that occur
E)
fees you are charged in the process of purchasing the asset in question
Ans: B

Level: Basic

Subject: Components of Return

Type: Concepts

33. Last year you purchased 100 shares of Marvel Entertainment stock for $12 per share. According to today's
quote in The National Post, the stock is currently selling for $18 per share. The stock pays no dividends.
Your return on this investment is comprised of _____________________.
A)
an income return only
B)
an income return and a capital gains return
C)
a real return only
D)
a capital gains return only
E)
a dividend yield only
Ans: D

Level: Basic

Subject: Capital Gains Return

Type: Concepts

34. Based on the historical record from 1948 to 2002, which of the following types of Canadian securities
earned the SECOND highest return?
A)
Long bonds
B)
Small stocks
C)
Inflation
D)
Canadian Treasury bills
E)
Common stocks (S&P /TSX Composite)
Ans: E

Level: Basic

Subject: Historical Returns

Type: Concepts

35. Which of the following investments have grown faster than the rate of inflation over the period 1948-2002?
I. Canadian common stocks
II. Treasury bills
III. Long bonds
IV. Small stocks
A)
I and III only
B)
I, II, and IV
C)
III and IV only
D)
I and II only
E)
I, II, III, and IV
Ans: E

Level: Basic

Subject: Historical Returns

Type: Concepts

36. Over the past 50 years, which of the following Canadian investments has provided the largest average
return?
A)
Canadian common stocks
B)
Inflation
C)
Treasury bills
D)
Long bonds
E)
Canadian small stocks
Ans: E

Level: Basic

Subject: Historical Returns

Type: Concepts

37. Over the past 50 years, which of the following investments has provided the smallest average return?
A)
Canadian common stocks
B)
U.S. common stocks
C)
Treasury bills
D)
Long bonds
E)
Canadian small stocks
Ans: C

Level: Basic

Subject: Historical Returns

Type: Concepts

55.The lessons from capital market history tell us:

I. There is a reward for bearing risk.
II. The greater the potential reward from a risky asset, the greater is the risk.
III. The TSX is an inefficient market.
A)
I only
B)
II only
C)
I and II only
D)
I and III only
E)
I, II, and III
Ans: C

Level: Basic

Subject: Capital Market History

Type: Concepts

56. If capital markets are efficient, then ________________________.

A)
there is no reason to believe that prices are too high or too low
B)
it is possible to profit regularly from publicly available information
C)
prices will adjust slowly when reacting to new information
D)
it is not possible to make money by playing the stock market
E)
historical price trends will give you a good idea of where prices are headed in the future
Ans: A

Level: Basic

Subject: Efficient Markets

Type: Concepts

57. Which of the following is NOT correct with regards to the Efficient Markets Hypothesis?
A)
The EMH suggests that there are no positive NPV investments, on average.
B)
The EMH asserts that information has been "priced out" of stocks.
C)
The EMH refers to well-organized capital markets.
D)
The EMH suggests that the prices on the TSX are fair, on average.
E)
The EMH suggests that markets in which prices fluctuate a great deal cannot be efficient.
Ans: E

Level: Basic

Subject: Efficient Markets

Type: Concepts

58. Which form(s) of market efficiency is/are generally considered to hold in well-organized markets?
I. Strong form efficiency
II. Semi-strong form efficiency
III. Weak form efficiency
A)
I only
B)
II only
C)
III only
D)
I and II only
E)
II and III only
Ans: E

Level: Basic

Subject: Efficient Markets

Type: Concepts

59. Which of the following is implied by the evidence regarding market efficiency?
A)
Prices in well-organized capital markets are unfair.
B)
There is a simple way to identify mispriced stocks when they exist.
C)
Prices don't respond rapidly to new information.
D)
It is difficult to predict future price movements based on public information.
E)
Insiders cannot make money from their private information.
Ans: D

