Finance Quiz Chapter 11 and 12

The appropriate opportunity cost of capital is the return that investors give up on alternative investments with the same risk
The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stock have no diversification of risk
The major benefit of diversification is to reduce the expected risk
What is a risk type that can be diversified by adding stock to a portfolio? Unique Risk
What risk is most important to a well-diversified investor in common stocks? Market Risk
The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that common stocks should offer a higher return than Treasury bills
In theory, the “market portfolio” should contain: all risky assets
Only macro events are reflected in the performance of the market portfolio because: unique risks have been diversified away
In practice, the market portfolio is often represented by a diversified stock market index
The sensitivity of a stock’s returns to the returns on a market portfolio is referred to as the stocks’s beta
When the overall market is up by 10% an investor with a portfolio of defensive stock will probably have positive portfolio returns less than 10%
When the overall market experiences a decline of 8%, an investor with a portfolio of aggressive stocks will probably experience negative portfolio return on greater than 8%
An investor divides her portfolio into thirds, with on part in Treasury bills, one part in a market index and one part in a diversified portfolio with beta of 1.50. What is the beta of the investors’s overall portfolio? 0.833
What is the beta of a three-stock portfolio including 25% of Stock A with a beta of .90, 40% Stock B with a beta of 1.05, and 35% Stock C with a beta of 1.73? 1.25
The beta of an investment in US Treasury bill is 0
If Treasury bills are yielding 10% at a time when the market risk premium is 6%, then the market portfolio should yield 16%
What will happen to the expected return on a stock with a beta of 1.5 and a market risk premium of 9% if the Treasury bill yield increases from 3% to 5%? The expected return will increase by 2%
What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a beta of 1.4 to yield 18% 14.6%
If Treasury bills yield 6% and the market risk premium is 9%, then a portfolio with a beta of 1.5 would be expected to yield 19.5%

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