公司理财原版题库Chap010

Chapter 10
Return and Risk: The Capital-Assets-Pricing Model Multiple Choice Questions
1. When a security is added to a portfolio the appropriate return and risk contributions are
A) the expected return of the asset and its standard deviation.
B) the expected return and the variance.
C) the expected return and the beta.
D) the historical return and the beta.
E) these both can not be measured.
Answer: C Difficulty: Medium Page: 255
2. When stocks with the same expected return are combined into a portfolio
A) the expected return of the portfolio is less than the weighted average expected return of the
stocks.
B) the expected return of the portfolio is greater than the weighted average expected return of the
stocks.
C) the expected return of the portfolio is equal to the weighted average expected return of the
stocks.
D) there is no relationship between the expected return of the portfolio and the expected return of
the stocks.
E) None of the above.
Answer: C Difficulty: Easy Page: 261
3. Covariance measures the interrelationship between two securities in terms of
A) both expected return and direction of return movement.
B) both size and direction of return movement.
C) the standard deviation of returns.
D) both expected return and size of return movements.
E) the correlations of returns.
Answer: B Difficulty: Medium Page: 258-259
Use the following to answer questions 4-5:
GenLabs has been a hot stock the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows:
State of Economy Probability GenLabs Returns
Depression .05 -50%
Recession .10 -15
Mild Slowdown .20 5
Normal .30 15%
Broad Expansion .20 25
Strong Expansion .15 40
4. The expected return on GenLabs is:
A) 3.3%
B) 8.5%
C) 12.5%
D) 20.5%
E) None of the above.
Answer: C Difficulty: Medium Page: 256
Rationale:
E(r) = .05(-.5) + .10(-.15) + .2(.05) + .3(.15) + .2(.25) + .15(.40) = .125 = 12.5%
5. The variance of GenLabs returns is
A) .0207
B) .0428
C) .0643
D) .0733
E) None of the above.
Answer: B Difficulty: Medium Page: 256-257
Rationale:
.05(-.50 - .125)2 + .1(-.15 - .125)2 + .2(.05 - .125)2 + .3(.15 - .125)2 + .2(.25 - .125)2 + .15(.40 - .125)2 = .0428
6. The standard deviation of GenLabs returns is
A) .0845
B) .2069
C) .3065
D) .3358
E) None of the above.
Answer: B Difficulty: Medium Page: 256-257
Rationale:
.05(-.50 - .125)2 + .1(-.15 - .125)2 + .2(.05 - .125)2 + .3(.15 - .125)2 + .2(.25 - .125)2 + .15(.40 - .125)2 = .0428
(.0428) = .2069
7. The correlation between two stocks
A) can take in positive values.
B) can take on negative values.
C) cannot be greater than 1.
D) cannot be less than -1.
E) All of the above.
Answer: E Difficulty: Medium Page: 260-261
8. If the correlation between two stocks is –1, the returns
A) generally move in the same direction.
B) move perfectly opposite one another.
C) are unrelated to one another as it is < 0.
D) have standard deviations of equal size but opposite signs.
E) None of the above.
Answer: B Difficulty: Medium Page: 260
9. Stock A has an expected return of 20%, and stock B has an expected return of 4%. However, the
risk of stock A as measured by its variance is 3 times that of stock B. If the two stocks are
combined equally in a portfolio, what would be the portfolio's expected return?
A) 4%
B) 12%
C) 20%
D) Greater than 20%
E) Need more information to answer.
Answer: B Difficulty: Medium Page: 262
Rationale:
Rp = 20(.5) + 4(.5) = 12%
Use the following to answer questions 10-14:
Idaho Slopes (IS) and Dakota Steppes (DS) are both seasonal businesses. IS is a downhill skiing facility, while DS is a tour company that specializes in walking tours and camping. The equally likely returns on each company over the next year is expected to be:
Economy Idaho Slopes Dakota Steppes
Strong Downturn -10% 2%
Mild Downturn - 4% 7%
Slow Growth 4% 6%
Moderate Growth 12% 4%
Strong Growth 20% 4%
10. The mean expected returns of Idaho Slopes and Dakota Steppes are
A) 4.0%; 6.0%
B) 4.4%; 4.6%
C) 5.5%; 5.8%
D) 10.0%; 6.0%
E) None of the above
Answer: B Difficulty: Medium Page: 256
Rationale:
IS = (-10%-4%+4%+12%+20%)/5 = 4.4%
DS = (2%+7%+6%+4%+4%)/5 = 4.6%
11. The variances of Idaho Slopes and Dakota Steppes are
A) .0145; .00038
B) .011584; .000304
C) .006454; .000154
D) .0008068; .000193
E) None of the above
Answer: B Difficulty: Hard Page: 256-257
Rationale:
2IS = .2 = 0.011584
2DS = .2 = .000304
12. The covariance between the Idaho Slopes and Dakota Steppes returns is
A) .00187
B) .00240
C) .00028
D) .000056
E) None of the above
Answer: C Difficulty: Hard Page: 258-259
Rationale:
ISDS = = .00028
13. If Idaho Slopes and Dakota Steppes are combined in a portfolio with 50% invested in each, the
expected return and risk would be?
