BUS785 In Class Work No.

1. The capital asset pricing model

A) provides a risk-return trade-off in which risk is measured in terms of the market
volatility.
B) provides a risk-return trade-off in which risk is measured in terms of beta.
C) measures risk as the coefficient of variation between security and market rates of return
D) depicts the total risk of a security

2. Sibling Incorporated has a beta of 1.0. If the expected return on the market is 14 percent, what is
the expected return on Sibling Incorporated's stock?
A) 10%
B) 14%
C) 18%
D) cannot be determined without the risk-free rate
3. You determine that XYZ common stock will return 15 percent. XYZ has a beta of 1.5. The
risk-free rate is 5 percent, and the market expected return is 15 percent. Which of the following
is most likely to happen:
A) You and other investors will buy up XYZ stock and its price will rise.
B) You and other investors will sell XYZ stock and its return will fall.
C) You and other investors will buy up XYZ stock and its return will rise.
D) You and other investors will sell XYZ stock and its price will fall.

4. If you hold a $1.3 million portfolio made up of the following stocks:

Market value
Beta
Stock A .2 million
1.5
B
.5 million
1.2
C
.6 million
.8
What is the beta of the portfolio?
A)
1.17
B)
1.14
C)
1.38
D)
1.06
E)
cannot be determined from the information given

5.

Which of the following is/are true of the Capital Asset Pricing Model?
A)
Its graph is referred to as the Characteristic Line
B)
It uses the T-bill rate as the risk-free rate
C)
It uses beta as a measure of market risk
D)
all of the above
E)
Only B and C above

6.

Stock A has a beta of 1.5 and stock B has a beta of 0.5. Which of the following
statements must be true a bout these securities? (Assume the market is in equilibrium.)
a)
When held in isolation, Stock A has greater risk than Stock B.
b)
Stock B would be a more desirable addition to a portfolio than Stock A.
c)
Stock A would be a more desirable addition to a portfolio than Stock B.
d)
The expected return on Stock A will be greater than that on Stock B.
e)
The expected return on Stock B will be greater than that on Stock A.

7. Which of the following is the slope of the security market line?

A) beta
B) one
C) It varies and is steeper for riskier securities.
D) the market risk premium
8. T. Martell Inc.'s stock has a 50% chance of producing a 30% return, a 25% chance of
producing a 9% return, and a 25% chance of producing a -25% return. What is Martell's
expected return?
a.
b.
c.
d.
e.

9.

11.0%
15.2%
16.0%
16.8%
17.6%

Magee Company's stock has a beta of 1.20, the risk-free rate is 4.50%, and the market
risk premium is 5.00%. What is Magee's required return?
a.
b.
c.
d.
e.

10.25%
10.50%
10.75%
11.00%
11.25%

10.

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following
statements is CORRECT?
a. Stock Ys return during the coming year will be higher than Stock Xs return.
b. Stock Ys return has a higher standard deviation than Stock X.
c. If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio will
have a beta significantly lower than 1.0.
d. None of above.

11.

Which of the following statements best describes what would be expected to happen as
you randomly select stocks and add them to your portfolio?
a. Adding more such stocks will reduce the portfolios unsystematic, or diversifiable,
risk.
b. Adding more such stocks will reduce the portfolios beta.
c. Adding more such stocks will increase the portfolios expected return.
d. Adding more such stocks will reduce the portfolios market risk.
e. Adding more such stocks will have no effect on the portfolios risk

12. Which of the following statement is NOT true for a portfolio made up of several
stocks?
a. The expected return = weighted average of each stocks expected return.
b. The portfolio standard deviation is >= the weighted average of each stocks
standard deviation.
c. The portfolio beta is the weighted average of each stocks beta
d. The portfolio standard deviation is <= the weighted average of each stocks
standard deviation.
13.

Beta is a statistical measure of

A) unsystematic risk.
B) stand alone risk.
C) the relationship between an investment's returns and the market
return.
D) default risk.
E) the standard deviation.

