1. Assume stocks A and B have had identical stock prices every day for the past three years. Stock A

pays a dividend but Stock B does not. Which one of these statements applies to these stocks for the last

three years?

A. Their annual total rates of return are equal.

B. Stock A's total return has been higher than Stock B's every year.

C. Stock B's capital gain has exceeded Stock A's every year.

D. Stock A's total return had to be positive every year.

E. Stock B's holding period return exceeded that of Stock A.

2. Which one of these stocks is most apt to have the highest (least negative) rate of return assuming

that each stock has a negative total return for the period?

A. Highdividend, high standard deviation stock

B. No dividend, high standard deviation stock

C. Highdividend, low standard deviation stock

D. Lowdividend, high standard deviation stock

E. Lowdividend, low standard deviation stock

3. Given a normal distribution, assume you want to earn a rate of return that plots more than three

standard deviations above the mean. What is your probability of earning such a return in any one year?

A. Zero percent

B. Less than .5 percent

C. Between .5 and 1 percent

D. Between 1 and 2 percent

E. More than 2 percent

4. Suppose a portfolio had an arithmetic average return of 8 percent for a 4year period. Which one of

these statements must be true regarding this portfolio for the period?

A. At least one of the four years produced an annual rate of return of 8 percent.

B. If the standard deviation of the portfolio is greater than zero, then the geometric average

portfolio return is less than 8 percent.

C. The standard deviation of the portfolio must be lower than the standard deviation of a

comparable portfolio that had an arithmetic average return of 9 percent.

D. If the standard deviation of the portfolio is zero, then the geometric average return must also be

zero.

E. The holding period return must be less than 8 percent.

5. You are comparing the returns on two portfolios for a 10year period. Portfolio I has a lower

dispersion of returns and a higher average rate of return than Portfolio II. Given this, what do you know

with certainty?

A. Portfolio I has a lower standard deviation than Portfolio II.

B. Portfolio I consists of more dividendpaying stocks than Portfolio II.

C. Portfolio II has less total risk than Portfolio I.

D. Portfolio I will outperform Portfolio II over the next 10 years.

E. Portfolio II consists of more individual stocks than Portfolio I.

6. Over the period 19252012, stocks outperformed bonds by a wide margin. What conclusion should

you draw from this performance?

A. Stocks will have a higher rate of return than bonds in any given year.

B. Investors should only purchase stocks.

C. Any stock you select will outperform a bond over the longterm.

D. On an annual basis, stock returns will exceed the rate of inflation but bond returns may or may

not.

E. Stocks are riskier than bonds.

7. Which one of these statements must be correct?

A. Longterm expected rates of return are inversely related to risk premium.

B. The lower the risk premium the higher a security's average rate of return.

C. Risk premium is defined as the nominal rate of return minus the rate of inflation.

D. One security can have both a higher standard deviation and a lower risk premium than another

security for the same historical period.

E. A security with a standard deviation of 9.9 percent for a stated historical period will have a

higher average rate of return for that period than a security with a standard deviation of 9.6 percent.

8. The average squared difference between the actual return and the average return is called the:

A. excess return.

B. variance.

C. standard deviation.

D. risk premium.

E. volatility return.

9. The average compound return earned per year over a multiyear period is called the _____ average

return.

A. real

B. standard

C. arithmetic

D. variant

E. geometric

10. The excess return you earn by moving from a relatively riskfree investment to a risky investment is

called the:

A. geometric average return.

B. inflation premium.

C. risk premium.

D. time premium.

E. arithmetic average return.

11. The capital gains yield plus the dividend yield on a security is called the:

A. geometric return.

B. total return.

C. average period return.

D. variance of returns.

E. current yield.

12. Which one of the following is a correct ranking of securities based on their volatility over the period

of 1926 to 2012? Rank from highest volatility to lowest volatility.

A. Smallcompany stocks, largecompany stocks, longterm government bonds

B. Largecompany stocks, U.S. Treasury bills, longterm government bonds

C. Smallcompany stocks, longterm government bonds, largecompany stocks

D. Longterm corporate bonds, largecompany stocks, U.S. Treasury bills

E. Smallcompany stocks, longterm corporate bonds, largecompany stocks

13. Which one of these statements correctly reflects historical history from 1926 through 2012?

A. Largecompany stocks have never returned more than 40 percent in a single year.

B. In 2012, the rate of inflation was slightly higher than the average inflation rate for the period of

1926 through 2012.