A) 4.5%; 0%
B) 4.5%; 5.48%
C) 5.0%; 0%
D) 5.625%; 37.2%
E) 8.0%; 8.2%
Answer: B Difficulty: Hard Page: 261-262
Rationale:
Rp = .5(.044) + .5(.046) = .045 = 4.5%
p = .5 = .05477 = 5.48%
14. The correlation between stocks A and B is the
A) covariance between A and B divided by the standard deviation of A times the standard
deviation of B.
B) standard deviation A divided by the standard deviation of B.
C) standard deviation of B divided by the covariance between A and B.
D) variance of A plus the variance of B dividend by the covariance.
E) None of the above.
Answer: A Difficulty: Medium Page: 260
15. A portfolio is entirely invested into Buzz's Bauxite Boring Equity, which is expected to return 16%,
and Zum's Inc. bonds, which are expected to return 8%. Sixty percent of the funds are invested in Buzz's and the rest in Zum's. What is the expected return on the portfolio?
A) 6.4%
B) 9.6%
C) 12.8%
D) 24.2%
E) Need additional information.
Answer: C Difficulty: Medium Page: 262
Rationale:
R p = .60(R Buzz)+.40(R Zum) = .60(16%) + .40(8%) = 12.8%
16. You have plotted the data for two securities over time on the same graph, ie., the month return of
each security for the last 5 years. If the pattern of the movements of the two securities rose and fell as the other did, these two securities would have
A) no correlation at all.
B) a weak negative correlation.
C) a strong negative correlation.
D) a strong positive correlation.
E) one can not get any idea of the correlation from a graph.
Answer: D Difficulty: Easy Page: 260
17. If the covariance of stock 1 with stock 2 is -.0065, then what is the covariance of stock 2 with stock
1?
A) -.0065
B) +.0065
C) greater than +.0065
D) less than -.0065
E) Need additional information.
Answer: A Difficulty: Medium Page: 258-259
18. If you have a portfolio of two risky stocks which turns out to have no diversification benefit. The
reason you have no diversification is the returns
A) are too small.
B) move perfectly opposite of one another.
C) are too large to offset.
D) move perfectly with one another.
E) are completely unrelated to one another.
Answer: D Difficulty: Easy Page: 264
19. A portfolio will usually contain
A) one riskless asset.
B) one risky asset.
C) two or more assets.
D) no assets.
E) None of the above.
Answer: C Difficulty: Easy Page: 261
20. The variance of Stock A is .004, the variance of the market is .007 and the covariance between the
two is .0026. What is the correlation coefficient?
A) .9285
B) .8542
C) .5010
D) .4913
E) .3510
Answer: D Difficulty: Medium Page: 260
Rationale:
Standard deviation of B = .06325, Standard deviation of the market = .08366
CORR = COV/(SDA)(SDM) = .0026/(.06325)(.08366) = .4913
21. If the correlation between two stocks is +1, then a portfolio combining these two stocks will have a
variance that is
A) less than the weighted average of the two individual variances.
B) greater than the weighted average of the two individual variances.
C) equal to the weighted average of the two individual variances.
D) less than or equal to average variance of the two weighted variances, depending on other
information.
E) None of the above.
Answer: C Difficulty: Medium Page: 264
22. The opportunity set of portfolios is
A) all possible return combinations of those securities.
B) all possible risk combinations of those securities.
C) all possible risk-return combinations of those securities.
D) the best or highest risk-return combination.
E) the lowest risk-return combination.
Answer: C Difficulty: Medium Page: 267
23. A portfolio has 50% of its funds invested in Security One and 50% of its funds invested in Security
Two. Security One has a standard deviation of 6. Security Two has a standard deviation of 12. The securities have a coefficient of correlation of .5. Which of the following values is closest to
portfolio variance?
A) .0027
B) .0063
C) .0095
D) .0104
E) One must have covariance to calculate expected value.
Answer: B Difficulty: Medium Page: 262
Rationale: Var. = .52(.06)2 + .52(.12)2 + 2(.5)(.5)(.5)(6)(12) = .0009 + .0036 + .0018 = .0063
24. A portfolio has 25% of its funds invested in Security C and 75% of its funds invested in Security D.
Security C has an expected return of 8% and a standard deviation of 6. Security D has an expected return of 10% and a standard deviation of 10. The securities have a coefficient of correlation of .6.
