1) If a person's required return does not change when risk increases, that person is said to be

A) risk-seeking. B) risk-neutral.
C) risk-averse. D) risk-aware.
Answer: B

2) If a person's required return decreases for an increase in risk, that person is said to be
A) risk-seeking. B) risk-neutral.
C) risk-averse. D) risk-aware.
Answer: A

3) ________ is the chance of loss or the variability of returns associated with a given asset.
A) Return B) Value
C) Risk D) Probability
Answer: C

4) The ________ of an asset is the change in value plus any cash distributions expressed as a
percentage of the initial price or amount invested.
A) return B) value
C) risk D) probability
Answer: A

5) Risk aversion is the behavior exhibited by managers who require a (n) ________.
A) increase in return, for a given decrease in risk
B) increase in return, for a given increase in risk
C) decrease in return, for a given increase in risk
D) decrease in return, for a given decrease in risk
Answer:B

6) If a person requires greater return when risk increases, that person is said to be
A) risk-seeking. B) risk-indifferent.
C) risk-averse. D) risk-aware.
Answer: C

7) Last year Mike bought 100 shares of Dallas Corporation common stock for $53 per share.
During the year he received dividends of $1.45 per share. The stock is currently selling for $60
per share. What rate of return did Mike earn over the year?
A) 11.7 percent. B) 13.2 percent.
C) 14.1 percent. D) 15.9 percent.
Answer: D

8) The ________ is the extent of an asset's risk. It is found by subtracting the pessimistic outcome
from the optimistic outcome.
A) return B) standard deviation
C) probability distribution D) range
Answer: D

9) The ________ of an event occurring is the percentage chance of a given outcome.

A) dispersion B) standard deviation
C) probability D) reliability
Answer:C

10) ________ probability distribution shows all possible outcomes and associated probabilities for a
given event.
A) A discrete B) An expected value
C) A bar chart D) A continuous
Answer:D

11) The ________ measures the dispersion around the expected value.
A) coefficient of variation B) chi square
C) mean D) standard deviation
Answer: D

12) The ________ is a measure of relative dispersion used in comparing the risk of assets with
differing expected returns.
A) coefficient of variation B) chi square
C) mean D) standard deviation
Answer: A

13) Since for a given increase in risk, most managers require an increase in return, they are
A) risk-seeking. B) risk-indifferent.
C) risk-free. D) risk-averse.
Answer: D

14) Which asset would the risk-averse financial manager prefer? (See below.)

A) Asset A. B) Asset B.
C) Asset C. D) Asset D.
Answer: D

15) The expected value and the standard deviation of returns for asset A is (See below.)

A) 12 percent and 4 percent. B) 12.7 percent and 2.3 percent.

C) 12.7 percent and 4 percent. D) 12 percent and 2.3 percent.
Answer: B

16) The ________ the coefficient of variation, the ________ the risk.
A) lower; lower B) higher; lower
C) lower; higher D) more stable; higher
Answer: A
17) Given the following expected returns and standard deviations of assets B, M, Q, and D, which
asset should the prudent financial manager select?

A) Asset B B) Asset M
C) Asset Q D) Asset D
Answer: A

18) The expected value, standard deviation of returns, and coefficient of variation for asset A are
(See below.)

A) 10 percent, 8 percent, and 1.25, respectively.

B) 9.33 percent, 8 percent, and 2.15, respectively.
C) 9.35 percent, 4.68 percent, and 2.00, respectively.
D) 9.35 percent, 2.76 percent, and 0.295, respectively.
Answer :D

19) What is the market risk premium if the risk free rate is 5 percent and the expected market return
is given as follows?