Level: Basic

Subject: Efficient Markets

Type: Concepts

60. Assume that markets are semi-strong form efficient. Suppose, then, that during a trading day, important
new information is released for the first time concerning a certain company. This information indicates that
one of the firm's oil fields, previously thought to be very promising, just came up dry. How would you
expect the price of a share of stock to react to this information?
A)
The value of a share will fall over an extended period of time as investors begin to sell shares in the
company.
B)
The value of a share will drop immediately to a price that reflects the value of the new information.
C)
The value of a share will fall below what is considered appropriate because of the decreased demand
for the shares, but eventually the price will rise to the correct level.
D)
The value of a share will rise over a long period of time as investors sell the stock.
E)
The stock price will not change since this type of information has no impact in markets that are semistrong form efficient.
Ans: B

Level: Basic

Subject: Efficient Markets

Type: Concepts

Use the following to answer questions 108-111:

You purchased 500 shares of a stock at a price of $22.50 per share. One year later, the shares sold for $21 each. At
that end of the year, a $1.50 per share dividend was paid.

108. What is the total dollar return for the investment?

A)
$0
B)
$750
C)
$1,250
D)
$1,500
E)
$1,750
Ans: A

Level: Basic

Subject: Total Dollar Return

Type: Problems

109. What is the capital gains yield for the investment?

A)
-7.1%
B)
-6.7%
C)
0.0%
D)
6.7%
E)
7.1%
Ans: B

Level: Basic

Subject: Capital Gains Yield

Type: Problems

110. What is the dividend yield for the investment?

A)
-7.1%
B)
-6.7%
C)
0.0%
D)
6.7%
E)
7.1%
Ans: D

Level: Basic

Subject: Dividend Yield

Type: Problems

111. What is the total percentage return for the investment?

A)
-7.1%
B)
-6.7%
C)
0.0%
D)
6.7%
E)
7.1%
Ans: C

Level: Basic

Subject: Percentage Return

Type: Problems

Use the following to answer questions 112-116:

Use the following historical average returns and standard deviations to answer the question(s) below.
Asset
Average
Return Standard Deviation
Canadian common stocks
13.20%
16.62%
US common stocks
15.59%
16.86%
Long bonds
7.64%
10.57%
Small-company stocks
14.79%
23.68%
Treasury bills
6.04%
4.04%

112. What is the historical risk premium on Canadian common stocks?

A)
0%
B)
7.16%
C)
9.55%
D)
1.60%
E)
8.75%
Ans: B

Level: Basic

Subject: Risk Premiums

Type: Problems

113. What is the historical risk premium of Canadian common stocks over long bonds?
A)
7.15%
B)
7.16%
C)
5.56%
D)
1.60%
E)
8.75%
Ans: C

Level: Basic

Subject: Risk Premiums

Type: Problems

114. Based on the historical data above, what is your reward for bearing risk of owning small-company stocks
rather than Canadian common stocks?
A)
1.59%
B)
0.80%
C)
2.39%
D)
1.60%
E)
4.25%
Ans: A

Level: Basic

Subject: Risk Premiums

Type: Problems

115. If the returns on small-company stocks are normally distributed, which of the following returns would lie in
a 99% confidence interval around the mean, but not in a 95% confidence interval?
A)
-30%
B)
-10%
C)
50%
D)
70%
E)
90%
Ans: D

Level: Intermediate

Subject: Normal Distribution

Type: Problems

116. Assume the return on T-bills is normally distributed. Assuming a 68% probability, what is the highest
return you would expect to earn on T-bills?
A)
2.00%
B)
4.04%
C)
6.04%
D)
10.08%
E)
14.12%
Ans: D

Level: Intermediate

Subject: Normal Distribution

Type: Problems

117. Marti purchased a stock one year ago at a price of $23.89. Over the past year she has received a total of
$1.63 in dividends. Today she sold the stock for $22.84. What percentage total return did Marti earn on this
investment?
A)
2.43%
B)
2.54%
C)
4.40%
D)
6.82%
E)
7.14%
Ans: A

Level: Basic

Subject: Total Return

Type: Problems

118. Sam purchased a stock for $46.91 one year ago. Today he sold the stock for $48.03. The stock paid a total
of $1.40 in dividends over the year. What capital gains yield did Sam realize on this investment?
A)
2.33%
B)
2.39%
C)
2.67%
D)
3.13%
E)
5.37%
Ans: B

