exam: 081060RR - Portfolio Management
1. What type of security has a beta of 0?
A. Moderate-risk security
B. Fixed-income security
C. High-risk security
D. Risk-free security
2. Which of the following statements best describes the risk premium?
A. The nominal return minus the rate of inflation
B. The extra compensation paid to an investor who invests in a risky asset
C. The yield earned on bonds that are guaranteed by the government
D. The return an investor expects to earn from investing in a risky asset
3. Western Exports stock has a standard deviation of 15.6% and a covariance with the market of .0150.
The market has a standard deviation of 13.7%. What is the correlation of this stock with the market?
A. .702
B. .581
C. .689
D. .774
4. If the correlation coefficient of two assets is zero, what conclusion can be drawn?
A. The two assets are perfectly correlated
B. The two assets are positively correlated.
C. The two assets are uncorrelated
D. The two assets have an undetermined correlation
5. Which one of the following statements best describes an investment opportunity set?
A. A collection of possible risk-return combinations available from portfolios consisting of individual assets
B. An efficient portfolio that provides the highest possible return given its risk profile
C. A grouping of market sectors based upon their levels of risk
D. A portfolio consisting of only stocks with above-average betas
6. Of the following betas, which one has the highest level of systematic risk?
A. 1.87
B. .94
C. 1.72
D. 1.13
7. A portfolio has a Sharpe ratio of .94, a standard deviation of 22.4 percent, and an expected return of
17.3 percent. What's the risk-free rate?
A. 3.23%
B. 3.76%
C. 3.89%
D. 3.58%
8. How can unsystematic risk be eliminated?
A. Through portfolio immunization
B. Through portfolio diversification
C. By reducing a portfolio's standard deviation
D. By increasing a portfolio's beta
9. You own a stock that will produce varying rates of return based upon the state of the economy. Which one of the following will measure the risk associated with owning that stock?
A. Rate of return for a given economic state
B. Weighted average return given the multiple states of the economy
C. Correlation between the returns give the various states of the economy
D. Variance of the returns given the multiple states of the economy
10. For a portfolio consisting of the securities below, what's the portfolio weight of stock C?
Stock Number of Shares Price Per Share
A 300 $22
B 200 $41
C 450 $35
D 600 $39
A. 29.19%
B. 27.42%
C. 33.14%
D. 25.87%
11. If a company announced earnings per share of $1.24 for the quarter when analysts expected earnings of $68, what is the amount of the surprise portion of the announcement?
A. $.32
B. $.56
C. $.42
D. $.51
12. A risky asset has a beta of 1.72 and an expected return of 15.84 percent. What's the risk-free rate if the risk-to-reward ratio is 7.1 percent?
A. 4.21%
B. 4.58%
C. 3.94%
D. 3.63%
13. You own a stock with an overall expected return of 18.32 percent. The economy is expected to either boom or be normal. There's a 65 percent chance the economy will boom. If the economy booms, this stock is expected to return 23 percent. What's the expected return on the stock if the economy is normal?
A. 8.51%
B. 11.84%
C. 10.25%
D. 9.63%
14. If a stock has an expected return of 19.2 and a standard deviation of 15.9 percent, what's the smallest expected loss over the next month given a probability of 5 percent?
A. –5.65%
B. –4.89%
C. –5.92%
D. –5.31%
15. Which of the following statements is true of systematic risk?
A. It affects only one specific firm
B. It affects a large number of assets
C. It's the same as interest rate risk
D. It affects one asset class but not others
16. Which one of the following is another name for market risk?
A. Event risk
B. Diversifiable risk
C. Firm-specific risk
D. Systematic risk
17. A stock has an expected return of 18 percent in a boom economy and 11 percent in a normal economy. The probability of a boom is 25 percent and the probability of a normal economy is 75 percent. What's the variance of the expected returns?
A. 7.59
B. 12.34
C. 5.81
D. 9.19
18. What's the variance of the returns on a security given the following information?
State of
Economy
Probability of State
of Economy
Rate of Return
if State Occurs
Boom .10 21 percent
Normal .65 13 percent
Recession .25 -8 percent
A. 84.52
B. 243.81
C. 124.41
D. 96.85
19. What's the covariance of a security to the market given the following information?
Year Security Returns Market Returns
1 28 24
2 12 15
3 –13 –8
A. 274
B. 321
C. 295
D. 337
20. Stock X has a standard deviation of 21% per year and Stock Y has a standard deviation of 6% per
year. The correlation between Stock A and Stock B is .38. You have a portfolio of these two stocks
wherein Stock X has a portfolio weight of 42%. What is your portfolio standard deviation?