C. U.S. Treasury bills have had a positive rate of return every single year.

D. The return on U.S. Treasury bills has exceeded the rate of inflation every single year.

E. The rate of inflation as measured by the consumer price index has been positive every single

year.

14. The risk premium is computed by ______ the average rate of return for an investment.

A. subtracting the inflation rate from

B. adding the inflation rate to

C. subtracting the average return on U.S. Treasury bills from

D. adding the average return on U.S. Treasury bills to

E. subtracting the average return on longterm government bonds from

15. Winter's just declared that it is increasing its annual dividend from $.82 a share to $.85 a share. If

the stock price should remain constant, then:

A. the capital gains yield would decrease.

B. the capital gains yield would increase.

C. the dividend yield would remain constant.

D. the dividend yield would increase.

E. neither the capital gains yield nor the dividend yield would change.

16. When forecasting the future, the arithmetic average historical return is probably too ____ of an

estimate for longer periods and the geometric average historical return is:

A. high; probably too low.

B. high: probably accurate.

C. low: probably too high.

D. low: probably also too low.

E. high; probably also too high.

17. This morning you purchased one share of stock for $14. The stock pays $.20 per share each quarter

as a dividend. What must the stock price be one year from now if you want to earn a total return of 12

percent for the year?

A. $14.54

B. $14.88

C. $15.01

D. $13.12

E. $13.46

18. One year ago, Barkley's stock sold for $20 a share. During last year, Barkley's paid $1.40 per share in

dividends and saw its stock price increase by five percent for the year. Today, the firm announced that it

will pay $1.43 per share in dividends this year. What do you know with certainty about the performance

of Barkley's stock for this year?

A. The total rate of return will be higher this year than it was last year.

B. The dividend yield for this year will be higher than it was last year.

C. The capital gains yield will be positive.

D. The dividend yield for this year will be lower than it was last year.

E. The total rate of return will be lower this year than it was last year.

19. One year ago, Stacey purchased 300 shares of IXC Tek stock at a price of $11.23 per share. The stock

pays an annual dividend of $.23 per share. Today, Stacey sold all of her shares for $16.20 per share.

What is her total dollar return on this investment?

A. $1,703

B. $1,560

C. $1,422

D. $1,389

E. $1,491

20. Winslow stock is currently selling for $48 a share. The stock has a dividend yield of 3.1 percent. How

much dividend income will you receive per year if you purchase 600 shares of this stock?

A. $148.80

B. $390.47

C. $892.80

D. $639.05

E. $1,860.00

21. You just sold 250 shares of stock for $37.75 a share. One year ago, you purchased the stock for

$40.50 a share and have received dividends totaling $2.64 per share. What is your capital gain in dollars?

A. $687.50

B. $975.50

C. $687.50

D. $975.50

E. $1,347.50

22. Deltona stock sold for $38.60 a share one year ago and pays an annual dividend of $1.55. What does

the stock price need to be today for the annual capital gain to be 7.5 percent?

A. $39.95

B. $40.08

C. $41.50

D. $41.63

E. $43.18

23. Today, you sold 200 shares of SLG stock for a total of $10,018. Last year, you purchased the stock

for $52.30 a share and received $326 in dividends. What is your total rate of return on this investment?

A. 1.11%

B. .82%

C. .37%

D. 7.34%

E. 1.16%

24. Assume the riskfree rate and the market risk premium are both positive. Trevor currently owns a

portfolio comprised of risky and riskfree securities. The portfolio has an expected return of 11.2

percent, a standard deviation of 16.2 percent, and a beta of 1.21. He has decided that he would prefer a

higher expected return. Which one of these actions should he take?