A) 10.5% B) 11.0%
C) 16.0 D) 16.5%
Answer:B

20) Nico bought 100 shares of Cisco Systems stock for $24.00 per share on January 1, 2015. He
received a dividend of $2.00 per share at the end of 2015 and $3.00 per share at the end of 2016. At
the end of 2017, Nico collected a dividend of $4.00 per share and sold his stock for $18.00 per share.
What was Nico's realized holding period return?
A)-12.5% B)+12.5%
C)-16.7% D)+16.7%
Answer: B

21) Nico bought 100 shares of Cisco Systems stock for $24.00 per share on January 1, 2002. He
received a dividend of $2.00 per share at the end of 2002 and $3.00 per share at the end of 2003. At
the end of 2004, Nico collected a dividend of $4.00 per share and sold his stock for $18.00 per share.
What was Nico's realized holding period return? What was Nico's compound annual rate of return?
A) -12.5%; -4.4% B) +12.5%; +4.4%
C) -16.7%; -4.4% D) +16.7%; +4.4%
Answer: B
22) A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for a given
level of return.
A) efficient B) coefficient
C) continuous D) risk-indifferent
Answer: A

23) A collection of assets is called a(n)

A) grouping. B) portfolio.
C) investment. D) diversity.
Answer:B

24) An efficient portfolio is one that

A) maximizes risk for a given level of return. B) maximizes return for a given level of risk.
C) minimizes return for a given level of risk. D) maximizes return at all risk levels.
Answer:B

25) The ________ is a statistical measure of the relationship between series of numbers.
A) coefficient of variation B) standard deviation
C) correlation D) probability
Answer: C

26) The goal of an efficient portfolio is to

A) maximize risk for a given level of return. B) maximize risk in order to maximize profit.
C) minimize profit in order to minimize risk. D) minimize risk for a given level of return.
Answer: D

27) Perfectly ________ correlated series move exactly together and have a correlation coefficient of
________, while perfectly ________ correlated series move exactly in opposite directions and have a
correlation coefficient of ________.
A) negatively; -1; positively; +1 B) negatively; +1; positively; -1
C) positively; -1; negatively; +1 D) positively; +1; negatively; -1
Answer: D

28) Combining negatively correlated assets having the same expected return results in a portfolio
with ________ level of expected return and ________ level of risk.
A) a higher; a lower B) the same; a higher
C) the same; a lower D) a lower; a higher
Answer:C

29) An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K;
$25,000 will be invested in asset R, with an expected annual return of 12 percent; $10,000 will be
invested in asset J, with an expected annual return of 18 percent; and $15,000 will be invested in
asset K, with an expected annual return of 8 percent. The expected annual return of this portfolio is
A) 12.67%. B)12.00%.
C)10.00%. D) unable to be determined from the information provided.
Answer: B

30) The correlation of returns between Asset A and Asset B can be characterized as (See Table 5.1)
A) perfectly positively correlated. B) perfectly negatively correlated.
C) uncorrelated. D) cannot be determined.
Answer:B

31) If you were to create a portfolio designed to reduce risk by investing equal proportions in each of
two different assets, which portfolio would you recommend? (See Table 5.1)
A) Assets A and B B)Assets A and C
C) none of the available combinations D)cannot be determined
Answer:A

32) The portfolio with a standard deviation of zero (See Table 5.1)
A) is comprised of Assets A and B. B) is comprised of Assets A and C.
C) is not possible. D) cannot be determined.
Answer:A

33) Combining two negatively correlated assets to reduce risk is known as

A) diversification. B) valuation.
C) liquidation. D) risk aversion.
Answer:A

34) In general, the lower (less positive and more negative) the correlation between asset returns,
A) the less the potential diversification of risk.
B) the greater the potential diversification of risk.
C) the lower the potential profit.
D) the less the assets have to be monitored.
Answer:B

35) Combining two assets having perfectly negatively correlated returns will result in the creation of
a portfolio with an overall risk that
A) remains unchanged.
B) decreases to a level below that of either asset.
C) increases to a level above that of either asset.
D) stabilizes to a level between the asset with the higher risk and the asset with the lower risk.
Answer:B

36) Combining two assets having perfectly positively correlated returns will result in the creation of a
portfolio with an overall risk that
A) remains unchanged.
B) decreases to a level below that of either asset.
C) increases to a level above that of either asset.
D) lies between the asset with the higher risk and the asset with the lower risk.
Answer:D

37) Systematic risk is also referred to as

A) diversifiable risk. B) economic risk.
C) nondiversifiable risk. D) not relevant.
Answer: C

38) The purpose of adding an asset with a negative or low positive beta is to
A) reduce profit. B) reduce risk.
C) increase profit. D) increase risk.
Answer:B

39) The beta of the market

A) is greater than 1. B) is less than 1.
C) is 1. D) cannot be determined.
Answer: C