Level: Basic

Subject: Capital Gains Yield

Type: Problems

124.A stock produced total returns of 11.5%, 8.3%, and -2.4% over the past three years, respectively. Based on this
information what range of returns would you expect to see 95% of the time?
A)
-36.70% to 25.10%
B)
-26.40% to 14.80%
C)
-14.80% to 26.40%
D)
-25.10% to 36.70%
E)
-35.40% to 47.00%
Ans: D

Level: Intermediate

Subject: Probability Distributions

Type: Problems

125. ABC stock pays a $1.80 annual dividend. The market price of the stock was $21.74, $19.83, $22.60, and
$23.10 at the end of the past four years, respectively. Based on this information, what is the mean rate of
return?
A)
9.67%
B)
10.91%
C)
11.25%
D)
19.14%
E)
21.82%
Ans: B

Level: Intermediate

Subject: Mean Rate Of Return

Type: Problems

126. A stock has an average rate of return of 11.5% and a standard deviation of 12.8%. What is the probability
that the stock will lose more than 26.9% in any one year?
A)
0.50%
B)
1.00%
C)
1.25%
D)
2.50%
E)
5.00%
Ans: A

Level: Intermediate

Subject: Probability Distributions

Type: Problems

127. Over the past three years, a stock has produced capital gains of 3.6%, 42.9%, and -18.6%, respectively. The
stock does not pay a dividend. Based on this information what is the approximate probability than the stock
will double in value in any one year?
A)
0.0%
B)
0.5%
C)
1.0%
D)
2.5%
E)
5.0%
Ans: B

Level: Intermediate

Subject: Probabilty Distributions

Type: Problems

128. Assume that for some period of time corporate bonds had an average rate of return of 5.4% while Treasury
bills returned 2.8% and inflation averaged 2.7%. Given these assumptions, what is the risk premium on
corporate bonds?
A)
-0.1%
B)
0.1%
C)
2.6%
D)
2.7%
E)
2.8%
Ans: C

Level: Basic

Subject: Risk Premium

Type: Problems

129. Fred made the following rates of return on his portfolio over the past five years. The T-Bill rate and the
inflation rate for each year are also shown. Based on this information, in which year did Fred have the
highest real rate of return?
Year
1
2
3
4
5
A)
B)
C)
D)
E)

Portfolio Return
11.00%
8.00%
16.00%
12.00%
9.00%

T-Bill rate
3.00%
4.00%
9.00%
6.00%
3.00%

Inflation Rate
5.00%
3.00%
11.00%
6.00%
2.00%

Year 1
Year 2
Year 3
Year 4
Year 5

Ans: E

Level: Basic

Subject: Real Rate Of Return

Type: Problems

130. Over the past four years a stock produced annual returns of 4%, -18%, - 21%, and 48%, respectively. Based
on this information, what is the standard deviation for this stock?
A)
18.03%
B)
27.58%
C)
31.85%
D)
34.62%
E)
55.16%
Ans: C

Level: Intermediate

Subject: Standard Deviation

Type: Problems

131. Over the past five years a stock produced annual returns of 11%, 16%, 5%, 2%, and 9%, respectively.
Based on this information, what is the standard deviation for this stock?
A)
2.94%
B)
3.88%
C)
4.03%
D)
5.09%
E)
5.42%
Ans: E

Level: Intermediate

Subject: Standard Deviation

Type: Problems

132. One year ago, Yokino purchased 100 shares of stock for $3,896. Since that time, he has received a total of
$180 in dividends. If he sells the stock at today's market price he will realize a total return on his
investment of 10.37%. Assuming he sells the stock today, what is the dollar amount of his capital gain per
share of stock?
A)
$1.80
B)
$2.24
C)
$3.68
D)
$4.04
E)
$5.84
Ans: B