A. Replace a stock in his current portfolio with a beta of 1.34 with a stock that has a 1.02 beta

B. Sell a portion of the risky assets and use the proceeds to purchase riskfree securities

C. Lower both the portfolio standard deviation and beta

D. Increase the portfolio weight of the risky assets without affecting the total portfolio value

E. Increase the standard deviation of the portfolio without affecting the portfolio beta

25. Eight months ago, Isaac purchased 50 shares of stock at a price of $65.90 a share. To date, he has

received two quarterly dividends of $1.03 a share each. If he sells his shares at the current price of

$52.80 a share, what will be his total percentage return?

A. 11.27%

B. 9.38%

C. 16.75%

D. 20.91%

E. 13.40%

26. A stock had annual returns of 8 percent, 2 percent, 4 percent, and 20 percent over the past four

years. What is the standard deviation of these returns?

A. 16.33%

B. 16.09%

C. 7.10%

D. 9.29%

E. 7.99%

27. A stock has an expected rate of return of 14.2 percent and a standard deviation of 23.4 percent.

Which one of the following best describes the probability that this stock will lose more than 1/3 of its

value in any one year?

A. Less than .1%

B. Approximately 2.25%

C. Approximately 1%

D. Less than .26%

E. Approximately 4.60%

28. A stock returned 13 percent, 18 percent, 16 percent and 1 percent annually for the past four years.

Based on this information, what is the 99.74 percent probability range for any one given year?

A. 8.4 to 11.7%

B. 16.1 to 22.6%

C. 24.5 to 34.3%

D. 42.4 to 49.4%

E. 54.8 to 61.3%

29. A stock had returns of 7 percent, 15 percent, and 1 percent for the past three years. Based on these

returns, what is the probability that this stock will earn at least 15 percent in any one given year?

A. 8.00%

B. 2.28%

C. 15.87%

D. 4.56%

E. 31.74%

30. A stock had returns of 19 percent, 12 percent, 29 percent, 35 percent, and 4 percent annually for

the past five years. Based on these returns, what is the approximate probability that this stock will earn

at least 30 percent in any one given year?

A. 8%

B. 2%

C. 16%

D. 5%

E. .5%

31. What are the arithmetic and geometric average returns for a stock with annual returns of 4 percent,

12 percent, 8 percent and 9 percent?

A. 8.25%; 6.25%

B. 4.25%; 4.89%

C. 4.25%; 3.96%

D. 8.25%; 7.89%

E. 8.25%; 8.21%

32. The price of a stock for Years 1 through 4 was $23.19, $24.00, $23.18, and $24.86, respectively. The

stock paid dividends per share of $.23, $.24, and $.25 for Years 2 through 4, respectively. What is the

geometric average rate of return for the period?

A. 3.2%

B. 3.4%

C. 3.6%

D. 3.8%

E. 4.0%

33. One year ago, Ted purchased 100 shares of stock at $18.79 a share. Today, he received a total of

$130 in dividends and sold his shares for a total of $1,211. What was his total rate of return?

A. 8.69%

B. 7.94%

C. 44.43%

D. 42.47%

E. 28.63%

34. The annual returns for KLO stock for the last three years are 11.2 percent, 16.4 percent and 3.8

percent. Assuming no dividends were paid, what was the 3year holding period return?

A. 10.47%

B. 15.70%

C. 31.40%

D. 34.36%

E. 36.52%

35. Assume the return on largecompany stocks is currently 11.5 percent. The risk premium on largecompany

stocks is 8.6 percent and the inflation rate is 2.4 percent. What is the current riskfree rate of

return?

A. 2.9%

B. 7.4%

C. 8.4%

D. 10.6%

E. 12.6%

36. Assume inflation averaged 3.2 percent during a period in which U.S. Treasury bills earned 4.3

percent. What was the average real rate of return on largecompany stocks if the risk premium on those

stocks was 7.4 percent for the period?

A. 8.5%

B. 3.2%

C. .1%

D. 7.5%

E. 14.9%

37. Assume a $1 investment in a stock 36 years ago is now worth $54.82. What is the geometric average

return for the period?

A. 10.52%

B. 11.76%

C. 12.08%

D. 12.67%

E. 14.03%

38. The principle of diversification tells us that:

A. concentrating an investment in three companies all within the same industry will greatly reduce

the overall risk of a portfolio.

