FRL 301 CHAPTER 13 QUESTIONS AND
ANSWERS
hYou own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in
a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your
stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? -
expected return
Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total.
Which one of the following terms most applies to Suzie's investments? - portfolio
Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen
percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the
following? - portfolio weight
Which one of the following is a risk that applies to most securities? - systematic
A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20
percent. What type of risk does this news flash represent? - unsystematic
The principle of diversification tells us that: - spreading an investment across many diverse assets will
eliminate some of the total risk.
The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable
risk. - systematic risk principle
Which one of the following measures the amount of systematic risk present in a particular risky asset
relative to the systematic risk present in an average risky asset? - beta
Which one of the following is a positively sloped linear function that is created when expected returns
are graphed against security betas? - security market line
Which one of the following is represented by the slope of the security market line? - market risk
premium
Which one of the following is the formula that explains the relationship between the expected return on
a security and the level of that security's systematic risk? - capital asset pricing model
Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this
project is referred to as the - cost of capital
The expected return on a stock given various states of the economy is equal to the: - weighted average
of the returns for each economic state
, The expected return on a stock computed using economic probabilities is - a mathematical expectation
based on a weighted average and not an actual anticipated outcome.
The expected risk premium on a stock is equal to the expected return on the stock minus the: - risk-free
rate.
Standard deviation measures which type of risk? - total
The expected rate of return on a stock portfolio is a weighted average where the weights are based on
the: - market value of the investment in each stock.
The expected return on a portfolio considers which of the following factors?
I. percentage of the portfolio invested in each individual security
II. projected states of the economy
III. the performance of each security given various economic states
IV. probability of occurrence for each state of the economy - I, II, III, and IV
The expected return on a portfolio
I. can never exceed the expected return of the best performing security in the portfolio.
II. must be equal to or greater than the expected return of the worst performing security in the portfolio.
III. is independent of the unsystematic risks of the individual securities held in the portfolio.
IV. is independent of the allocation of the portfolio amongst individual securities. - I, II, and III only
If a stock portfolio is well diversified, then the portfolio variance: - may be less than the variance of the
least risky stock in the portfolio
The standard deviation of a portfolio: - can be less than the standard deviation of the least risky security
in the portfolio.
22. The standard deviation of a portfolio - can be less than the weighted average of the standard
deviations of the individual securities held in that portfolio.
Which one of the following statements is correct concerning a portfolio of 20 securities with multiple
states of the economy when both the securities and the economic states have unequal weights?
A. Given the unequal weights of both the securities and the economic states, the standard deviation of
the portfolio must equal that of the overall market.
B. The weights of the individual securities have no effect on the expected return of a portfolio when
multiple states of the economy are involved.
C. Changing the probabilities of occurrence for the various economic states will not affect the expected
standard deviation of the portfolio.
D. The standard deviation of the portfolio will be greater than the highest standard deviation of any
single security in the portfolio given that the individual securities are well diversified.
ANSWERS
hYou own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in
a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your
stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? -
expected return
Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total.
Which one of the following terms most applies to Suzie's investments? - portfolio
Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen
percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the
following? - portfolio weight
Which one of the following is a risk that applies to most securities? - systematic
A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20
percent. What type of risk does this news flash represent? - unsystematic
The principle of diversification tells us that: - spreading an investment across many diverse assets will
eliminate some of the total risk.
The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable
risk. - systematic risk principle
Which one of the following measures the amount of systematic risk present in a particular risky asset
relative to the systematic risk present in an average risky asset? - beta
Which one of the following is a positively sloped linear function that is created when expected returns
are graphed against security betas? - security market line
Which one of the following is represented by the slope of the security market line? - market risk
premium
Which one of the following is the formula that explains the relationship between the expected return on
a security and the level of that security's systematic risk? - capital asset pricing model
Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this
project is referred to as the - cost of capital
The expected return on a stock given various states of the economy is equal to the: - weighted average
of the returns for each economic state
, The expected return on a stock computed using economic probabilities is - a mathematical expectation
based on a weighted average and not an actual anticipated outcome.
The expected risk premium on a stock is equal to the expected return on the stock minus the: - risk-free
rate.
Standard deviation measures which type of risk? - total
The expected rate of return on a stock portfolio is a weighted average where the weights are based on
the: - market value of the investment in each stock.
The expected return on a portfolio considers which of the following factors?
I. percentage of the portfolio invested in each individual security
II. projected states of the economy
III. the performance of each security given various economic states
IV. probability of occurrence for each state of the economy - I, II, III, and IV
The expected return on a portfolio
I. can never exceed the expected return of the best performing security in the portfolio.
II. must be equal to or greater than the expected return of the worst performing security in the portfolio.
III. is independent of the unsystematic risks of the individual securities held in the portfolio.
IV. is independent of the allocation of the portfolio amongst individual securities. - I, II, and III only
If a stock portfolio is well diversified, then the portfolio variance: - may be less than the variance of the
least risky stock in the portfolio
The standard deviation of a portfolio: - can be less than the standard deviation of the least risky security
in the portfolio.
22. The standard deviation of a portfolio - can be less than the weighted average of the standard
deviations of the individual securities held in that portfolio.
Which one of the following statements is correct concerning a portfolio of 20 securities with multiple
states of the economy when both the securities and the economic states have unequal weights?
A. Given the unequal weights of both the securities and the economic states, the standard deviation of
the portfolio must equal that of the overall market.
B. The weights of the individual securities have no effect on the expected return of a portfolio when
multiple states of the economy are involved.
C. Changing the probabilities of occurrence for the various economic states will not affect the expected
standard deviation of the portfolio.
D. The standard deviation of the portfolio will be greater than the highest standard deviation of any
single security in the portfolio given that the individual securities are well diversified.