Level: Intermediate

Subject: Dollar Return

Type: Problems

13.If world events cause investors to become more risk-averse, we would expect the market risk premium to
increase.
Ans: True

Level: Basic

Subject: Risk Premiums

Type: Concepts

14. If you invest in stocks with higher-than-average betas, you are certain to earn higher-than-average returns
over the next year.
Ans: False

Level: Basic

Subject: Systematic Risk

Type: Concepts

15. If the total risk of firm X is greater than that of firm Y, then the beta of firm X must be greater than that of
firm Y.
Ans: False

Level: Basic

Subject: Beta

Type: Concepts

16. A portfolio is _________________.

A)
a group of assets, such as stocks and bonds, held as a collective unit by an investor
B)
the expected return on a risky asset
C)
the expected return on a collection of risky assets
D)
the variance of returns for a risky asset
E)
the standard deviation of returns for a collection of risky assets
Ans: A

Level: Basic

Subject: Portfolios

Type: Definitions

17. The percentage of a portfolio's total value invested in a particular asset is called that asset's:
A)
Portfolio return.
B)
Portfolio weight.
C)
Portfolio risk.
D)
Rate of return.
E)
Investment value.
Ans: B

Level: Basic

Subject: Portfolio Weights

Type: Definitions

18. Risk that affects a large number of assets, each to a greater or lesser degree, is called:
A)
Idiosyncratic risk.
B)
Diversifiable risk.
C)
Systematic risk.
D)
Asset-specific risk.
E)
Total risk.
Ans: C

Level: Basic

Subject: Systematic Risk

Type: Definitions

19. Risk that affects at most a small number of assets is called:

A)
Portfolio risk.
B)
Undiversifiable risk.
C)
Market risk.
D)
Unsystematic risk.
E)
Total risk.
Ans: D

Level: Basic

Subject: Unsystematic Risk

Type: Definitions

20. The principle of diversification tells us that:

A)
Concentrating an investment in two or three large stocks will eliminate all of your risk.
B)
Concentrating an investment in two or three large stocks will reduce your overall risk.
C)
Spreading an investment across many diverse assets cannot (in an efficient market) eliminate any
risk.
D)
Spreading an investment across many diverse assets will eliminate all of the risk.
E)
Spreading an investment across many diverse assets will eliminate some of the risk.
Ans: E

Level: Basic

Subject: Principle Of Diversification

Type: Definitions

21. The __________________ tells us that the expected return on a risky asset depends only on that asset's
systematic risk.
A)
Efficient Markets Hypothesis (EMH)
B)
systematic risk principle
C)
Open Markets Theorem
D)
Law of One Price
E)
principle of diversification
Ans: B

Level: Basic

Subject: Systematic Risk Principle

Type: Definitions

22. The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an
average risky asset, is called the particular asset's:
A)
Beta coefficient.
B)
Reward to risk ratio.
C)
Law of One Price.
D)
Diversifiable risk.
E)
Treynor index.
Ans: A

Level: Basic

Subject: Beta Coefficient

Type: Definitions

38.Which of the following statements is/are true about the variance of the possible future returns on a financial asset
where you have multiple possible states of the economy along with associated probabilities of the states
occurring?
I. The variance is a simple average of the squared deviations of the actual returns from the expected
returns
II. The greater the dispersion in the possible returns on the firm's stock, the lower the variance of the
possible returns, all else equal
III. The variance of the possible returns on a risk-free asset is zero
A)
I only
B)
II only
C)
III only
D)
II and III only
E)
I, II, and III
Ans: C

Level: Basic

Subject: Variance

Type: Concepts

39. Which of the following statements is/are true about the variance of the possible future returns on a financial
asset?
A)
The standard deviation of the possible returns on an asset is equal to the square root of the variance
of the possible returns
B)
Low-variance securities are high-standard deviation securities
C)
The variance and the standard deviation of the possible returns on a risk-free asset are negative
D)
Standard deviation of returns can be computed without considering probabilities, but variance cannot
E)
All else equal, assets with high average returns will also have high standard deviations relative to
those with lower returns
Ans: A

