FIN3703 ASSIGNMENT 2 STUDY GUIDE
2025/2026: VERIFIED QUESTIONS &
SOLUTIONS
Topic 1: Risk and Return & Portfolio Theory
1. Question: What is the expected return of a stock with a 30% chance
of a 15% return, a 50% chance of a 10% return, and a 20% chance of a -
5% return?
• A. 6.5%
• B. 8.5%
• C. 10.0%
• D. 20.0%
• Rationale: E(R) = Σ [Probability * Return] = (0.30 * 0.15) + (0.50
* 0.10) + (0.20 * -0.05) = 0.045 + 0.05 - 0.01 = 0.085 or 8.5%.
2. Question: The systematic risk of a security, measured by its beta (β),
primarily reflects its sensitivity to:
• A. Firm-specific news events.
• B. The overall stock market movements.
• C. Interest rate changes only.
• D. The company's management quality.
• Rationale: Beta measures a stock's volatility in relation to the
systematic, market-wide risk that cannot be diversified away. Firm-
specific risk is unsystematic and can be diversified.
, 3. Question: According to the Capital Asset Pricing Model (CAPM)
, what is the required return for a stock with a beta of 1.2, a risk-free
rate of 3%, and a market risk premium of 5%?
• A. 8.0%
• B. 9.0%
• C. 10.0%
• D. 11.0%
• Rationale: Required Return = Rf + β(Rm - Rf) = 3% + 1.2(5%) =
3% + 6% = 9%.
4. Question: Diversification is most effective at reducing which type of
risk?
• A. Systematic Risk
• B. Unsystematic Risk
• C. Market Risk
• D. Inflation Risk
• Rationale: Unsystematic risk is unique to a specific company or
industry. By holding a diversified portfolio, the impact of one
company's bad news is offset by others' good news, effectively
eliminating this risk.
5. Question: If a portfolio has a beta of 0, what does that imply about its
expected return according to CAPM?
• A. It should be zero.
• B. It should be equal to the risk-free rate.
• C. It should be equal to the market return.
2025/2026: VERIFIED QUESTIONS &
SOLUTIONS
Topic 1: Risk and Return & Portfolio Theory
1. Question: What is the expected return of a stock with a 30% chance
of a 15% return, a 50% chance of a 10% return, and a 20% chance of a -
5% return?
• A. 6.5%
• B. 8.5%
• C. 10.0%
• D. 20.0%
• Rationale: E(R) = Σ [Probability * Return] = (0.30 * 0.15) + (0.50
* 0.10) + (0.20 * -0.05) = 0.045 + 0.05 - 0.01 = 0.085 or 8.5%.
2. Question: The systematic risk of a security, measured by its beta (β),
primarily reflects its sensitivity to:
• A. Firm-specific news events.
• B. The overall stock market movements.
• C. Interest rate changes only.
• D. The company's management quality.
• Rationale: Beta measures a stock's volatility in relation to the
systematic, market-wide risk that cannot be diversified away. Firm-
specific risk is unsystematic and can be diversified.
, 3. Question: According to the Capital Asset Pricing Model (CAPM)
, what is the required return for a stock with a beta of 1.2, a risk-free
rate of 3%, and a market risk premium of 5%?
• A. 8.0%
• B. 9.0%
• C. 10.0%
• D. 11.0%
• Rationale: Required Return = Rf + β(Rm - Rf) = 3% + 1.2(5%) =
3% + 6% = 9%.
4. Question: Diversification is most effective at reducing which type of
risk?
• A. Systematic Risk
• B. Unsystematic Risk
• C. Market Risk
• D. Inflation Risk
• Rationale: Unsystematic risk is unique to a specific company or
industry. By holding a diversified portfolio, the impact of one
company's bad news is offset by others' good news, effectively
eliminating this risk.
5. Question: If a portfolio has a beta of 0, what does that imply about its
expected return according to CAPM?
• A. It should be zero.
• B. It should be equal to the risk-free rate.
• C. It should be equal to the market return.
