finance 13

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that yourstock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? expected return
Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie’s investments? portfolio
Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of thefollowing? portfolio weight
Which one of the following is a risk that applies to most securities? systematic
A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent. What type of risk does this news flash represent? unsystematic
The principle of diversification tells us that: spreading an investment across many diverse assets will eliminate some of the TOTAL RISK.
The _____ tells us that the expected return on a risky asset depends only on that asset’s nondiversifiablerisk. systematic risk principle
Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset? beta
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas? security market line
Which one of the following is represented by the slope of the security market line? market risk premium
Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security’s systematic risk? capital asset pricing model
Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the: cost of capital.
The expected return on a stock given various states of the economy is equal to the: weighted average of the returns for each economic state.
The expected return on a stock computed using economic probabilities is: a mathematical expectation based on a weighted average and not an actual anticipated outcome.
The expected risk premium on a stock is equal to the expected return on the stock minus the: risk-free rate.
Standard deviation measures which type of risk? total
The expected rate of return on a stock portfolio is a weighted average where the weights are based onthe: market value of the investment in each stock.
The expected return on a portfolio considers which of the following factors?I. percentage of the portfolio invested in each individual securityII. projected states of the economyIII. the performance of each security given various economic statesIV. probability of occurrence for each state of the economy I, II, III, and IV
The expected return on a portfolio:I. can never exceed the expected return of the best performing security in the portfolio.II. must be equal to or greater than the expected return of the worst performing security in the portfolio.III. is independent of the unsystematic risks of the individual securities held in the portfolio.IV. is independent of the allocation of the portfolio amongst individual securities. I, II, and III only
If a stock portfolio is well diversified, then the portfolio variance: may be less than the variance of the least risky stock in the portfolio
The standard deviation of a portfolio: can be less than the standard deviation of the least risky security in the portfolio.
The standard deviation of a portfolio: can be less than the weighted average of the standard deviations of the individual securities held in thatportfolio.
Which one of the following statements is correct concerning a portfolio of 20 securities with multiplestates of the economy when both the securities and the economic states have unequal weights? Given both the unequal weights of the securities and the economic states, an investor might be able tocreate a portfolio that has an expected standard deviation of zero.
Which one of the following events would be included in the expected return on Sussex stock? This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated.
Which one of the following statements is correct? Over time, the average unexpected return will be zero.
Which one of the following statements related to unexpected returns is correct? Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.
Which one of the following is an example of systematic risk? investors panic causing security prices around the globe to fall precipitously
Unsystematic risk: can be effectively eliminated by portfolio diversification.
Which one of the following is an example of unsystematic risk? consumer spending on entertainment decreased nationally
Which one of the following is least apt to reduce the unsystematic risk of a portfolio? reducing the number of stocks held in the portfolio
Which one of the following statements is correct concerning unsystematic risk? Eliminating unsystematic risk is the responsibility of the individual investor.
Which one of the following statements related to risk is correct?A. The beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio.B. Every portfolio that contains 25 or more securities is free of unsystematic risk.C. The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.D. Adding five additional stocks to a diversified portfolio will lower the portfolio’s beta.E. Stocks that move in tandem with the overall market have zero betas. C. The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.
Which one of the following risks is irrelevant to a well-diversified investor? unsystematic risk
Which of the following are examples of diversifiable risk?I. earthquake damages an entire townII. federal government imposes a $100 fee on all business entitiesIII. employment taxes increase nationallyIV. toymakers are required to improve their safety standards I and IV only
Which of the following statements are correct concerning diversifiable risks?I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities.II. There is no reward for accepting diversifiable risks.III. Diversifiable risks are generally associated with an individual firm or industry.IV. Beta measures diversifiable risk. I, II and III only
Which one of the following is the best example of a diversifiable risk? a firm’s sales decrease
Which of the following statements concerning risk are correct?I. Nondiversifiable risk is measured by beta.II. The risk premium increases as diversifiable risk increases.III. Systematic risk is another name for nondiversifiable risk.IV. Diversifiable risks are market risks you cannot avoid. I and III only
The primary purpose of portfolio diversification is to: eliminate asset-specific risk.
Which one of the following indicates a portfolio is being effectively diversified? a decrease in the portfolio standard deviation
How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio? 25
You want your portfolio beta to be 0.95. Currently, your portfolio consists of $4,000 invested in stock A with a beta of 1.47 and $3,000 in stock B with a beta of 0.54. You have another $9,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in therisk-free asset? Total investment =$4,000+$3,000+$9,000 =$16000Let x be invested in the risk-free asset$4,0001.47 +3,000 0.54 +($9,000-x)1.74 + x0 =0.95*$16000x =$4574.71Investment in risk free asset = $4574.71
You have a $12,000 portfolio which is invested in stocks A and B, and a risk-free asset. $5,000 is invested in stock A. Stock A has a beta of 1.76 and stock B has a beta of 0.89. How much needs to be invested in stock B if you want a portfolio beta of 1.10? $4,943.82wanted beta(portfolio) = stock A investment(stock A beta) + x(stock B beta)
You recently purchased a stock that is expected to earn 22 percent in a booming economy, 9 percent in a normal economy, and lose 33 percent in a recessionary economy. There is a 5 percent probability of a boom and a 75 percent chance of a normal economy. What is your expected rate of return on this stock? 1.25 percentE(r) = (booming profit x booming earnings) + (normal profit x normal earnings) + (recession profit x recession earnings)*profits add to 100%
The common stock of Manchester & Moore is expected to earn 13 percent in a recession, 6 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 5 percent while the probability of a recession is 45 percent. What is the expected rate of return on this stock? 8.65 percentE(r) = (booming profit x booming earnings) + (normal profit x normal earnings) + (recession profit x recession earnings)*recession earnings always negative
Jerilu Markets has a beta of 1.09. The risk-free rate of return is 2.75 percent and the market rate of returnis 9.80 percent. What is the risk premium on this stock? 7.68 percentrisk premium = beta (market rate of return – risk-free rate of return)
If the economy is normal, Charleston Freight stock is expected to return 15.7 percent. If the economyfalls into a recession, the stock’s return is projected at a negative 11.6 percent. The probability of a normaleconomy is 80 percent while the probability of a recession is 20 percent. What is the variance of the returns on this stock? 0.011925E(r) = (prob of normal econ. x normal stock return) + (prob of recession x – recession return) = BVar = prob of normal econ. (normal stock return – B)^2 + prob of recession (- recession return – B)^2
The returns on the common stock of New Image Products are quite cyclical. In a boom economy, thestock is expected to return 32 percent in comparison to 14 percent in a normal economy and a negative28 percent in a recessionary period. The probability of a recession is 25 percent while the probability of aboom is 10 percent. What is the standard deviation of the returns on this stock? 19.94 percent*calculate the E(r) and Var first, then square root variance!
You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected return of 8.7percent. Stock A has an expected return of 11.4 percent while stock B is expected to return 6.4 percent.What is the portfolio weight of stock A? 46 percentportfolio expected return = A expected return (x) + [ B expected return (1 – (x) ]
You own the following portfolio of stocks. What is the portfolio weight of stock C?A:number of shares 500price per share 14B: number of shares 200price per share 23C:number of shares 600price per share 18D: number of shares 100price per share 47 39.85 percentportfolio weight = (C number of shares x price per share) / [(A# x A$) + (B# x B$) + (C# x C$) + (D# x D$)

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