Level: Basic

Subject: Variance

Type: Concepts

40. Which of the following is true about calculating expected portfolio returns and variances?
A)
You need to calculate the weight of each asset relative to the total portfolio to calculate the portfolio
return, but not to calculate the portfolio variance.
B)
Portfolio return can be calculated using the expected return and portfolio weight for each asset.
C)
The portfolio return is not needed to calculate the portfolio variance.
D)
The portfolio return and variance are independent of the possible states of nature.
E)
The portfolio variance is generally a weighted average of the variances of the individual assets in the
portfolio.
Ans: B

Level: Intermediate

Subject: Portfolio Return & Variance

Type: Concepts

41. If portfolio weights are positive: 1) Can the return on a portfolio ever be less than the smallest return on an
individual security in the portfolio? 2) Can the variance of a portfolio ever be less than the smallest
variance of an individual security in the portfolio?
A)
1) yes;
2) yes
B)
1) yes; 2) no
C)
1) no; 2) yes
D)
1) no; 2) no
E)
1) maybe; 2) no
Ans: C

Level: Intermediate

Subject: Portfolio Return & Variance

Type: Concepts

42. You have a portfolio consisting of equal amounts of IBM stock and Treasury bills. If you replace half of
the Treasury bills with more IBM stock, the portfolio expected return will likely ___________ , all else the
same.
A)
increase
B)
decrease
C)
remain unchanged
D)
either increase or decrease
E)
decrease if IBM is considered a small-cap stock
Ans: A

Level: Basic

Subject: Portfolio Return

Type: Concepts

43. Which of the following does NOT correctly complete this sentence: In general, the link between an
information announcement and the stock price is that ____________________.
A)
the expected stock return will change if the announcement contains a surprise component
B)
the stock price will not change if the announcement provided only anticipated information
C)
only announcements that have already been discounted will affect the stock price
D)
in order for the price of the stock to change, the announcement must be relevant to that particular
stock and must be unanticipated
E)
if markets are efficient in the semi-strong form, then the market will react rapidly to the new
information
Ans: C

Level: Basic

Subject: Efficient Markets

Type: Concepts

44. The return anticipated on a risky asset in the future is the ____________ return.
A)
unexpected
B)
expected
C)
actual
D)
unsystematic
E)
systematic
Ans: B

Level: Basic

Subject: Expected Returns

Type: Concepts

97.In a highly competitive market, all stocks should:

A)
Produce the same rate of return.
B)
Plot on the same security market line.
C)
Have the same beta.
D)
Have the same standard deviation.
E)
Plot at the intercept point.
Ans: B

Level: Intermediate

Subject: SML

Type: Concepts

98. What is the expected return for the following stock?

State
Probability
Average
.55
Recession
.20
Depression
.25
A)
B)
C)
D)
E)

Return
.20
.10
-.20

0.055
0.080
0.095
0.105
0.110

Ans: B

Level: Basic

Subject: Expected Return

Type: Problems

99. Which of the following stocks has the greatest expected return and by how much?
State
Probability
Return on A
Return on B
Boom
.1
.6
.4
Good
.8
.3
.3
Recession
.1
0
-.1
A)
B)
C)
D)
E)

A by 6%
B by 6%
A by 3%
B by 3%
A and B have the same expected return.

Ans: C

Level: Basic

Subject: Expected Return

Type: Problems

100. What is the risk premium for the following returns if the risk-free rate is 5%?
State
Probability
Return
Boom
.15
.60
Good
.50
.20
Recession
.25
-.10
Depression
.10
-.30
A)
B)
C)
D)
E)

0.085
0.100
0.125
0.135
0.175

Ans: A

Level: Basic

Subject: Risk Premiums

101. What is the variance of the following returns?

State
Probability
Boom
.15
Good
.50
Recession
.25
Depression
.10

Type: Problems

Return
.60
.20
-.10
-.30

A)
B)
C)
D)
E)