14. Which of the following statements is correct?

a.
b.
c.
d.
e.

lower beta stocks have a higher required return.

Two securities with the same stand-alone risk must have same betas.
Company-specific risk can be diversified away.
The market risk premium is not affected by investors attitudes about risk.
All above statements are correct.

15. Which of the following is/are true of the Capital Asset Pricing Model?
A) Its graph is referred to as the Charisma Line
B) It usually uses the T-bill rate as the risk-free rate
C) It uses beta as a measure of market risk
D) all of the above
E) Only B and C above
16 Inflation, recession, and high interest rates are economic events that are characterized as
a.
b.
c.
d.
e.

Company-specific risk that can be diversified away.

Market risk.
Systematic risk that can be diversified away.
Diversifiable risk.
Unsystematic risk that can be diversified away.

17. The stand alone risk of a stock is measured by

(a) the stock price
(b) stock returns
(c) the volatility of the stock return (standard deviation)
(d) the mean of the stock price
(e) none of the above
18. The risk that remains in a well-diversified stock portfolio is
(a) systematic risk (also called market risk)
(b) firm-level risk
(c) idiosyncratic risk
(d) unique risk
(e) none of the above

19. Betas measure

(a) firm-level risk
(b) unique risk
(c) systematic risk or market risk
(d) idiosyncratic risk
(e) none of the above
4

20. What is the beta of the market portfolio (market index)?

(a)0
(b)1
(c)1.5
(d) 2
(e) none of the above
Suppose that the risk-free rate is 5% and expected rate of return on the market portfolio is
15%.
21. What is risk premium on the market portfolio (this is called the market risk
premium)?
(a) 9%
(b) 15%
(c) 10%
(d) 14%
(e) none of the above

BUS785 In Class Work No. 3

1. The capital asset pricing model

A) provides a risk-return trade-off in which risk is measured in terms of the market
volatility.
B) provides a risk-return trade-off in which risk is measured in terms of beta.
C) measures risk as the coefficient of variation between security and market rates of return
D) depicts the total risk of a security

2. Sibling Incorporated has a beta of 1.0. If the expected return on the market is 14 percent, what is
the expected return on Sibling Incorporated's stock?
A) 10%
B) 14%
C) 18%
D) cannot be determined without the risk-free rate
3. You determine that XYZ common stock will return 15 percent. XYZ has a beta of 1.5. The
risk-free rate is 5 percent, and the market expected return is 15 percent. Which of the following
is most likely to happen:
A) You and other investors will buy up XYZ stock and its price will rise.
B) You and other investors will sell XYZ stock and its return will fall.
C) You and other investors will buy up XYZ stock and its return will rise.
D) You and other investors will sell XYZ stock and its price will fall.

4.. If you hold a $1.3 million portfolio made up of the following stocks:

Market value
Beta
Stock A .2 million
1.5
B
.5 million
1.2
C
.6 million
.8
What is the beta of the portfolio?
A)
1.17
B)
1.14
C)
1.38
D)
1.06
E)
cannot be determined from the information given

5. Which of the following is/are true of the Capital Asset Pricing Model?
A)
Its graph is referred to as the Characteristic Line
B)
It uses the T-bill rate as the risk-free rate
C)
It uses beta as a measure of market risk
D)
all of the above
E)
Only B and C above
6. Stock A has a beta of 1.5 and stock B has a beta of 0.5. Which of the following statements
must be true a bout these securities? (Assume the market is in equilibrium.)
a)
When held in isolation, Stock A has greater risk than Stock B.
b)
Stock B would be a more desirable addition to a portfolio than Stock A.
c)
Stock A would be a more desirable addition to a portfolio than Stock B.
d)
The expected return on Stock A will be greater than that on Stock B.
e)
The expected return on Stock B will be greater than that on Stock A.
7.
Which of the following is the slope of the security market line?
A) beta
B) one
C) It varies and is steeper for riskier securities.
D) the market risk premium
8. T. Martell Inc.'s stock has a 50% chance of producing a 30% return, a 25% chance of
producing a 9% return, and a 25% chance of producing a -25% return. What is Martell's
expected return?
a.
b.
c.
d.
e.

