An investor currently holds the following portfolio: Amount Invested 8,000 shares of Stock A $16,000 Beta = 1.3 15,000 shares of Stock B $48,000 Beta = 1.8 25,000 shares of Stock C $96,000 Beta = 2.2 The investor is worried that the beta of his portfolio is too high, so he wants to sell some stock C and add stock D, which has a beta of 1.0, to his portfolio. If the investor wants his portfolio to have a beta of 1.72, how much stock C must he replace with stock D?

		$24,000
		$36,000
		$18,000
		$31,000

4 points

QUESTION 2

Small company stocks have historically had higher average annual returns than large company stocks, and also a higher risk premium.

True

False

4 points

QUESTION 3

Stock W has an expected return of 12% with a standard deviation of 8%. If returns are normally distributed, then approximately two-thirds of the time the return on stock W will be

		between 12% and 20%.
		between 4% and 20%.
		between -4% and 28%.
		between 8% and 12%.

4 points

QUESTION 4

A stock with a beta of 1.4 has 40% more variability in returns than the average stock.

True

False

4 points

QUESTION 5

Beta is a measurement of the relationship between a security's returns and the general market's returns.

True

False

4 points

QUESTION 6

A rational investor will always prefer an investment with a lower standard deviation of returns, because such investments are less risky.

True

False

4 points

QUESTION 7

Total risk equals systematic risk plus unsystematic risk.

True

False

4 points

QUESTION 8

The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.

True

False

4 points

QUESTION 9

Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

True

False

4 points

QUESTION 10

The realized rate of return, or holding period return, is equal to the holding period dollar gain divided by the price at the beginning of the period.

True

False

4 points

QUESTION 11

Of the following different types of securities, which is typically considered most risky?

		common stocks of large companies
		long-term government bonds
		common stocks of small companies
		long-term corporate bonds

4 points

QUESTION 12

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

True

False

4 points

QUESTION 13

You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year. Historical data suggests the following probability distribution for your commission income. Which job has the higher expected income? Probability of Commission Occurrence $15,000 .15 $35,000 .20 $48,000 .35 $67,000 .22 $80,000 .18

		The salary of $50,000 is greater than the expected commission of $49,630.
		The salary of $50,000 is less than the expected commission of $52,720.
		The salary of $50,000 is greater than the expected commission of $48,400.
		The salary of $50,000 is less than the expected commission of $50,050.

4 points

QUESTION 14

The Beta of a T-bill is one.

True

False

4 points

QUESTION 15

Diversifying among different kinds of assets is called asset allocation.

True

False

4 points

QUESTION 16

Variation in the rate of return of an investment is a measure of the riskiness of that investment.

True

False

4 points

QUESTION 17

The slope of the characteristic line of a security is that security's Beta.

True

False

4 points

QUESTION 18

Unique security risk can be eliminated from an investor's portfolio through diversification.

True

False

4 points

QUESTION 19

A stock with a beta of 1 has systematic or market risk equal to the "typical" stock in the marketplace.

True

False

4 points

QUESTION 20

An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%.

True

False

4 points

QUESTION 21

Stock A has the following returns for various states of the economy: State of the Economy Probability Stock A's Return Recession 10% -30% Below Average 20% -2% Average 40% 10% Above Average 20% 18% Boom 10% 40% Stock A's expected return is

		5.4%.
		8.2%.
		7.2%.
		9.6%

4 points

QUESTION 22

Assume that you have $330,000 invested in a stock that is returning 11.50%, $170,000 invested in a stock that is returning 22.75%, and $470,000 invested in a stock that is returning 10.25%. What is the expected return of your portfolio?

		14.8%
		15.6%
		12.9%
		18.3%