0.0523
0.0673
0.0835
0.1324
0.4156

Ans: B

Level: Basic

Subject: Variance

Type: Problems

102. Ed Lawrence has $100,000 invested. Of that, $30,000 is invested in IBM stock, $25,000 is invested in Tbills, and the remainder is invested in corporate bonds. Which of the following is NOT correct regarding
his portfolio weights? (All values are current market values. )
A)
Ed has 30% of his portfolio invested in stocks.
B)
Ed has 45% of his portfolio invested in corporate bonds.
C)
Ed has 70% of his portfolio invested in assets other than stocks.
D)
Ed has 70% of his portfolio invested in risk-free assets.
E)
If Ed sells his corporate bonds and buys GM stock with the proceeds, he will end up with 75% of his
portfolio invested in stocks.
Ans: D

Level: Basic

Subject: Portfolio Weights

Type: Problems

103. You own 40 shares of stock A, which has a price of $15 per share, and 200 shares of stock B, which has a
price of $2 per share. What is the portfolio weight for stock A in your portfolio?
A)
18%
B)
25%
C)
40%
D)
60%
E)
75%
Ans: D

Level: Basic

Subject: Portfolio Weights

Type: Problems

104. What is the expected portfolio return given the following information:
Asset
Portfolio
Return
weight
A
.25
15%
B
.25
20%
C
.30
10%
D
.20
35%
A)
B)
C)
D)
E)

7.71%
9.23%
18.75%
19.25%
21.15%

Ans: C

Level: Basic

Subject: Portfolio Expected Return

105. What is the expected return for the following portfolio?

Asset
Investment
A
$200
B
$300
C
$500

Type: Problems

Return
0.15
0.10
0.25

A)
B)
C)
D)
E)

0.1000
0.1150
0.1225
0.1550
0.1850

Ans: E

Level: Basic

Subject: Portfolio Expected Return

Type: Problems

106. Given the following information, what is the portfolio standard deviation?
State
Probability
Return
Boom
.2
.30
Good
.6
.21
Recession
.2
.08
A)
B)
C)
D)
E)

0.0128
0.0527
0.0638
0.0703
0.1159

Ans: D

Level: Basic

Subject: Portfolio Standard Deviation

Type: Problems

107. What is the portfolio beta if 75% of your money is invested in the market portfolio, and the remainder is
invested in a risk-free asset?
A)
0.50
B)
0.25
C)
1.25
D)
1.00
E)
0.75
Ans: E

Level: Basic

Subject: Portfolio Beta

Type: Problems

108. What is the portfolio beta with 125% of your funds invested in the market portfolio via borrowing 25% of
the funds at the risk-free interest rate?
A)
0.25
B)
0.50
C)
0.75
D)
1.00
E)
1.25
Ans: E

Level: Basic

Subject: Portfolio Beta

Type: Problems

117.You form a portfolio by investing equally in A (beta=0.8), B (beta=1.2), the risk-free asset, and the market
portfolio. What is your portfolio beta?
A)
0.67
B)
0.75
C)
0.95
D)
1.12
E)
1.15
Ans: B

Level: Basic

Subject: Portfolio Beta

Type: Problems

118. Given the following information: The risk-free rate is 7%, the beta of stock A is 1.2, the beta of stock B is
0.8, the expected return on stock A is 13.5%, and the expected return on stock B is 11.0%. Further, we
know that stock A is fairly priced and that the betas of stocks A and B are correct. Which of the following
regarding stock B must be true?
A)
Stock B is also fairly priced.
B)
The expected return on stock B is too high.
C)
The expected return on stock A is too high.
D)
The price of stock B is too high.
E)
The price of stock A is too high.
Ans: D

Level: Basic

Subject: Reward To Risk Ratio

Type: Problems

119. Asset A has a reward to risk ratio of .075 and a beta of 1.5. The risk-free rate is 5%. What is the expected
return on A?
A)
11.25%
B)
12.25%
C)
13.50%
D)
14.25%
E)
16.25%
Ans: E

