Final

Question 1

A stock has a beta of 1.18. A portfolio manager has estimated that the stock is currently priced to yield an expected return of 13.2 percent. The risk-free rate is 4.1 percent and the expected return on the market portfolio is 11.6 percent. According to the Capital Asset Pricing Model, which of the following statements is true?

Answer 1

The stock is underpriced because its estimated return is higher than its required return.

Question 2

The US Securities and Exchange Commission regularly charges individuals with insider trading and claims that those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than ______ form efficient.

Answer 2

Strong

Question 3

Which form of market efficiency will most likely offer the greatest profit potential to an outstanding professional stock analyst?

Answer 3

weak form

Question 4

Which of the following statements concerning risk are correct?

I. Non-diversifiable risk is measured by beta

II. The risk premium increases as diversifiable risk increases

III. Systematic risk is another name for non-diversifiable risk

IV. Diversifiable risks are market risks you cannot avoid

Answer 4

I and III

Question 5

Which one of the following is irrelevant to a well-diversified investor?

Answer 5

unsystematic risk

Question 6

1. Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. What term refers to the difference between these two rates of return?

Answer 6

risk premium

Question 7

2. What is the definition of the variance of an investment’s annual returns over a number of years?

Answer 7

The average squared difference between the actual returns and the arithmetic average return.

Question 8

3. Standard deviation is a measure of which one of the following?

Answer 8

Volatility

Question 9

4. The average compound return earned per year over a multiyear period is called the _____ average return.

Answer 9

geometric

Question 10

Can be effectively eliminated by portfolio diversification.

Answer 10

Unsystematic risk:

Question 11

The principle of diversification tells us that:

Answer 11

Spreading an investment across many diverse assets will reduce unsystematic risk.

Question 12

Which one of the following should earn the most risk premium based on CAPM?

Answer 12

C. Stock with a beta of 1.28.

Question 13

Standard deviation is a measure of ______________ while beta is a measure of ____________________.

Answer 13

Total risk; systematic risk

Question 14

You 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?

Answer 14

expected return

Question 15

You recently overheard your boss telling someone that if he’d actually crunched some numbers and done some analysis instead of just going with his instincts, he
never would have opened the new store in Centre City. Which one of the following caused your boss to make a bad decision?

Answer 15

after heuristic

Question 16

Which one of the following best illustrates an error which you, as a project manager, might make due to confirmation bias?

Answer 16

Listening to the advice of subordinates with whom you agree while ignoring the advice of subordinates with D. whom you tend to disagree.

Question 17

Steve purchased a stock last year for $34 a share. The stock increased in value to $36 a share before declining to its current value of $30. Steve has decided to sell the stock, but only if he can receive $34 a share or better. Steve is suffering most from which one of the following behavioral conditions?

Answer 17

loss aversion

Question 18

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?

Answer 18

efficient capital market

Question 19

he risk premium (sometimes referred to as excess return) is computed as the:

Answer 19

A return on risky security minus the risk free rate

Question 20

Recently, a neighbor you have known for years won a lottery and received a $250,000 prize. This neighbor decided to invest all of his winnings in a new business venture that he knew only had a 5 percent chance of success. Previous to this, the neighbor had always been ultra conservative with his money and had refused to invest in this business venture as recently as last week. Which one of the following behaviors most

Answer 20

house money

Question 21

Which one of the following is most directly affected by the level of systematic risk in a security?

Answer 21

expected rate of return

Question 22

Roger’s Meat Market is a chain of retail stores that limits its sales to fresh­cut meats. The stores have been very profitable in northern cities. However, when two stores were opened in the south, both lost money and had to be closed. Roger, the owner, has now concluded that no southern­based store should be opened as it would not be profitable. Which one of the following applies to Roger?

Answer 22

representativeness heuristic