1. Speculation is undertaken despite the risk because:
   1. speculation inevitably provides for recovery of losses.
   2. speculators enjoy taking risks.
   3. speculators expect a risk-return trade-off.
   4. speculation always gives a positive return.

2. The geometric average rate of return is ____________.
   1. also called the time-weighted average return
   2. also called the dollar-weighted average return
   3. equivalent to the internal rate of return
   4. an uncompounded rate of return

3. Suppose you pay $9,950 for a Treasury bill with a $10,000 face value that matures in one month. What is the effective rate of return for this investment?
   1. 6.00%
   2. 6.03%
   3. 6.17%
   4. 6.20%

4. What is the exact real rate of return for an investment that has an expected nominal rate of return of 15% while the expected rate of inflation is 9%?
   1. 5.5%
   2. 6.0%
   3. 9.5%
   4. 10.0%

5. A risky portfolio has an expected rate of return of 15% and a standard deviation of 20%. The Treasury bill rate is 4%. What is the reward-to volatility ratio for the portfolio?
   1. 0.55
   2. 0.75
   3. 0.80
   4. 0.95

6. You purchased 100 shares of ABC stock for $20 per share. One year later you received cash dividends of $1 per share and sold the stock for $22 per share. Your holding-period return was _______________.
   1. 5%
   2. 10%
   3. 15%
   4. 20%

7. An investment has a 10% probability of earning a 20% rate of return, a 60% probability of earning a 10% rate of return, and a 30% probability of losing 5%. What is the expected rate of return for this investment?
   1. 7.0%
   2. 9.5%
   3. 8.3%
   4. 6.5%

8. What is the Sharpe measure of a portfolio that has an annual risk premium of 7% and standard deviation of 17%?
   1. 0.49
   2. 0.82
   3. 2.43
   4. 0.41

9. Treasury securities are commonly regarded as risk-free assets because ____________.
   1. returns on Treasury securities are adjusted for inflation
   2. interest on Treasury securities is not subject to federal income taxes
   3. investors can match their desired holding periods with the maturity of a Treasury security
   4. Treasury securities are free of default risk

10. A passive investment strategy is based on the premise that ____________.
    1. investors are highly risk averse
    2. securities are normally undervalued or overvalued
    3. securities are fairly priced
    4. the most important part of portfolio construction is security selection

11. Portfolio diversification benefits ______________.
    1. exist only when security returns are negatively correlated
    2. are always available, regardless of securities' correlation coefficients
    3. exist whenever security returns are less than perfectly positively correlated
    4. are greater for positively correlated security returns than for negatively correlated security returns

12. Katherine expects the market rate of return this year to be 12%. The expected rate of return on a stock with a beta of 1.2 is currently 14%. If the market return this year turns out to be 10%, what is the revised expected rate of return on the stock?
    1. 16.4%
    2. 11.6%
    3. 40.4%
    4. 12%

13. A portfolio is composed of two stocks, A and B. For Stock A, the standard deviation of the rate of return is 20%. For Stock B, the standard deviation of the rate of return is 30%. Stock A comprises 40% of the portfolio while Stock B comprises 60% of the portfolio. What is the standard deviation of return for the portfolio if the correlation coefficient between the returns for A and B is 0.5?
    1. 5.3%
    2. 23.1%
    3. 27.4%
    4. 45.4%

14. John Mathew has a $800,000 fully diversified portfolio. He subsequently inherits XYZ company common stock worth $200,000. His financial adviser provided him with the following estimates: The original portfolio has expected monthly returns of 0.34%, and standard deviation of

monthly returns of 1.19%. XYZ Company has expected monthly returns of 0.63% and standard deviation of monthly returns of 1.48%.The correlation coefficient of XYZ stock returns with the original portfolio returns is .20. The inheritance changes Mathew's overall portfolio, and he is deciding whether to keep the XYZ stock. Assuming Mathew keeps the XYZ stock, calculate the standard deviation of his new portfolio which includes the XYZ stock.

1. 1.05
2. 1.11
3. 1.42
4. 1.32

15. Which term denotes the ratio of alpha to standard deviation of residual return?
    1. Reward-to-volatility ratio
    2. Sharpe ratio
    3. Information ratio
    4. Concentration ratio

16. The slope of the security characteristic line ____________.
    1. measures the average response of an individual security's return to changes in the market return
    2. can not be negative
    3. is a measure of the security's firm-specific risk
    4. all of the statements about the slope of the security characteristic line are correct

17. The investment opportunity set is ______________.
    1. equivalent to the efficient frontier
    2. the set of all available portfolio risk-return combinations
    3. the set of portfolios that minimize risk for a given expected rate of return
    4. the set of portfolios ideal to the investor in question

18. The risk that can be eliminated by diversification is called _________risk, while the risk that remains even after diversification is called
19. _________risk.
    1. nonsystematic; market
    2. nonsystematic; unique
    3. systematic; market
    4. firm-specific; nonsystematic

20. For a portfolio, assume that E(rP)=25%, rf =5%, and E(rM) =15%. What is the beta of this portfolio?
    1. 2
    2. 1.5
    3. 1.9
    4. 2.9