40) Risk that affects all firms is called

A) total risk. B) management risk.
C) nondiversifiable risk. D) diversifiable risk.
Answer:C

41) The portion of an asset's risk that is attributable to firm-specific, random causes is called
A) unsystematic risk. B) nondiversifiable risk.
C) systematic risk. D) none of the above.
Answer:A

42) The relevant portion of an asset's risk attributable to market factors that affect all firms is called
A) unsystematic risk. B) diversifiable risk.
C) systematic risk. D) none of the above.
Answer: C

43) ________ risk represents the portion of an asset's risk that can be eliminated by combining assets
with less than perfect positive correlation.
A) Diversifiable B) Nondiversifiable
C) Systematic D) Total
Answer: A

44) Unsystematic risk is not relevant, because

A)it does not change. B)it can be eliminated through diversification.
C)it cannot be estimated. D)it cannot be eliminated through diversification.
Answer:B

45)Strikes, lawsuits, regulatory actions, and increased competition are all examples of
A)diversifiable risk. B)nondiversifiable risk.
C)economic risk. D)systematic.
Answer:A

46)War, inflation, and the condition of the foreign markets are all examples of
A)diversifiable risk. B)nondiversifiable risk.
C)economic risk. D)unsystematic.
Answer:B

47)A beta coefficient of +1 represents an asset that

A)is more responsive than the market portfolio.
B)has the same response as the market portfolio.
C)is less responsive than the market portfolio.
D)is unaffected by market movement.
Answer:B

48)A beta coefficient of -1 represents an asset that

A)is more responsive than the market portfolio.
B)has the same response as the market portfolio but in opposite direction
C)is less responsive than the market portfolio.
D)is unaffected by market movement.
Answer:B
49)A beta coefficient of 0 represents an asset that
A)is more responsive than the market portfolio.
B)has the same response as the market portfolio.
C)is less responsive than the market portfolio.
D)is unrelated to the market portfolio.
Answer:D

50)An investment banker has recommended a $100,000 portfolio containing assets B, D, and F.
$20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a beta
of 2.0; and $30,000 will be invested in asset F, with a beta of 0.5. The beta of the portfolio is
A)1.25. B)1.33.
C)1.45. D)unable to be determined from the information provided.
Answer:C

51) The higher an asset's beta,

A) the more responsive it is to changing market returns.
B) the less responsive it is to changing market returns.
C) the higher the expected return will be in a down market.
D)the lower the expected return will be in an up market.
Answer:A

52)An increase in nondiversifiable risk

A)would cause an increase in the beta and would lower the required return.
B)would have no effect on the beta and would, therefore, cause no change in the required return.
C)would cause an increase in the beta and would increase the required return.
D)would cause a decrease in the beta and would, therefore, lower the required rate of return.
Answer:C

53)An increase in the Treasury Bill rate ________ the required rate of return of a common stock.
A)has no effect on B)increases
C)decreases D)cannot be determined by
Answer:B

55) The beta of a portfolio is

A) The sum of the betas of all assets in the portfolio.
B) Irrelevant, only the betas of the individual assets are important.
C) Does not change over time.
D) Is the weighted average of the betas of the individual assets in the portfolio.
Answer:D

You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows:

56) Given the information in Table 5.2, what is the expected annual return of this portfolio?
A)11.4% B)10.0%
C)11.0% D)11.7%
Answer:C

57) The beta of the portfolio in Table 5.2, containing assets X, Y, and Z, is
A)1.5. B)2.4.
C)1.6. D)2.0.
Answer:C
58) The beta of the portfolio in Table 5.2 indicates this portfolio
A)has more risk than the market. B)has less risk than the market.
C)has an undetermined amount of risk compared to the market.
D)has the same risk as the market.
Answer:A

59)As randomly selected securities are combined to create a portfolio, the ________ risk of the
portfolio decreases until 10 to 20 securities are included. The portion of the risk eliminated is
________ risk, while that remaining is ________ risk.
A) diversifiable; nondiversifiable; total B) relevant; irrelevant; total
C) total; diversifiable; nondiversifiable D) total; nondiversifiable; diversifiable
Answer:C

60) Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A
comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all of her
investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will be:
A)0.60. B)0.88.
C)1.00. D)1.25.
Answer:D

