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20 Investment Multiple Choice Questions

21. The expected return on a security given two unequal states of the economy:
e. will equal the overall expected return on the market.
c. will always be higher than that based on a single economic state.
b. is computed as the geometric average of the returns for each state.
d. is affected by the probability of occurrence of each economic state.
a. is computed as the arithmetic average of the returns for each state.

22. The portfolio weights for a portfolio consisting of multiple securities given multiple states of the economy are based on the:
c. amount of the original investment in each security.
d. beta of each individual security.
a. probabilities of occurrence of each economic state.
e. expected rates of return of each security given a normal economic state.
b. market value of the investment in each individual security.

23. The standard deviation of a portfolio:
d. measures only the unsystematic risk of that portfolio.
e. considers the current value of the investments within that portfolio.
b. is equal to the weighted arithmetic average of the standard deviations of the individual securities included in the portfolio.
c. measures only the systematic risk of that portfolio.
a. is based on a geometric average of the standard deviations of the individual securities included in the portfolio.

24. Which one of the following is considered an example of systematic risk?
a. a higher inflation rate than predicted
e. higher company profits than those forecasted
d. an increase in overseas sales for a conglomerate, such as General Electric
b. lower company sales than predicted
c. resignation of a firm's chief financial officer

25. Which one of the following is best classified as unsystematic risk ?
d. a sudden increase in the inflation rate
e. a sudden decline in national exports
b. an unexpected increase in interest rates
a. an unexpected recessionary period
c. an unexpected decline in the sales of a firm

26. A portfolio that is adequately diversified should produce a return which:
c. is equivalent to beta multiplied by the market risk premium.
a. is superior to the overall market if the portfolio beta has been reduced to 1.0.
b. lies at a point on the security market line given the portfolio's beta.
e. is equal to the risk-free rate plus the standard deviation times the market risk premium.
d. is equal to the risk-free rate.

27. An increase in the unsystematic risk of a portfolio will _____ the portfolio's beta.
a. not change
d. either increase or not change
c. decrease
b. increase
e. either decrease or not change

28. If a group of securities are correctly priced, then the reward-to-risk ratio:
e. of the combined group is equal to that of a risk-free security.
c. for each security must equal 0.
b. for each security must equal 1.0.
a. for the entire group must equal 1.0.
d. is equal for each security.

29. Which of the following will increase the rate of return for a security that plots on the security market line? (I. increasing the risk-free rate of return; II. decreasing the beta of the security; III. increasing the market risk premium; IV. increasing the market risk-to-reward ratio)
a. I and III only
b. II and IV only
d. I, III, and IV only
e. I, II, III, and IV
c. I, II, and III only

30. The Capital Asset Pricing Model states that the expected return on a security depends on which of the following? (I. pure time value of money; II. amount of systematic risk as measured by beta; III. the reward for bearing systematic risk as measured by the market risk premium; IV. the reward for bearing risk as measured by the standard deviation)
b. II and IV only
e. I, II, III, and IV
a. I and III only
d. II, III, and IV only
c. I, II, and III only

31. The stock of Midget Kars is expected to produce the following returns given the various states of the economy.

Probability

State of of State of Rate of

Economy Economy Return

Recession .20 -.18

Normal .70 .09

Boom .10 .14

What is the expected return on this stock?

d. 10.7 percent
b. 4.9 percent
e. 11.3 percent
c. 7.2 percent
a. 4.1 percent

32. The stock of Miller's Machine Shop has an expected return of 3.3 percent. Given the information below, what is the expected return on this stock if the economy booms?

Probability

State of of State of Rate of

Economy Economy Return

Recession .35 -.04

Normal .60 .07

Boom .05 ?

e. 10.69 percent
b. 9.2 percent
a. 8.6 percent
d. 10.48 percent
c. 10.0 percent

33. Given the following information, what is the standard deviation for this stock?

Probability

State of of State of Rate of

Economy Economy Return

Boom .05 .15

Normal .65 .08

Recession .30 -.05

d. 6.37 percent
c. 6.03 percent
b. 5.98 percent
a. 5.84 percent
e. 6.87 percent

34. You own a portfolio consisting of the securities listed below. The expected return for each security is as shown. What is the expected return on the portfolio?

Number Price Expected

Stock Of Shares Per Share Return

J 300 $43 .11

K 500 $23 .09

L 200 $ 8 -.25

M 100 $56 .14

a. 8.98 percent
b. 9.52 percent
d. 9.88 percent
e. 10.20 percent
c. 9.69 percent

35. A portfolio is invested 40 percent in stock A, 30 percent in stock B, and 30 percent in stock C. Assuming that the returns are normally distributed, what is the 68 percent probability range of returns for any given year?

