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Exam 13: Return, Risk, and the Security Market Line

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Question 131

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Draw the SML and plot asset C such that it has less risk than the market but plots above the SML, and asset D such that it has more risk than the market and plots below the SML. (Be sure to indicate where the market portfolio is on your graph.) Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium.

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Question 132

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The inclusion of thirty highly diverse securities in a portfolio eliminates the bulk of the ___ risk.

A) Market.
B) Unique.
C) Unexpected.
D) Expected.
E) Inflation.

F) B) and E)
G) B) and C)

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Question 133

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Using the Capital Asset Pricing Model (CAPM), an increase in the security's beta will increase the expected rate of return on an individual security. Assume that the security's beta, the risk-free rate of return, and the market rate of return are all positive.

Margaret has a portfolio consisting of a risk-free asset and a stock with a beta of 1.5. If she wishes to lower the overall beta of her portfolio Margaret could _____ the portfolio weight of the risk-free Asset and _____ the portfolio weight of the stock.

In the first chapter, it was stated that financial managers should act to maximize shareholder wealth. Why are the efficient markets hypothesis (EMH), the CAPM, and the SML so important in the accomplishment of this objective?

ABC Investment Corporation is considering a portfolio with 30% weighting in a cyclical stock and 70% weighting in a countercyclical stock. It is expected that there will be three economic states; Good, Average and Bad, each with equal probabilities of occurrence. The cyclical stock is expected To have returns of 12%, 5% and 1% in Good, Average and Bad economies respectively. The Countercyclical stock is expected to have returns of -8%, 2% and 14% in Good, Average and Bad Economies respectively. Given this information, calculate the portfolio expected return.

What is the standard deviation of a portfolio which is invested 10% in stock A, 35% in stock B and 55% in stock C?

A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.

Combining stocks with bonds in a portfolio helps reduce unsystematic risk in a portfolio.

You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return?

The market rate of return is 12% and the risk-free rate of return is 4%. A stock that has 5% more risk than the market has an actual return of 12%. Given this information, the stock is underpriced.

A portfolio is _________________.

What concept does the following graph illustrate?

Zelo, Inc. stock has a beta of 1.23. The risk-free rate of return is 4.5% and the market rate of return is 10%. What is the amount of the risk premium on Zelo stock?

The reward-to-risk ratio can be defined as the:

The principle of diversification states that spreading an investment over a number of assets will eliminate:

What is the risk premium for the following returns if the risk-free rate is 5%?

Risk that affects at most a small number of assets is called:

What is the standard deviation of the returns on a stock given the following information?

The slope of the security market line is the ________________.