Question

1) The systematic risk of an investment:

A. is likely to be higher in a rising market

B. results from its own unique factors

C. depends upon market volatility

D. cannot be reduced by diversification

2) Consider the CAPM. The risk-free rate is 5% and the expected return on the market is 15%. What is the beta on a stock with an expected return of 12%?

A. 0.5

B. 0.7

C. 1.2

D. 1.4

3) An asset with a negative beta:

A. has a negative expected return

B. is expected to have a higher return than the market during bad market times

C. both A and B

D. none of the above

4) If an asset has a beta of 1.3 and the risk-free rate is 5% and the market risk premium is 8% then:

A. the expected return on the asset is 15.40%

B. the expected return on the asset is 8.90%

C. the expected return on the asset is 3.90%

D. cannot be determined without knowing the expected rate of inflation

5) If the beta of the market index is 1.0 and the standard deviation of the market index increases from 12% to 18%, what is the beta of the market index following this increase?

A. 0.8

B. 1.0

C. 1.2

D. 1.5

6) The security market line represents __________

A. the risk-return for all portfolios which can be constructed from the risk-free investment and the optimal risky portfolio

B. the relationship between beta and expected return

C. the relationship between an investment’s return and the return on an index

D. the relationship between an investment's return and the return on a negative beta portfolio

Answer 1

1. The systematic risk of an investment is the risk that cannot be reduced by diversification.

So, the correct option is option D.

2. The formula for the CAPM is :

Re = Rf + beta (Rm - Rf)

0.12 = 0.05 + beta ( 0.15 - 0.05)

Beta = 0.7

So, the correct option is option B.

3. An asset with a negative beta, generally generates returns opposite to the market returns.Such a stock, is expected to generate positive return bad times in the market. The negative beta stocks moves in the inverse direction to the market.

So, the correct option is option B.

4. The expected return on the asset is:

Re = Rf + beta(Rm - Rf)

= 5 + 1.3*8

=15.4%

So, the expected return on the stock is 15.4%.

So, the correct option is option A.