B. concentrating an investment in two or three large stocks will eliminate all of a portfolio's risk.

C. spreading an investment across many diverse assets will eliminate all of a portfolio's risk.

D. spreading an investment across many diverse assets will lower a portfolio's level of risk.

E. spreading an investment across five diverse companies will not lower a portfolio's level of risk.

39. Which one of these measures the interrelationship between two securities?

A. Standard deviation

B. Variance

C. Beta

D. Covariance

E. Alpha

40. The beta of a security is calculated by dividing the:

A. variance of the market by the covariance of the security with the market.

B. correlation of the security with the market by the variance of the security.

C. variance of the market by the correlation of the security with the market.

D. covariance of the security with the market by the variance of the market.

E. covariance of the security with the market by the variance of the security.

41. Which one of the following is an example of a nondiversifiable risk?

A. A poorly managed firm suddenly goes out of business due to lack of sales

B. A well managed firm reduces its work force and automates several jobs

C. A key employee of a firm suddenly resigns and accepts employment with a key competitor

D. A well respected chairman of the Federal Reserve suddenly resigns

E. A well respected president of a firm suddenly resigns

42. The risk premium for an individual security is computed by:

A. adding the riskfree rate to the security's expected return.

B. multiplying the security's beta by the market risk premium.

C. multiplying the security's beta by the riskfree rate of return.

D. dividing the market risk premium by the beta of the security.

E. dividing the market risk premium by the quantity (1 beta).

43. Standard deviation measures _____ risk.

A. total

B. nondiversifiable

C. unsystematic

D. economic

E. systematic

44. When computing the expected return on a portfolio of stocks the portfolio weights are based on

the:

A. number of shares owned in each stock.

B. price per share of each stock.

C. market value of the total shares held in each stock.

D. original amount invested in each stock.

E. cost per share of each stock held.

45. The expected return on a portfolio:

A. can be greater than the expected return on the best performing security in the portfolio.

B. can be less than the expected return on the worst performing security in the portfolio.

C. is independent of the performance of the overall economy.

D. is limited by the returns on the individual securities within the portfolio.

E. is an arithmetic average of the returns of the individual securities when the weights of those

securities are unequal.

46. If a stock portfolio is well diversified, then the portfolio variance:

A. must be equal to or greater than the variance of the least risky stock in the portfolio.

B. will be a weighted average of the variances of the individual securities in the portfolio.

C. will equal the variance of the most volatile stock in the portfolio.

D. will be an arithmetic average of the variances of the individual securities in the portfolio.

E. may be less than the variance of the least risky stock in the portfolio.

47. Which one of the following statements is correct concerning the standard deviation of a portfolio?

A. Standard deviation is used to determine the amount of risk premium that should apply to a

portfolio.

B. The greater the diversification of a portfolio, the greater the standard deviation of that portfolio.

C. Standard deviation measures only the systematic risk of a portfolio.

D. The standard deviation of a portfolio can often be lowered by changing the weights of the

securities in the portfolio.

E. The standard deviation of a portfolio is equal to a weighted average of the standard deviations

of the individual securities held within the portfolio.

48. The standard deviation of a portfolio will tend to increase when:

A. the portfolio concentration in a single cyclical industry increases.

B. one of two stocks related to the airline industry is replaced with a third stock that is unrelated to

the airline industry.