A. 11.84%
B. 10.64%
C. 9.85%
D. 12.92%
1. What type of security has a beta of 0?
A. Moderate-risk security
B. Fixed-income security
C. High-risk security
D. Risk-free security
2. Which of the following statements best describes the risk premium?
A. The nominal return minus the rate of inflation
B. The extra compensation paid to an investor who invests in a risky asset
C. The yield earned on bonds that are guaranteed by the government
D. The return an investor expects to earn from investing in a risky asset
3. Western Exports stock has a standard deviation of 15.6% and a covariance with the market of .0150.
The market has a standard deviation of 13.7%. What is the correlation of this stock with the market?
A. .702
B. .581
C. .689
D. .774
4. If the correlation coefficient of two assets is zero, what conclusion can be drawn?
A. The two assets are perfectly correlated
B. The two assets are positively correlated.
C. The two assets are uncorrelated
D. The two assets have an undetermined correlation
5. Which one of the following statements best describes an investment opportunity set?
A. A collection of possible risk-return combinations available from portfolios consisting of individual assets
B. An efficient portfolio that provides the highest possible return given its risk profile
C. A grouping of market sectors based upon their levels of risk
D. A portfolio consisting of only stocks with above-average betas
6. Of the following betas, which one has the highest level of systematic risk?
A. 1.87
B. .94
C. 1.72
D. 1.13
7. A portfolio has a Sharpe ratio of .94, a standard deviation of 22.4 percent, and an expected return of
17.3 percent. What's the risk-free rate?
A. 3.23%
B. 3.76%
C. 3.89%
D. 3.58%
8. How can unsystematic risk be eliminated?
A. Through portfolio immunization
B. Through portfolio diversification
C. By reducing a portfolio's standard deviation
D. By increasing a portfolio's beta
9. You own a stock that will produce varying rates of return based upon the state of the economy. Which one of the following will measure the risk associated with owning that stock?
A. Rate of return for a given economic state
B. Weighted average return given the multiple states of the economy
C. Correlation between the returns give the various states of the economy
D. Variance of the returns given the multiple states of the economy
10. For a portfolio consisting of the securities below, what's the portfolio weight of stock C?
Stock Number of Shares Price Per Share
A 300 $22
B 200 $41
C 450 $35
D 600 $39
A. 29.19%
B. 27.42%
C. 33.14%
D. 25.87%
11. If a company announced earnings per share of $1.24 for the quarter when analysts expected earnings of $68, what is the amount of the surprise portion of the announcement?
A. $.32
B. $.56
C. $.42
D. $.51
12. A risky asset has a beta of 1.72 and an expected return of 15.84 percent. What's the risk-free rate if the risk-to-reward ratio is 7.1 percent?
A. 4.21%
B. 4.58%
C. 3.94%
D. 3.63%
13. You own a stock with an overall expected return of 18.32 percent. The economy is expected to either boom or be normal. There's a 65 percent chance the economy will boom. If the economy booms, this stock is expected to return 23 percent. What's the expected return on the stock if the economy is normal?
A. 8.51%
B. 11.84%
C. 10.25%
D. 9.63%
14. If a stock has an expected return of 19.2 and a standard deviation of 15.9 percent, what's the smallest expected loss over the next month given a probability of 5 percent?
A. –5.65%
B. –4.89%
C. –5.92%
D. –5.31%
15. Which of the following statements is true of systematic risk?
A. It affects only one specific firm
B. It affects a large number of assets
C. It's the same as interest rate risk
D. It affects one asset class but not others
16. Which one of the following is another name for market risk?
A. Event risk
B. Diversifiable risk
C. Firm-specific risk
D. Systematic risk
17. A stock has an expected return of 18 percent in a boom economy and 11 percent in a normal economy. The probability of a boom is 25 percent and the probability of a normal economy is 75 percent. What's the variance of the expected returns?
A. 7.59
B. 12.34
C. 5.81
D. 9.19
18. What's the variance of the returns on a security given the following information?
State of
Economy
Probability of State
of Economy
Rate of Return
if State Occurs
Boom .10 21 percent
Normal .65 13 percent
Recession .25 -8 percent
A. 84.52
B. 243.81
C. 124.41
D. 96.85
19. What's the covariance of a security to the market given the following information?
Year Security Returns Market Returns
1 28 24
2 12 15
3 –13 –8
A. 274
B. 321
C. 295
D. 337
20. Stock X has a standard deviation of 21% per year and Stock Y has a standard deviation of 6% per
year. The correlation between Stock A and Stock B is .38. You have a portfolio of these two stocks
wherein Stock X has a portfolio weight of 42%. What is your portfolio standard deviation?
A. 11.84%
B. 10.64%
C. 9.85%
D. 12.92%