9.

11.0%
15.2%
16.0%
16.8%
17.6%

Magee Company's stock has a beta of 1.20, the risk-free rate is 4.50%, and the market
risk premium is 5.00%. What is Magee's required return?
a.
b.
c.
d.
e.

10.25%
10.50%
10.75%
11.00%
11.25%

10.

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following
statements is CORRECT?
a. Stock Ys return during the coming year will be higher than Stock Xs return.
b. Stock Ys return has a higher standard deviation than Stock X.
c. If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio will
have a beta significantly lower than 1.0.
d. None of above.

11.

Which of the following statements best describes what would be expected to happen as
you randomly select stocks and add them to your portfolio?
a. Adding more such stocks will reduce the portfolios unsystematic, or diversifiable,
risk.
b. Adding more such stocks will reduce the portfolios beta.
c. Adding more such stocks will increase the portfolios expected return.
d. Adding more such stocks will reduce the portfolios market risk.
e. Adding more such stocks will have no effect on the portfolios risk

12. Which of the following statement is NOT true for a portfolio made up of several
stocks?
a. The expected return = weighted average of each stocks expected return.
b. The portfolio standard deviation is >= the weighted average of each stocks
standard deviation.
c. The portfolio beta is the weighted average of each stocks beta
d. The portfolio standard deviation is <= the weighted average of each stocks
standard deviation.
13.

Beta is a statistical measure of

A) unsystematic risk.
B) stand alone risk.
C) the relationship between an investment's returns and the market
return.
D) default risk.
E) the standard deviation.

14. Which of the following statements is correct?

a.
b.
c.
d.
e.

lower beta stocks have a higher required return.

Two securities with the same stand-alone risk must have same betas.
Company-specific risk can be diversified away.
The market risk premium is not affected by investors attitudes about risk.
All above statements are correct.

15. Which of the following is/are true of the Capital Asset Pricing Model?
A) Its graph is referred to as the Charisma Line
B) It usually uses the T-bill rate as the risk-free rate
C) It uses beta as a measure of market risk
D) all of the above
E) Only B and C above
16 Inflation, recession, and high interest rates are economic events that are characterized as
a.
b.
c.
d.
e.

Company-specific risk that can be diversified away.

Market risk.
Systematic risk that can be diversified away.
Diversifiable risk.
Unsystematic risk that can be diversified away.

17. The stand alone risk of a stock is measured by

(a) the stock price
(b) stock returns
(c) the volatility of the stock return (standard deviation)
(d) the mean of the stock price
(e) none of the above
The risk of a stock is measured by the variance or standard deviation of stock
returns. Standard deviation is also called volatility.

18.The risk that remains in a well-diversified stock portfolio is

(a) systematic risk (also called market risk)
(b) firm-level risk
(c) idiosyncratic risk
(d) unique risk
(e) none of the above
Firm-level risk or idiosyncratic risk or unique risk can be diversified away in a
well-diversified portfolio.

19.Betas measure
(a) firm-level risk
(b) unique risk
(c) systematic risk or market risk
(d) idiosyncratic risk
(e) none of the above

20.What is the beta of the market portfolio (market index)?

(a)0
(b)1
(c)1.5
(d) 2
(e) none of the above
This is a fact, based on the definition of the Beta.
Suppose that the risk-free rate is 5% and expected rate of return on the market portfolio is
15%.
21.What is risk premium on the market portfolio (this is called the market risk
premium)?
(a) 9%
(b) 15%
(c) 10%
(d) 14%
(e) none of the above
The risk premium =15% -5% =10%

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