C. a risky asset in the portfolio is replaced with U.S. Treasury bills.

D. the weights of the various diverse securities become more evenly distributed.

E. shortterm bonds are replaced with Treasury Bills.

49. Systematic risk is measured by:

A. beta.

B. the arithmetic average.

C. the geometric average.

D. the covariance.

E. the standard deviation.

50. Which one of the following is the best example of systematic risk?

A. The price of lumber declines sharply

B. Inflation rises unexpectedly

C. Airline pilots go on strike

D. A hurricane hits a tourist destination

E. People become diet conscious and avoid fast food restaurants

51. The systematic risk of the market is assigned a:

A. beta of 1.

B. beta of 0.

C. standard deviation of 1.

D. standard deviation of 0.

E. variance of 1.

52. Unsystematic risk:

A. can be effectively eliminated through portfolio diversification.

B. is measured by beta.

C. is compensated for by the risk premium.

D. is nondiversifiable.

E. is related to the overall economy.

53. The primary purpose of portfolio diversification is to:

A. increase returns and risks.

B. eliminate all risks.

C. eliminate assetspecific risk.

D. lower both returns and risks.

E. eliminate systematic risk.

54. Which one of the following would tend to indicate that a portfolio is being effectively diversified?

A. A decrease in the portfolio standard deviation

B. An increase in the portfolio rate of return

C. An increase in the portfolio beta

D. An increase in the portfolio standard deviation

E. A constant portfolio beta

55. A security that is fairly priced will have a return that lies _____ the security market line.

A. below

B. on or below

C. on

D. on or above

E. above

56. A stock with an actual return that lies above the security market line:

A. has less systematic risk than the overall market.

B. has more risk than warranted based on the realized rate of return.

C. has yielded a return equivalent to the level of risk assumed.

D. has more systematic risk than the overall market.

E. has yielded a higher return than expected for the level of risk assumed.

57. The market risk premium is computed by:

A. adding the riskfree rate of return to the inflation rate.

B. adding the riskfree rate of return to the market rate of return.

C. subtracting the riskfree rate of return from the inflation rate.

D. subtracting the riskfree rate of return from the market rate of return.

E. multiplying the riskfree rate of return by a beta of one.

58. Welldiversified portfolios have negligible:

A. systematic risks.

B. unsystematic risks.

C. expected returns.

D. variances.

E. covariances.

59. What is the first step an investor takes when making an investment decision according to the

separation principle?

A. Determining the mix of risky and riskfree assets he/she will hold

B. Quantifying the amount of risk he/she is willing to accept

C. Estimating future inflation and riskfree rates

D. Determining the portfolio of risky assets that he/she will hold

E. Specifying a desired rate of return

60. The risk of an individual security that will be compensated by the market depends upon the:

A. standard deviation of that security.

B. covariance of that security with the market.

C. expected rate of return on that security.

D. security's historical variance.

E. industry most associated with that security.

61. A stock with a beta of zero would be expected to have a rate of return equal to:

A. the prime rate.

B. the average AAA bond.

C. the market rate.

D. the riskfree rate.

E. zero.

62. The combination of the efficient set of portfolios with a riskless lending and borrowing rate results

in:

A. the capital market line which shows that investors will only invest in the riskless asset.

B. the capital market line which shows that investors will invest in a combination of the riskless

asset and the tangency portfolio.

C. the security market line which shows that all investors will invest in the riskless asset only.

D. the security market line which shows that all investors will invest in a combination of the riskless

asset and the tangency portfolio.

E. the capital market line which shows that investors will invest at the vertical intercept point of

that line.

63. According to the capital asset pricing model, the expected return on a security is:

A. negatively and linearly related to the security's beta.

B. positively and linearly related to the security's beta.

C. positively and nonlinearly related to the security's beta.

D. positively and linearly related to the security's variance.

E. negatively and nonlinearly related to the security's beta.

64. The separation principle states that an investor will:

A. choose any efficient portfolio and invest some amount in the riskless asset to generate the

expected return.

B. never choose to invest in the riskless asset because the expected return on the riskless asset is

lower over time.

C. invest only in the riskless asset and tangency portfolio choosing the weights of each based on

his/her individual risk tolerance.

D. randomly select any efficient portfolio.

E. select a portfolio based solely on his/her desired rate of return while ignoring the associated

risks of their selection.

65. Amy has a portfolio with a beta of 1.26. She has decided to lower her investment risk. Adding which

one of the following securities to her portfolio is most assuredly going to lower the risk of the portfolio?

A. A stock that has a covariance with the market of .89

B. A security that has a standard deviation of 11 percent

C. A security with a beta of 1.58

D. U.S. Treasury bills

E. A mix of smallcompany and largecompany stocks

66. The correlation between stocks A and B is equal to the:

A. standard deviation of A divided by the standard deviation of B.

B. covariance of A and B divided by the product of the standard deviation of A multiplied by the

standard deviation of B.