Which of the following values is closest to portfolio return and variance?
A) .090; .0081
B) .095; .001675
C) .095; .0072
D) .100; .00849
E) Cannot calculate without the number of covariance terms.
Answer: C Difficulty: Medium Page: 261-262
Rationale:
E(R) = .25(.08) + .75(.10) = .095 = 9.5%
Variance = .252(.06)2 + .752(.10)2 + 2(.25)(.75)(.06)(.60)(.10) = .0072
25. When many assets are included in a portfolio or index the risk of the portfolio or index will be
A) greater than the risk of the securities because the correlations are greater than 1.
B) equal to the risk of the securities because the correlations are equal to 1.
C) less than the risk of the securities because the correlations are usually less than 1.
D) unaffected by the risk of securities because their correlations are less than 1.
E) None of the above.
Answer: C Difficulty: Medium Page: 264
26. The efficient set of portfolios
A) contains the portfolio combinations with the highest return for a given level of risk.
B) contains the portfolio combinations with the lowest risk for a given level of return.
C) is the lowest overall risk portfolio.
D) Both A and B
E) Both A and C.
Answer: D Difficulty: Medium Page: 267
27. Diversification can effectively reduce risk. Once a portfolio is diversified the type of risk
remaining is
A) individual security risk.
B) riskless security risk.
C) risk related to the market portfolio.
D) total standard deviations.
E) None of the above.
Answer: C Difficulty: Easy Page: 274
28. For a highly diversified equally weighted portfolio with a large number of securities, the portfolio
variance is
A) the average covariance.
B) the average expected value.
C) the average variance.
D) the weighted average expected value.
E) the weighted average variance.
Answer: A Difficulty: Medium Page: 273-274
29. A well-diversified portfolio has negligible
A) expected return.
B) systematic risk.
C) unsystematic risk.
D) variance.
E) Both C and D.
Answer: C Difficulty: Easy Page: 274
30. The CML is the pricing relationship between
A) efficient portfolios and beta.
B) the risk-free asset and standard deviation of the portfolio return.
C) the optimal portfolio and the standard deviation of portfolio return.
D) beta and the standard deviation of portfolio return.
E) None of the above.
Answer: C Difficulty: Medium Page: 279
31. The SML is the equilibrium pricing relationship for
A) efficient portfolios.
B) single securities.
C) inefficient portfolios.
D) All of the above.
E) None of the above.
Answer: D Difficulty: Easy Page: 285-286
32. A typical investor is assumed to be
A) a fair gambler.
B) a gambler.
C) a single security holder.
D) risk averse.
E) risk neutral.
Answer: D Difficulty: Medium Page: 275
33. You've owned a share of stock for 6 years. It returned 5% in 3 of those years and -5% in the other
3. What was the variance?
A) 0
B) .0015
C) .0030
D) .0150
E) .0400
Answer: C Difficulty: Medium Page: 256-257
Rationale:
VAR= {(5-0)2 + (5-0)2 +(5-0)2 + (5-0)2 +(5-0)2 + (5-0)2/5 - 30
34. The total number of variance and covariance terms in portfolio is N2. How many of these would be
(including non-unique) covariance's?
A) N
B) N2
C) N2 - N
D) N2 - N/2
E) None of the above.
Answer: C Difficulty: Medium Page: 272
35. Total risk can be divided into
A) standard deviation and variance.
B) standard deviation and covariance.
C) portfolio risk and beta.
D) systematic risk and unsystematic risk.
E) portfolio risk and covariance.
Answer: D Difficulty: Easy Page: 274
36. Beta measures
A) the ability to diversify risk.
B) how an asset covaries with the market.
C) the actual return on an asset.
D) the standard of the assets' returns.
E) All of the above.
Answer: B Difficulty: Medium Page: 283
37. The dominant portfolio with the lowest possible risk measures is
A) the efficient frontier.
B) the minimum variance portfolio.
C) the upper tail of the efficient set.
D) the tangency portfolio.
E) None of the above.
Answer: B Difficulty: Medium Page: 266
38. The measure of beta associates most closely with
A) idiosyncratic risk.
B) risk-free return.
C) systematic risk.
D) unexpected risk.
E) unsystematic risk.
Answer: C Difficulty: Easy Page: 269
39. An efficient set of portfolios is
A) the complete opportunity set.
B) the portion of the opportunity set below the minimum variance portfolio.
C) only the minimum variance portfolio.
D) the dominant portion of the opportunity set.
E) only the maximum return portfolio.
Answer: D Difficulty: Medium Page: 270
40. A stock with a beta of zero would be expected to have a rate of return equal to
A) the risk-free rate.
B) the market rate.
C) the prime rate.
D) the average AAA bond.
