Chapter 10
Return and Risk: The Capital-Assets-Pricing Model Multiple Choice Questions
1. When a security is added to a portfolio the appropriate return and risk contributions are
A) the expected return of the asset and its standard deviation.
B) the expected return and the variance.
C) the expected return and the beta.
D) the historical return and the beta.
E) these both can not be measured.
Answer: C Difficulty: Medium Page: 255
2. When stocks with the same expected return are combined into a portfolio
A) the expected return of the portfolio is less than the weighted average expected return of the
stocks.
B) the expected return of the portfolio is greater than the weighted average expected return of the
stocks.
注册公司的流程C) the expected return of the portfolio is equal to the weighted average expected return of the
stocks.
D) there is no relationship between the expected return of the portfolio and the expected return of
the stocks.
E) None of the above.
Answer: C Difficulty: Easy Page: 261
3. Covariance measures the interrelationship between two securities in terms of
A) both expected return and direction of return movement.
B) both size and direction of return movement.
C) the standard deviation of returns.
D) both expected return and size of return movements.
E) the correlations of returns.
Answer: B Difficulty: Medium Page: 258-259
Use the following to answer questions 4-5:
GenLabs has been a hot stock the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows:
State of Economy Probability GenLabs Returns
Depression .05 -50%
Recession .10 -15
Mild Slowdown .20 5
Normal .30 15%
Broad Expansion .20 25
Strong Expansion .15 40
4. The expected return on GenLabs is:
A) 3.3%
B) 8.5%
C) 12.5%
D) 20.5%
E) None of the above.
Answer: C Difficulty: Medium Page: 256
Rationale:
E(r) = .05(-.5) + .10(-.15) + .2(.05) + .3(.15) + .2(.25) + .15(.40) = .125 = 12.5%
5. The variance of GenLabs returns is
A) .0207
B) .0428
C) .0643
D) .0733
E) None of the above.
Answer: B Difficulty: Medium Page: 256-257
Rationale:
.05(-.50 - .125)2 + .1(-.15 - .125)2 + .2(.05 - .125)2 + .3(.15 - .125)2 + .2(.25 - .125)2 + .15(.40 - .125)2 = .0428
6. The standard deviation of GenLabs returns is
A) .0845
B) .2069
C) .3065
D) .3358
E) None of the above.
Answer: B Difficulty: Medium Page: 256-257
Rationale:
.05(-.50 - .125)2 + .1(-.15 - .125)2 + .2(.05 - .125)2 + .3(.15 - .125)2 + .2(.25 - .125)2 + .15(.40 - .125)2 = .0428
(.0428) = .2069
7. The correlation between two stocks
A) can take in positive values.
B) can take on negative values.
C) cannot be greater than 1.
D) cannot be less than -1.
E) All of the above.
Answer: E Difficulty: Medium Page: 260-261
8. If the correlation between two stocks is –1, the returns
A) generally move in the same direction.
B) move perfectly opposite one another.
C) are unrelated to one another as it is < 0.
D) have standard deviations of equal size but opposite signs.
E) None of the above.
Answer: B Difficulty: Medium Page: 260
9. Stock A has an expected return of 20%, and stock B has an expected return of 4%. However, the
risk of stock A as measured by its variance is 3 times that of stock B. If the two stocks are
combined equally in a portfolio, what would be the portfolio's expected return?
A) 4%
B) 12%
C) 20%
D) Greater than 20%
E) Need more information to answer.
Answer: B Difficulty: Medium Page: 262
Rationale:
Rp = 20(.5) + 4(.5) = 12%
Use the following to answer questions 10-14:
Idaho Slopes (IS) and Dakota Steppes (DS) are both seasonal businesses. IS is a downhill skiing facility, while DS is a tour company that specializes in walking tours and camping. The equally likely returns on each company over the next year is expected to be:
Economy Idaho Slopes Dakota Steppes
Strong Downturn -10% 2%
Mild Downturn - 4% 7%
Slow Growth 4% 6%
Moderate Growth 12% 4%
Strong Growth 20% 4%
10. The mean expected returns of Idaho Slopes and Dakota Steppes are
A) 4.0%; 6.0%
B) 4.4%; 4.6%
C) 5.5%; 5.8%
D) 10.0%; 6.0%
E) None of the above
Answer: B Difficulty: Medium Page: 256
Rationale:
IS = (-10%-4%+4%+12%+20%)/5 = 4.4%
DS = (2%+7%+6%+4%+4%)/5 = 4.6%
11. The variances of Idaho Slopes and Dakota Steppes are
A) .0145; .00038
B) .011584; .000304
C) .006454; .000154
D) .0008068; .000193
E) None of the above
Answer: B Difficulty: Hard Page: 256-257
Rationale:
2IS = .2 = 0.011584
2DS = .2 = .000304
12. The covariance between the Idaho Slopes and Dakota Steppes returns is
A) .00187
B) .00240
C) .00028
D) .000056
E) None of the above
Answer: C Difficulty: Hard Page: 258-259
Rationale:
ISDS = = .00028
13. If Idaho Slopes and Dakota Steppes are combined in a portfolio with 50% invested in each, the
expected return and risk would be?
A) 4.5%; 0%
B) 4.5%; 5.48%
C) 5.0%; 0%
D) 5.625%; 37.2%
E) 8.0%; 8.2%
Answer: B Difficulty: Hard Page: 261-262
Rationale:
Rp = .5(.044) + .5(.046) = .045 = 4.5%
p = .5 = .05477 = 5.48%
14. The correlation between stocks A and B is the
A) covariance between A and B divided by the standard deviation of A times the standard
deviation of B.
B) standard deviation A divided by the standard deviation of B.
C) standard deviation of B divided by the covariance between A and B.
D) variance of A plus the variance of B dividend by the covariance.
E) None of the above.
Answer: A Difficulty: Medium Page: 260
15. A portfolio is entirely invested into Buzz's Bauxite Boring Equity, which is expected to return 16%,
and Zum's Inc. bonds, which are expected to return 8%. Sixty percent of the funds are invested in Buzz's and the rest in Zum's. What is the expected return on the portfolio?
A) 6.4%
B) 9.6%
C) 12.8%
D) 24.2%
E) Need additional information.
Answer: C Difficulty: Medium Page: 262
Rationale:
R p = .60(R Buzz)+.40(R Zum) = .60(16%) + .40(8%) = 12.8%
16. You have plotted the data for two securities over time on the same graph, ie., the month return of
each security for the last 5 years. If the pattern of the movements of the two securities rose and fell as the other did, these two securities would have
A) no correlation at all.
B) a weak negative correlation.
C) a strong negative correlation.
D) a strong positive correlation.
E) one can not get any idea of the correlation from a graph.
Answer: D Difficulty: Easy Page: 260
17. If the covariance of stock 1 with stock 2 is -.0065, then what is the covariance of stock 2 with stock
1?
A) -.0065
B) +.0065
C) greater than +.0065
D) less than -.0065
E) Need additional information.
Answer: A Difficulty: Medium Page: 258-259
18. If you have a portfolio of two risky stocks which turns out to have no diversification benefit. The
reason you have no diversification is the returns
A) are too small.
B) move perfectly opposite of one another.
C) are too large to offset.
D) move perfectly with one another.
E) are completely unrelated to one another.
Answer: D Difficulty: Easy Page: 264
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