Level: Basic

Subject: Reward To Risk Ratio

Type: Problems

120. Asset A, which has an expected return of 12% and a beta of 0.8, plots on the security market line. Which of
the following is false about Asset B, another risky asset with a beta of 1.4?
A)
If the market is in equilibrium, Asset B also plots on the SML.
B)
If Asset B plots on the SML, then Asset B and Asset A have the same reward to risk ratio.
C)
Asset B has more systematic risk than both Asset A and the market portfolio.
D)
If Asset B plots on the SML with an expected return = 18%, then the risk-free rate must be 4%.
E)
If Asset B plots on the SML with an expected return = 18%, the expected return on the market must
be 15%.
Ans: E

Level: Basic

Subject: Security Market Line

Type: Problems

121. What is the expected return on asset A if it has a beta of 0.3, the expected market return is 14%, and the
risk-free rate is 5%?
A)
6.0%
B)
9.2%
C)
7.2%
D)
7.7%
E)
4.5%
Ans: D

Level: Basic

Subject: CAPM

Type: Problems

122. What is the expected market return if the expected return on asset A is 16% and the risk-free rate is 7%?
Asset A has a beta of 1.2.
A)
9.5%
B)
14.5%
C)
16.5%
D)
17.5%
E)
20.5%
Ans: B

Level: Basic

Subject: CAPM

Type: Problems

Use the following to answer questions 134-137:

Security
A
B
Risk-free asset

Return
15%
12%
5%

Standard Deviation
8%
14%
???

Beta
1.2
0.9
???

134. Which of A and B has the least total risk? The least systematic risk?
A)
A; A
B)
A; B
C)
B
D)
B; B
E)
Cannot be determined without more information.
Ans: B

Level: Intermediate

Subject: Total vs. Systematic Risk

Type: Problems

135. What is the value of systematic risk for a portfolio with 75% of the funds invested in A and 25% of the
funds invested in B?
A)
0.98
B)
1.13
C)
1.28
D)
1.40
E)
1.60
Ans: B

Level: Intermediate

Subject: Portfolio Beta

Type: Problems

136. What is the portfolio expected return and the portfolio beta if you invest 30% in A, 30% in B and 40% in
the risk-free asset?
A)
9.6%; 1.32
B)
9.6%; 1.00
C)
10.1%; 0.95
D)
10.1%; 0.72
E)
10.1%; 0.63
Ans: E

Level: Intermediate

Subject: Portfolio Return & Beta

Type: Problems

137. What is the portfolio expected return with 125% invested in A and the remainder in the risk-free asset via
borrowing at the risk-free interest rate?
A)
9.8%
B)
11.3%
C)
16.8%
D)
17.5%
E)
20.1%
Ans: D

Level: Intermediate

Subject: Portfolio Return With Short Position

Use the following to answer questions 138-142:

State
Boom
Normal

Probability
.3
.6

Return on A
12%
8%

Return on B
-2%
2%

Type: Problems

Bust

.1

4%

6%

138. What is the expected return for asset A?

A)
1.2%
B)
4.0%
C)
8.0%
D)
8.8%
E)
9.3%
Ans: D

Level: Intermediate

Subject: Expected Return

Type: Problems

139. What is the standard deviation of returns for asset A?

A)
1.3%
B)
1.9%
C)
2.5%
D)
2.4%
E)
6.4%
Ans: D

Level: Basic

Subject: Standard Deviation

Type: Problems

140. What is the standard deviation of returns for asset B?

A)
1.3%
B)
1.9%
C)
2.5%
D)
2.4%
E)
6.4%
Ans: D

Level: Basic

Subject: Standard Deviation

Type: Problems

141. What is the expected return on a portfolio with weights of 60% in asset A and 40% in asset B?
A)
2.2%
B)
4.4%
C)
5.8%
D)
8.8%
E)
9.9%
Ans: C

Level: Basic

Subject: Portfolio Return

Type: Problems

142. What is the standard deviation of a portfolio with weights of 60% in security A and the remainder in
security B?
A)
0.5%
B)
0.9%
C)
1.5%
D)
2.3%
E)
6.4%
Ans: A

Level: Basic

Subject: Portfolio Standard Deviation

Type: Problems