C. standard deviation of B divided by the covariance between A and B.

D. sum of the variances of A and B divided by the covariance of A and B.

E. product of the standard deviation of A multiplied by the standard deviation of B divided by

covariance of AB with the market.

67. You have a portfolio of two risky stocks that has no diversification benefit. The lack of any

diversification benefit must be due to the fact that:

A. the returns on the two stocks move perfectly in sync with one another.

B. the returns on the two stocks move perfectly opposite of one another.

C. one security must be a riskfree security.

D. the portfolio is equally weighted between the two stocks.

E. the two stocks are completely unrelated to one another.

68. Assume two securities are negatively correlated. If these two securities are combined into an

equally weighted portfolio, the portfolio standard deviation must be:

A. equal to the standard deviation of the overall market.

B. equal to the arithmetic average of the standard deviations of the individual securities.

C. equal to zero.

D. less than the weighted average of the standard deviations of the individual securities.

E. equal to or greater than the lowest standard deviation of the two securities.

69. You want your portfolio beta to be 1.3. Currently, the portfolio consists of $100 invested in stock A

with a beta of 1.5 and $300 in stock B with a beta of .8. You have another $400 to invest and want to

divide it between an asset with a beta of 1.7 and a riskfree asset. How much should you invest in the

riskfree asset?

A. $17.65

B. $50.25

C. $200.15

D. $382.35

E. $400.00

70. A $4,000 portfolio is invested in stocks A and B plus a riskfree asset. $2,100 is invested in stock A.

Stock A has a beta of 1.32 and stock B has a beta of .95. How much needs to be invested in stock B if the

goal is to create a portfolio that will mimic the entire market?

A. $0

B. $1,266.67

C. $1,482.08

D. $1,292.63

E. $1,200.00

71. You recently purchased a stock that is expected to earn 15 percent in a booming economy, 9

percent in a normal economy and lose 5 percent in a recessionary economy. There is a 15 percent

probability of a boom, a 75 percent chance of a normal economy, and a 10 percent chance of a

recession. What is your expected rate of return on this stock?

A. 8.00%

B. 7.45%

C. 8.50%

D. 7.75%

E. 9.50%

72. The Inferior Goods Co. stock is expected to earn 22 percent in a recession, 7 percent in a normal

economy, and lose 14 percent in a booming economy. The probability of a boom is 20 percent while the

probability of a normal economy is 55 percent. What is the expected rate of return on this stock?

A. 6.55%

B. 12.15%

C. 4.75%

D. 8.60%

E. 11.75%

73. Alpha stock has a beta of 1.43. The riskfree rate of return is 3.5 percent and the market rate of

return is 11 percent. What is the amount of the risk premium on Alpha stock?

A. 5.24%

B. 5.50%

C. 7.50%

D. 8.77%

E. 10.73%

74. KNF stock is quite cyclical. In a boom economy, the stock is expected to return 30 percent in

comparison to 12 percent in a normal economy and a negative 17 percent in a recessionary period. The

probability of a recession is 25%. There is a 15% chance of a boom economy. What is the standard

deviation of the returns this stock?

A. 10.15%

B. 12.60%

C. 15.43%

D. 17.46%

E. 25.04%

75. You have a 2stock portfolio with an expected return of 10.6 percent. Stock A has an expected

return of 12 percent while Stock B is expected to return 8 percent. What is the portfolio weight of Stock

A?

A. 76%

B. 72%

C. 61%

D. 65%

E. 68%

76. A portfolio consists of $10,500 of Stock A, $21,600 of Stock B, and $27,000 of Stock C. The expected

returns on Stocks A, B, and C are 7 percent, 11 percent and 5 percent, respectively. What is the overall

portfolio expected rate of return?

A. 2.98%

B. 3.21%

C. 5.88%

D. 7.55%

E. 7.87%

77. The economy has a 14 percent chance of booming. Otherwise, the economy will be normal. Stock G

will return 15 percent in a boom and 8 percent in a normal economy. Stock H will return 9 percent in a

boom and 6 percent in a normal economy. What is the variance of a portfolio consisting of $2,500 of

stock G and $7,500 of stock H?