State of Probability of Rate of Return if State Occurs

Economy State of Economy Stock A Stock B Stock C

Boom .10 .05 .16 .23

Normal .70 .08 .09 .11

Recession .20 .15 -.03 -.25

d. 4.12 to 15.18 percent
e. 4.99 to 18.67 percent
b. 2.29 to 12.37 percent
a. 1.69 to 8.34 percent
c. 3.68 to 13.89 percent

36. You have a portfolio comprised of the following. What is your portfolio beta?

Stock Value Beta

A $2,500 1.2

B $3,200 .7

C $4,800 1.6

D $4,500 1.1

b. 1.27
c. 1.34
d. 1.36
e. 1.41
a. 1.19

37. You currently own a portfolio valued at $16,000 that has a beta of 1.2. You have another $8,000 to invest and would like to invest it in a manner such that the risk of your portfolio matches that of the overall market. What does the beta of the new security have to be?
d. .8
b. .5
a. .3
e. .9
c. .6

38. Stock A has an expected return of 12 percent and a beta of 1.2. Stock B has an expected return of 9 percent and a beta of .8. Both stocks have the same reward-to-risk ratio. What is the risk-free rate?
a. 2.5 percent
c. 3.5 percent
d. 4.0 percent
b. 3.0 percent
e. 4.5 percent

39. Stock X has a beta of .9 and an expected return of 12 percent. Stock Y has a beta of 1.4 and an expected return of 16 percent. What is the risk-free rate if these securities both plot on the security market line?
e. 5.0 percent
d. 4.8 percent
c. 4.6 percent
b. 4.4 percent
a. 4.2 percent

40. You own a stock that has an expected return of 13.6 percent and a beta of 1.3. The U.S. Treasury bill is yielding 4.2 percent and the inflation rate is 3.8 percent. What is the expected rate of return on the market?
d. 10.87 percent
b. 9.80 percent
c. 10.67 percent
e. 11.43 percent
a. 9.74 percent

Solution Preview

Question 21  1 points    Save    
  21. The expected return on a security given two unequal states of the economy:  
    e. will equal the overall expected return on the market.  
   c. will always be higher than that based on a single economic state.  
   b. is computed as the geometric average of the returns for each state.  
   d. is affected by the probability of occurrence of each economic state.  
   a. is computed as the arithmetic average of the returns for each state.  

Answer:    d. is affected by the probability of occurrence of each economic state.  

Expected return = probability of state 1 x return of state 1 + probability of state 2 x return of state 2

   Question 22  1 points    Save    
  22. The portfolio weights for a portfolio consisting of multiple securities given multiple states of the economy are based on the:  
    c. amount of the original investment in each security.  
   d. beta of each individual security.  
   a. probabilities of occurrence of each economic state.  
   e. expected rates of return of each security given a normal economic state.  
   b. market value of the investment in each individual security.  

Answer:    b. market value of the investment in each individual security.  

   Question 23  1 points    Save    
  23. The standard deviation of a portfolio:  
    d. measures only the unsystematic risk of that portfolio.  
   e. considers the current value of the investments within that portfolio.  
   b. is equal to the weighted arithmetic average of the standard deviations of the individual securities included in the portfolio.  
   c. measures only the systematic risk of that portfolio.  
   a. is based on a geometric average of the standard deviations of the individual securities included in the portfolio.  

Answer:    e. considers the current value of the investments within that portfolio.  
Standard deviation is a measure of the total risk of the portfolio
Standard deviation of a portfolio is based on the weights of the investments in the portfolio, the standard deviation of investments and correlation between the investments

   Question 24  1 points    Save    
  24. Which one of the following is considered an example of systematic risk?  
    a. a higher inflation rate than predicted  
   e. higher company profits than those forecasted  
   d. an increase in overseas sales for a conglomerate, such as General Electric  
   b. lower company sales than predicted  
   c. resignation of a firm's chief financial officer  

Answer:     a. a higher inflation rate than predicted  

Systematic risk is a market wide risk-affects all the companies in the economy

   Question 25  1 points    Save    
  25. Which one of the following is best classified as unsystematic risk?  
    d. a sudden increase in the inflation rate  
   e. a sudden decline in national exports  
   b. an unexpected increase in interest rates  
   a. an unexpected recessionary period  
   c. an unexpected decline in the sales of a firm  

Answer:    c. an unexpected decline in the sales of a firm  

Unsytematic risk is unique to a company

   Question 26  1 points    Save    
  26. A portfolio that is adequately diversified should produce a return which:  
    c. is equivalent to beta multiplied by the market risk premium.  
   a. is superior to the overall market if the portfolio beta has been reduced to 1.0.  
   b. lies at a point on the security market line given the portfolio's beta.  
   e. is equal to the risk-free rate plus the standard deviation times the market risk premium.  
   d. is equal to the risk-free rate.  

Answer:    b. lies at a point on the security market line given the portfolio's beta.  

A diversified portfolio would give a return =risk free rate + beta x market risk premium and lie on the SML (security market line)

   Question 27  1 points    Save    
  27. An increase in the unsystematic risk of a portfolio will _____ the portfolio's beta.  
    a. not change  
   d. either increase or not change  
   c. decrease  
   b. increase  
   e. either decrease or not change  

Answer:     a. not change  

Beta is a measure of systematic risk

   Question 28  1 points    Save    
  28. If a group of securities are correctly priced, then the reward-to-risk ratio:  
    e. of the combined group is equal to that of a risk-free security.  
   c. for each security must equal 0.  
   b. for each security must equal 1.0.  
   a. for the entire group must equal 1.0.  
   d. is equal for each security.  

Answer:    d. is equal for each security.  

   Question 29  1 points    Save    
  29. Which of the following will increase the rate of return for a security that ...

Solution Summary

Answers 20 Investment Multiple Choice Questions on expected return, portfolio weights, systematic risk, unsystematic risk, standard deviation of return, portfolio, diversification, reward-to-risk ratio, security market line, probability range of returns, portfolio beta, expected rate of return on the market

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