61)Nico owns 100 shares of stock X which has a price of $12 per share and 200 shares of stock Y
which has a price of $3 per share. What is the proportion of Nico's portfolio invested in stock X?
A)77% B)67%
C)50% D)33%
Answer:B

62) Nico wants to invest all of his money in just two assets: the risk free asset and the market
portfolio. What is Nico's portfolio beta if he invests a quarter of his money in the market portfolio
and the rest in the risk free asset?
A)0.00 B)0.25
C)0.75 D)1.00
Answer:B

63) What is the expected market return if the expected return on asset X is 20 percent, its beta is 1.5,
and the risk free rate is 5 percent?
A) 5.0% B) 7.5%
C) 15.0% D) 22.5%
Answer: C
64) What is Nico's portfolio beta if he invests an equal amount in asset X with a beta of 0.60, asset Y
with a beta of 1.60, the risk-free asset, and the market portfolio?
A)1.20 B)1.00
C)0.80 D)0.60
Answer:C

Table 5.3

Consider the following two securities X and Y.

65) Which asset (X or Y) in Table 5.3 has the least total risk? Which has the least systematic risk?
A)X; X. B)X; Y.
C)Y; X. D)Y; Y.
Answer:B

66)Using the data from Table 5.3, what is the systematic risk for a portfolio with two-thirds of the
funds invested in X and one-third invested in Y?
A)0.88 B)1.17
C)1.33 D)1.67
Answer:C

67)Using the data from Table 5.3, what is the portfolio expected return and the portfolio beta if you
invest 35 percent in X, 45 percent in Y, and 20 percent in the risk-free asset?
A)12.5%, 0.975 B)12.5%, 1.975
C)15.0%, 0.975 D)15.0%, 1.975
Answer:A

68) Using the data from Table 5.3, what is the portfolio expected return if you invest 100 percent of
your money in X, borrow an amount equal to half of your own investment at the risk free rate and
invest your borrowings in asset X?
A)15.0% B)22.5%
C)25.0% D)27.5%
Answer:D

70) Examples of events that increase risk aversion include

A)a stock market crash. B)assassination of a key political leader.
C)the outbreak of war. D)all of the above.
Answer:D

71) In the capital asset pricing model, the beta coefficient is a measure of ________ risk and an index
of the degree of movement of an asset's return in response to a change in ________.
A)diversifiable; the prime rate B)nondiversifiable; the Treasury bill rate
C)diversifiable; the bond index rate D)nondiversifiable; the market return
Answer:D

72) Asset Y has a beta of 1.2. The risk-free rate of return is 6 percent, while the return on the market
portfolio of assets is 12 percent. The asset's market risk premium is
A)7.2 percent. B)6.0 percent.
C)13.2 percent. D)10 percent.
Answer:B

73)In the capital asset pricing model, the beta coefficient is a measure of
A)economic risk. B)diversifiable risk.
C)nondiversifiable risk. D)unsystematic risk.
Answer:C

74)Asset P has a beta of 0.9. The risk-free rate of return is 8 percent, while the return on the market
portfolio of assets is 14 percent. The asset's required rate of return is
A)13.4 percent. B) 6.0 percent.
C) 5.4 percent. D) 10 percent.
Answer:A

75) As risk aversion increases

A) a firm's beta will increase. B) investors' required rate of return will increase.
C)a firm's beta will decrease. D)investors' required rate of return will decrease.
Answer:B
78) An increase in the beta of a corporation indicates ________, and, all else being the same, results
in ________.
A) a decrease in risk; a higher required rate of return and hence a lower share price
B) an increase in risk; a higher required rate of return and hence a lower share price
C)a decrease in risk; a lower required rate of return and hence a higher share price
D) an increase in risk; a lower required rate of return and hence a higher share price
Answer:B

80) What is the expected risk-free rate of return if asset X, with a beta of 1.5, has an expected return
of 20 percent, and the expected market return is 15 percent?
A) 5.0% B) 7.5%
C) 15.0% D) 22.5%
Answer: A

81) What is the expected return for asset X if it has a beta of 1.5, the expected market return is 15
percent, and the expected risk-free rate is 5 percent?
A) 5.0% B) 7.5%
C)15.0% D)20.0%
Answer: D