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You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period. The overall expected rate of return On this stock will:


A) Be equal to one-half of 8% if there is a 50% chance of an economic boom.
B) Vary inversely with the growth of the economy.
C) Increase as the probability of a recession increases.
D) Be equal to 75% of 8% if there is a 75% chance of a boom economy.
E) Increase as the probability of a boom economy increases.

F) A) and D)
G) A) and C)

Correct Answer

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Which one of the following is an example of systematic risk?


A) The price of lumber declines sharply.
B) Airline pilots go on strike.
C) The Bank of Canada increases interest rates.
D) A blizzard hits St. John's.
E) People become diet conscious and avoid fast food restaurants.

F) All of the above
G) A) and D)

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What is the expected return on this portfolio? What is the expected return on this portfolio? A) 9.50% B) 9.67% C) 9.78% D) 10.59% E) 10.87%


A) 9.50%
B) 9.67%
C) 9.78%
D) 10.59%
E) 10.87%

F) A) and C)
G) B) and D)

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The common stock of PDS has a beta of .98 and an expected return of 12.34%. The risk-free rate of return is 4.1% and the market rate of return is 11.65%. Which one of the following statements is true Given this information?


A) The return on PDS stock will graph below the Security Market Line.
B) PDS stock is underpriced.
C) The expected return on PDS stock based on the Capital Asset Pricing Model is 15.52%.
D) PDS stock has more systematic risk than the overall market.
E) PDS stock is correctly priced.

F) D) and E)
G) A) and D)

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Unsystematic risk is also known as _____________________.


A) Total risk.
B) Market risk.
C) Asset-specific risk.
D) Non-diversifiable risk.
E) Specific risk.

F) A) and D)
G) All of the above

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You own a portfolio that is invested 50% in a risk-free asset and 50% in a stock that is equally as risky as the market. The risk-free asset has an expected return of 5%. Your portfolio has an Expected return of 8.80%. What is the expected return on the market?


A) 11.60%
B) 11.75%
C) 12.30%
D) 12.35%
E) 12.60%

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

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Give some examples to explain how diversification actually works to reduce portfolio risk.

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Student answers will vary. All stocks po...

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XYZ Investment Corporation is considering a portfolio with 70% weighting in a cyclical stock and 30% 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 25%, 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 expected return for the portfolio.


A) 8%
B) 7%
C) 6%
D) 5%
E) 4%

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

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You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return? You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return? A) 6.3% B) 6.8% C) 7.6% D) 10.0% E) 10.8%


A) 6.3%
B) 6.8%
C) 7.6%
D) 10.0%
E) 10.8%

F) A) and E)
G) D) and E)

Correct Answer

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If the portfolio beta is greater than one then the portfolio has more risk than the overall market.

A) True
B) False

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What is the expected return on a portfolio comprised of $4,500 in stock X and $5,500 in stock Y if the economy booms? What is the expected return on a portfolio comprised of $4,500 in stock X and $5,500 in stock Y if the economy booms? A) 10.16% B) 12.75% C) 13.33% D) 14.68% E) 15.30%


A) 10.16%
B) 12.75%
C) 13.33%
D) 14.68%
E) 15.30%

F) A) and D)
G) C) and D)

Correct Answer

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What is the standard deviation of a portfolio that is invested 40% in stock A and 60% in stock B, given the following information? What is the standard deviation of a portfolio that is invested 40% in stock A and 60% in stock B, given the following information? A) 2.18% B) 2.57% C) 2.69% D) 2.84% E) 3.13%


A) 2.18%
B) 2.57%
C) 2.69%
D) 2.84%
E) 3.13%

F) C) and D)
G) All of the above

Correct Answer

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Which of the following is the best definition of principle of diversification?


A) A theory showing that the expected return on any risky asset is a linear combination of various factors.
B) A risk that affects at most a small number of assets. Also called unique or asset-specific risks.
C) A risk that influences a large number of assets. Also called market risk.
D) Positively sloped straight line displaying the relationship between expected return and beta.
E) Principle stating that spreading an investment across a number of assets eliminates some, but not all, of the risk.

F) C) and D)
G) All of the above

Correct Answer

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What is the portfolio variance if 60% is invested in stock K and 40% is invested in stock L? What is the portfolio variance if 60% is invested in stock K and 40% is invested in stock L? A) .00000 B) .00091 C) .00108 D) .00172 E) .00249


A) .00000
B) .00091
C) .00108
D) .00172
E) .00249

F) None of the above
G) D) and E)

Correct Answer

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The process of eliminating systematic risk through the purchase of a number of assets is called:


A) Portfolio reduction.
B) The systematic risk principle.
C) The beta principle.
D) The risk-reward slope.
E) Portfolio diversification.

F) A) and B)
G) A) and C)

Correct Answer

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Which of the following stocks has the greatest expected return and by how much? Which of the following stocks has the greatest expected return and by how much? A) A by 6% B) B by 6% C) A by 3% D) B by 3% E) A and B have the same expected return.


A) A by 6%
B) B by 6%
C) A by 3%
D) B by 3%
E) A and B have the same expected return.

F) A) and D)
G) B) and E)

Correct Answer

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What is the beta of the following portfolio? What is the beta of the following portfolio? A) .98 B) 1.15 C) 1.19 D) 1.21 E) 1.23


A) .98
B) 1.15
C) 1.19
D) 1.21
E) 1.23

F) A) and B)
G) A) and E)

Correct Answer

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Which of A and B has the least total risk? The least systematic risk?


A) A; A
B) A; B
C) B
D) B; B
E) Cannot be determined without more information.

F) C) and D)
G) A) and D)

Correct Answer

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Ed Lawrence has $100,000 invested. Of that, $30,000 is invested in Tim Hortons stock, $25,000 is invested in T-bills, and the remainder is invested in corporate bonds. Which of the following is NOT Correct regarding his portfolio weights? (All values are current market values.)


A) Ed has 30% of his portfolio invested in stocks.
B) Ed has 45% of his portfolio invested in corporate bonds.
C) Ed has 70% of his portfolio invested in assets other than stocks.
D) Ed has 70% of his portfolio invested in risk-free assets.
E) If Ed sells his corporate bonds and buys Suncor stock with the proceeds, he will end up with 75% of his portfolio invested in stocks.

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

Correct Answer

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What is the expected return on a portfolio comprised of $8,000 in stock G and $6,000 in stock H if the economy is in a recession? What is the expected return on a portfolio comprised of $8,000 in stock G and $6,000 in stock H if the economy is in a recession? A) -5.21% B) -4.09% C) -3.14% D) -2.43% E) -2.21%


A) -5.21%
B) -4.09%
C) -3.14%
D) -2.43%
E) -2.21%

F) None of the above
G) B) and C)

Correct Answer

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