1) Stock Q will return 18 percent in a boom and 9 percent in a normal economy. Stock R will return 9 percent in a boom and 5 percent in a normal economy. There is a 75 percent probability the economy will be normal. What is the standard deviation of a portfolio that is invested 40 percent in Stock Q and 60 percent in stock R?
A) 0.78%
B) 2.60%
C) 5.42%
D) 7.80%
E) 17.80%
2) You want your portfolio beta to be 1.3. Currently, the portfolio consists of $100 invested in stock A with a beta of 1.5 and $300 in stock B with a beta of .8. You have another $400 to invest and want to divide it between an asset with a beta of 1.7 and a risk-free asset. How much should you invest in the risk-free asset?
A) $17.65
B) $50.25
C) $200.15
D) $382.35
E) $400
3) A $4,000 portfolio is invested in stocks A and B plus a risk-free asset. $2,100 is invested in stock A. Stock A has a beta of 1.32 and stock B has a beta of .95. How much needs to be invested in stock B if the goal is to create a portfolio that will mimic the entire market?
A) $0
B) $1,266.67
C) $1,482.08
D) $1,292.63
E) $1,200
4) The systematic risk of the market is assigned a:
A) Beta of 1
B) Beta of 0
C) Standard deviation of 1
D) Standard deviation of 0
E) Variance of 1
5) You plotted the monthly rate of return for two securities against time for the past 48 months. If the pattern of the movements of these two sets of returns rose and fell together for the majority, but not all of the time, then the securities have:
A) No correlation at all
B) A weak negative correlation
C) A strong negative correlation
D) A strong positive correlation
E) A perfect positive correlation
6) The primary purpose of portfolio diversification is to:
A) Increase returns and risks
B) Eliminate all risks
C) Eliminate asset-specific risks
D) Lower both returns and risks
E) Eliminate systematic risks
7) 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
8) Which one of the following is an example of a nondiversifiable risk?
A) A poorly managed firm suddenly goes out of business due to lack of sales
B) A well managed firm reduces its work force and automates several jobs
C) A key employee of a firm suddenly resigns and accepts employment with a key competitor
D) A well respected chairman of the Federal Reserve suddenly resigns
E) A well respected president of a firm suddenly resigns
9) The expected return on a portfolio:
A) Can be greater than the expected return on the best performing security in the portfolio
B) Can be less than the expected return on the worst performing security in the portfolio
C) Is independent of the performance of the overall economy
D) Is limited by the returns on the individual securities within the portfolio
E) Is smaller than the standard deviation of the portfolio
10) The intercept point of the security market line is the rate of return that corresponds to:
A) The market rate of return
B) The beta of the market
C) Value of one
D) Value of zero
E) Risk-free rate of return