2. Which one of the following best describes a portfolio?

A. Risky security

B. Security equally as risky as the overall market

C. New issue of stock

D. Group of assets held by an investor

E. Investment in a risk-free security

3. Stock A comprises 28 percent of Susan’s portfolio. Which one of the following terms applies to the 28 percent?

E. I, II, III, and IV

6. Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

E. Capital asset pricing model

7. The systematic risk principle states that the expected return on a risky asset depends only on which one of the following?

8. Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?

9. The security market line is a linear function which is graphed by plotting data points based on the relationship between which two of the following variables?

10. Which one of the following is the slope of the security market line?

A. Risk-free rate

B. Market risk premium

C. Beta coefficient

D. Risk premium on an individual asset

E. Market rate of return

11. The security market line is defined as a positively sloped straight line that displays the relationship between which two of the following variables?

A. Beta and standard deviation

B. Systematic and unsystematic risk

C. Nominal and real returns

12. Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

A. Risk-free rate

B. Market risk premium

C. Expected return minus the risk-free rate

D. Market rate of return

13. A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?

A. An increase in the rate of return in a recessionary economy

B. An increase in the probability of an economic boom

C. A decrease in the probability of a recession occurring

D. A decrease in the probability of an economic boom

14. The expected return on a security is currently based on a 22 percent chance of a 15 percent return given an economic boom and a 78 percent chance of a 12 percent return given a normal economy. Which of the following changes will decrease the expected return on this security?

I. an increase in the probability of an economic boom

II. a decrease in the rate of return given a normal economy

15. Which one of the following is the computation of the risk premium for an individual security? E(r) is the expected return on the security, r_f is the risk-free rate, b is the security’s beta, and E(r)_M is the expected rate of return on the market.

B. E(r) — E(r)_M

C. E(r) — (E(r)_M + r_f )

E.  b [E(r) — r_f ]

16. The expected rate of return on Delaware Shores, Inc. stock is based on three possible states of the economy. These states are boom, normal, and recession which have probabilities of occurrence of 20 percent, 75 percent, and 5 percent, respectively. Which one of the following statements is correct concerning the variance of the returns on this stock?

A. The variance must decrease if the probability of occurrence for a boom increases.

B. The variance will remain constant as long as the sum of the economic probabilities is 100 percent.

C. The variance can be positive, zero, or negative, depending on the expected rate of return assigned to each economic state.

D. The variance must be positive provided that each state of the economy produces a different expected rate of return.

E. The variance is independent of the economic probabilities of occurrence.

17. Which one of the following statements is correct?

A. The risk premium on a risk-free security is generally considered to be one percent.

B. The expected rate of return on any security, given multiple states of the economy, must be positive.

C. There is an inverse relationship between the level of risk and the risk premium given a risky security.

D. If a risky security is correctly priced, its expected risk premium will be positive.

E. If a risky security is priced correctly, it will have an expected return equal to the risk-free rate.

18. You are assigned the task of computing the expected return on a portfolio containing several individual stocks. Which one of the following statements is correct concerning this task?

A. The expected rate of return on the portfolio must be positive.

B. The arithmetic average of the betas for each security held in the portfolio must equal 1.0.

C. The portfolio beta must be 1.0.

D. The summation of the return deviation from the portfolio expected return for each economic state must equal zero.

E. The standard deviation of the portfolio must equal 1.0.

19. Consider a portfolio comprised of four risky securities. Assume the economy has three states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero?

A. The portfolio beta must be 1.0.

B. The portfolio expected rate of return must be the same for each economic state.

C. The portfolio risk premium must equal zero.

D. The portfolio expected rate of return must equal the expected market rate of return.

E. There must be equal probabilities that the state of the economy will be a boom or a bust.

20. Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?

A. A news bulletin that the anticipated layoffs by a firm will occur as expected on December 1

B. Announcement that the CFO of the firm is retiring June 1 st as previously announced

C. Announcement that a firm will continue its practice of paying a $3 a share annual dividend

D. Statement by a firm that it has just discovered a manufacturing defect and is recalling its product

E. The verification by senior management that the firm is being acquired as had been rumored

21. Which one of the following is the best example of unsystematic risk?

A. Inflation exceeding market expectations

B. A warehouse fire

26. Which one of the following best exemplifies unsystematic risk?

27. The risk premium for an individual security is based on which one of the following types of risk?

E. Unsystematic

28. Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security?

A. totally eliminated when a portfolio is fully diversified.

B. defined as the total risk associated with surprise events.

C. risk that affects a limited number of securities.

30. Which one of the following statements is correct?

A. A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0.

B. Any portfolio that is correctly valued will have a beta of 1.0.