Question-1
Assume the following information about the market and JumpMasters' stock. JumpMasters' beta = 1.50, the risk-free rate is 3.5%, the market risk premium is 10%. Using the SML, what is the expected return for JumpMasters' stock?
A. 7.5%
B. 13.5%
C. 18.5%
D. 27%
Question-2
The primary benefit of diversification is:
A. an increase in expected return.
B. an equal reduction in risk and return.
C. a reduction in risk.
D. Diversification has no real benefit; it is a shell game promoted
Question-3
Use the following table:
| States of the Economy | Probability of the State | 3-Month T-Bill | Large-Company Stock | Small-Company Stock |
| Boom | 0.3 | 4 | 10 | 30 |
| Steady | 0.5 | 4 | 5 | 20 |
| Recession | 0.2 | 4 | 0 | 10 |
What is the difference between the variances for large- and small-company stocks?
A. 40.25%
B. 36.75%
C. 27.30%
D. 14.90%
Question-4
__________ is risk that cannot be diversified away.
A. Unsystematic risk
B. Systematic risk
C. Firm-specific risk
D. Diversifiable risk
Question-5
The terms __________ and __________ mean the same thing.
A. nondiversifiable risk; unsystematic risk
B. diversifiable risk; systematic risk
C. diversifiable risk; unsystematic risk
D. total risk; unique risk
Question-6
| D | ||||
| Expected Return | 5% | 5% | 7% | 6% |
| Standard Deviation | 10% | 12% | 12% | 11% |
Which of the following statements is true?
A. A is a better investment than B.
B. B is a better investment than C.
C. C is a better investment than D.
D. D is a better investment than C.
Question-7
The practice of not putting all of your eggs in one basket is an illustration of:
A. variance.
B. diversification.
C. portion control.
D. expected return.
Question-8
The security market line:
A. is curvilinear and upward sloping.
B. is curvilinear and downward sloping.
C. may curve up or down depending upon market conditions.
D. is a straight line.
Question-9
Stocks A, B, C, and D have returns of 10%, 20%, 30%, and 40%, respectively. What is their variance?
A. 66.67%
B. 166.67%
C. 4.08%
D. 2.15%
Question-10
Find the variance for a security that has three one-year returns of -5%, 15%, and 20%.
A. 175%
B. 75%
C. 58.33%
D. 25%
Question-11
Which of the following investments is considered to be default risk-free?
A. Currency options
B. AAA-rated corporate bonds
C. Common stock
D. Treasury bills
Question-12
Jarvis bought a share of stock for $15.75 that paid a dividend of $.45 and sold three months later for $18.65. What was his dollar profit or loss and holding period return?
A. $2.90, 18.41%
B. $3.35, 21.27%
C. -$2.90, -18.41%
D. $.45, 2.86%
Question-13
Which of the statements below is true?
A. Investors want to maximize return and maximize risk.
B. Investors want to maximize return and minimize risk.
C. Investors want to minimize return and maximize risk.
D. Investors want to minimize return and minimize risk.
Question-14
For most stocks, the correlation coefficient with other stocks is:
A. positive.
B. negative.
C. zero.
D. The distribution of correlation coefficients between stocks is uniform from -1.0 to +1.0.
Question-15
Travis bought a share of stock for $31.50 that paid a dividend of $.85 and sold six months later for $27.65. What was his dollar profit or loss and holding period return?
A. -$3.00, -9.52%
B. -$3.85, -12.22%
C. -$.85, -2.70%
D. -$3.85, -9.52%
Question-16
__________ may be defined as a measure of uncertainty in a set of potential outcomes for an event in which there is a chance for some loss.
A. Diversification
B. Risk
C. Uncertainty
D. Collaboration
Question-17
The type of risk that can be diversified away is called:
A. unsystematic risk.
B. systematic risk.
C. nondiversifiable risk.
D. system-wide risk.
Question-18
Stocks A, B, C, and D have standard deviations, respectively, of 20%, 5%, 10%, and 15%. Which one is the riskiest?
A. Stock A
B. Stock B
C. Stock C
D. Stock D
Question-19
Unsystematic risk:
A. is also known as nondiversifiable risk.
B. can be diversified away.
C. is system-wide risk.
D. is equal to 2 times the systematic risk.
Question-20
Find the variance for a security that has three one-year returns of 5%, 10%, and 15%.
A. 10%
B. 16.67%
C. 25%
D. 30%
