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**EXAMINATION NUMBER**

**06058701**

**Risk and Return**

** **

1. The slope of the security market line, which is the difference between the expected return on a market portfolio and the risk-free rate, is called the

** **

** A. **market risk premium.

** B. **portfolio variance.

** C. **arithmetic average return.

** D. **cost of capital.

2. A stock with a beta coefficient (β) of 2.0 has

** **

** A. **one-tenth of the risk of an average asset.

** B. **the same systemic risk as an average asset.

** C. **one-half the systemic risk of an average asset.

** D. **twice as much systemic risk as an average asset.

3. In a market, when all information of every kind is reflected in stock prices, the market is said to be

** **

** A. **weak form efficient.

** B. **geometrically efficient.

** C. **strong form efficient.

** D. **average return efficient.

4. Suppose that you purchased 200 shares of a stock at $46 per share (ignore all

commissions). Assume the stock paid a dividend of $1.20 per share for the year.

The stock price rose to $52.78 per share, and was then sold at that price. What

was the total amount of dividends received?

** **

** A. **$120 **C. **$9,200

** B. **$240 **D. **$1,356

5. The term *diversifiable risk *is synonymous with which of the following?

** **

** A. **Risk premium **C. **Systematic risk

** B. **Unsystematic risk **D. **Total risk

6. The average *compound *return earned per year over a multiyear period is called the

** **

** A. **arithmetic average return. **C. **geometric average return.

** B. **normal distribution. **D. **standard deviation.

7. Which of the following is the formula used to describe the components of a risk premium?

** **

** A. ***risk premium = expected return + projected return*

** B. ***total returns = expected return + unexpected return*

** C. ***unexpected returns = systematic portion + unsystematic portion*

** D. ***risk premium = expected return – risk-free rate*

8. Suppose that you purchased 300 shares of a stock at $35 per share (ignore all

commissions). Assume the stock paid a dividend of $1.45 per share for the year.

The stock price rose to $42.50 per share, and was then sold at that price. What

was the total dollar return?

** **

** A. **$12,750 **C. **$2,250

** B. **$2,685 **D. **$435

9. The concept that asserts that well-organized capital markets, such as the NYSE,

are efficient is called the

** **

** A. **geometric average return. **C. **efficient markets hypothesis.

** B. **normal distribution. **D. **standard deviation.

10. The percentage of a portfolio’s total value placed in a particular investment is called the

** **

** A. **portfolio weight. **C. **portfolio variance.

** B. **beta coefficient. **D. **systematic risk.

11. The positively sloped straight line that shows the relationship between expected return

and the beta coefficient is called the

** **

** A. **frequency distribution. **C. **geometric average return.

** B. **bell curve. **D. **security market line.

12. Assume you purchased 150 shares of a stock at $18 per share (ignore all commissions).

The stock paid a dividend of $0.75 per share for the year. What is the total cost of

the stock?

** **

** A. **$112.50 **C. **$1,800

** B. **$2,812.50 **D. **$2,700

13. A high degree of uncertainty about the future for a firm is likely to lead to

** **

** A. **greater variability in the firm’s stock price.

** B. **lower variability in the firm’s stock price.

** C. **a lower variance and standard deviation.

** D. **less volatile returns on the stock.

14. The equation of the security market line that shows the relationship between expected

return and beta is called the

** **

** A. **security market beta line.

** B. **unsystematic risk equation.

** C. **principle of diversification.

** D. **capital asset pricing model (CAPM).

15. The minimum required return on a new investment is called the

** **

** A. **average return. **C. **beta coefficient.

** B. **cost of capital. **D. **risk premium.

16. The return earned in an average year over a multiyear period is called the

** **

** A. **normal distribution. **C. **arithmetic average return.

** B. **geometric average return. **D. **standard deviation.

17. Which of the following is the formula used to calculate the total return on a stock?

** **

** A. ***Total Return = Expected Return + Unexpected Return*

** B. ***Total Return = Unexpected Return + Stock Price*

** C. ***Total Return = Stock Price *_ *Number of Shares*

** D. ***Total Return = Dividend *_ *Number of Shares*

18. The concept of spreading an investment across a number of assets to eliminate some

(but not all) of the risk is called the

** **

** A. **systematic component of return. **C. **principle of diversification.

** B. **portfolio variance. **D. **beta coefficient.

19. Suppose that you purchased 100 shares of a stock at $28 per share (ignore all

commissions). Assume that the stock paid a dividend of $1.40 per share for the

year. The stock price rose to $34.65 per share, and was then sold at that price.

What was the total amount of the capital gain (or loss)?

** **

** A. **$2,800 **C. **$140

** B. **$665 **D. **$3,465

20. When you move from a risk-free investment to a risky investment, the excess return

required on the risky investment is called a

** **

** A. **risk premium. **C. **frequency distribution.

** B. **portfolio weight. **D. **portfolio variance.

Solution Description

1. The slope of the security market line, which is the difference between the expected return on a market portfolio and the risk-free rate, is called the

** **

** ****A. **market risk premium.

** ****B. **