A. .000167

B. .000193

C. .002098

D. .013879

E. .014002

78. Stock A will return 15 percent in a normal economy and lose 14 percent in a recession. Stock B deals

with inferior goods and will return 7 percent in a normal economy and 18 percent in a recession. There

is a 20 percent chance of a recession occurring. What is the standard deviation of a portfolio that is

equally weighted between the two stocks?

A. 3.60%

B. 6.50%

C. 1.30%

D. .13%

E. .36%

79. A portfolio is comprised of 30 percent of stock X, 55 percent of stock Y, and 15 percent of stock Z.

Stock X has a beta of .87, stock Y has a beta of 1.48, and stock Z has a beta of 1.04. What is the portfolio

beta?

A. 1.012

B. 1.111

C. 1.157

D. 1.190

E. 1.231

80. You would like to combine a risky stock with a beta of 1.6 with U.S. Treasury bills in such a way that

the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the

portfolio should be invested in the risky asset?

A. 16.00%

B. 62.50%

C. 52.55%

D. 47.45%

E. 37.5%

81. The riskfree rate of return is 3.3 percent and the market risk premium is 7.5 percent. What is the

expected rate of return on a stock with a beta of 1.62?

A. 9.12%

B. 10.10%

C. 15.45%

D. 17.50%

E. 15.36%

82. A stock has an expected return of 14.21 percent. The return on the market is 11.8 percent and the

riskfree rate of return is 3.2 percent. What is the beta of this stock?

A. .65

B. 1.09

C. 1.42

D. 1.28

E. 1.78

83. PPO stock has a beta of 1.12 and an expected return of 12.64 percent. The riskfree rate of return is

3.85 percent. What is the expected return on the market?

A. 7.85%

B. 8.04%

C. 11.62%

D. 11.70%

E. 12.16%

84. The expected return on HiLo stock is 12.04 percent while the expected return on the market is 10.52

percent. The beta of HiLo is 1.28. What is the riskfree rate of return?

A. 5.09%

B. 3.2%

C. 3.7%

D. 4.2%

E. 4.87%

85. BBG stock has a beta of .86 and an expected return of 9.51 percent. The riskfree rate of return is

3.26 percent and the market rate of return is 11.14 percent. Which one of the following statements is

true given this information?

A. BBG stock is correctly priced.

B. The return on BBG stock will graph below the security market line.

C. The expected return on BBG stock based on the capital asset pricing model is 9.88 percent.

D. BBG stock has more systematic risk than the overall market.

E. BBG stock is underpriced.

86. Stock A has a beta of .92 and an expected return of 9.04 percent. Stock B has a beta of 1.04 and an

expected return of 9.51 percent. Stock C has a beta of 1.36 and an expected return of 11.68 percent.

The riskfree rate is 3 percent and the market risk premium is 6.5 percent. Which of these stocks are

underpriced?

A. A only

B. C only

C. A and B only

D. B and C only

E. A and C only

87. The variance of Stock A is .003969, the variance of Stock B is .007056, and the covariance between

the two is .0026. What is the correlation coefficient?

A. .9284

B. .8542

C. .5010

D. .4913

E. .3510

88. There is a 5 percent probability the economy will boom, an 85 percent probability it will be normal,

and a 10 percent probability it will be recessionary. For these economic states, Stock A has deviations

from its expected returns of .06, .01, and .08, respectively. Stock B has deviations from its expected

returns of .06, .00, and .05, for the three economic states, respectively. What is the covariance of the

two stocks?

A. .00058

B. .00143

C. .00189

D. .00074

E. .00102

89. A portfolio contains four securities, A, B, C, and D. The betas of these securities are .88, 1.14, 1.57

and 1.64 for A through D, respectively. Securities A and B have portfolio weights of 30 percent each

while C and D have weights of 20 percent each. The riskfree rate is 4.39 percent and the market risk

premium is 7.46 percent. What is the portfolio beta?

A. .8001

B. 1.248

C. 1.199

D. .0822

E. .0131

90. A portfolio is equally weighted. Security One has a standard deviation of 10 percent. Security Two

has a standard deviation of 8 percent. The securities have a covariance of .4254. What is the portfolio

variance?

A. .2209

B. .0061

C. .8549

D. .8590

E. .2168