E) None of the above.
Answer: A Difficulty: Medium Page: 285
41. The combination of the efficient set of portfolios with a riskless lending and borrowing rate results
in
A) the capital market line which shows that all investors will only invest in the riskless asset.
B) the capital market line which shows that all investors will invest in a combination of the
riskless asset and the tangency portfolio.
C) the security market line which shows that all investors will invest in the riskless asset only.
D) the security market line which shows that all investors will invest in a combination of the
riskless asset and the tangency portfolio.
E) None of the above.
Answer: B Difficulty: Medium Page: 278
42. According to the CAPM
A) the expected return on a security is negatively and non-linearly related to the security's beta.
B) the expected return on a security is negatively and linearly related to the security's beta.
C) the expected return on a security is positively and linearly related to the security's variance.
D) the expected return on a security is positively and non-linearly related to the security's beta.
E) the expected return on a security is positively and linearly related to the security's beta.
Answer: E Difficulty: Easy Page: 282
43. The diversification effect of a portfolio of two stocks
A) increases as the correlation between the stocks declines.
B) increases as the correlation between the stocks rises.
C) decreases as the correlation between the stocks rises.
D) Both A and C.
E) None of the above.
Answer: A Difficulty: Medium Page: 266
44. The elements along the diagonal of the Variance / Covariance matrix are
A) covariances.
B) security weights.
C) security selections.
D) variances.
E) None of the above.
Answer: D Difficulty: Medium Page: 272
45. The elements in the off-diagonal positions of the Variance / Covariance matrix are
A) covariances.
B) security selections.
C) variances.
D) security weights.
E) None of the above.
Answer: A Difficulty: Medium Page: 272
46. The separation principle states that an investor will
A) choose any efficient portfolio and invest some amount in the riskless asset to generate the
expected return.
B) choose an efficient portfolio based on individual risk tolerance or utility.
C) never choose to invest in the riskless asset because the expected return on the riskless asset is
lower over time.
D) invest only in the riskless asset and tangency portfolio choosing the weights based on
individual risk tolerance.
E) All of the above.
Answer: D Difficulty: Medium
47. The beta of a security is calculated by
A) dividing the covariance of the security with the market by the variance of the market.
B) dividing the correlation of the security with the market by the variance of the market.
C) dividing the variance of the market by the covariance of the security with the market.
D) dividing the variance of the market by the correlation of the security with the market.
E) None of the above.
Answer: A Difficulty: Medium Page: 283
48. If investors possess homogeneous expectations over all assets in the market portfolio, when riskless
lending and borrowing is allowed, the market portfolio is defined to
A) be the same portfolio of risky assets chosen by all investors.
B) have the securities weighted by their market value proportions.
C) be a diversified portfolio.
D) All of the above.
E) None of the above.
Answer: D Difficulty: Medium Page: 280
49. A portfolio contains two assets. The first asset comprises 40% of the portfolio and has a beta of 1.2.
The other asset has a beta of 1.5. The portfolio beta is
A) 1.35
B) 1.38
C) 1.42
D) 1.50
E) 1.55
Answer: B Difficulty: Medium Page: 287
Rationale:
βp = .4(1.2)+.6(1.5)=1.38
50. A portfolio contains four assets. Asset 1 has a beta of .8 and comprises 30% of the portfolio. Asset
2 has a beta of 1.1 and comprises 30% of the portfolio. Asset
3 has a beta of 1.5 and comprises 20%
of the portfolio. Asset 4 has a beta of 1.6 and comprises the remaining 20% of the portfolio. If the riskless rate is expected to be 3% and the market risk premium is 6%, what is the beta of the
portfolio?
A) 0.80
B) 1.10
C) 1.19
D) 1.25
E) 1.40
Answer: C Difficulty: Hard Page: 287
Rationale:
βp = .3(.8)+.3(1.1)+.2(1.5)+.2(1.6)=1.19
51. The characteristic line is graphically depicted as
A) the plot of the relationship between beta and expected return.
B) the plot of the returns of the security against the beta.
C) the plot of the security returns against the market index returns.
D) the plot of the beta against the market index returns.
E) None of the above.
Answer: C Difficulty: Medium Page: 281-282
52. Recent research by Fama and French calls into questions the CAPM because they find
A) average security returns are negatively related to the firm P/E and M/B ratios.
B) P/E and M/B are only two of several factors explaining average returns.
C) a weak relationship between average returns and beta for 1941 to 1990 and no relationship
from 1963 to 1990.
D) Both A and C.
E) Both B and C.
Answer: D Difficulty: Hard Page: 295
53. Further study to evaluate the Fama-French results and the CAPM are needed because
A) P/E and M/B may be two of a large set of factors which were found due to hindsight bias.
B) A positive relationship is found over the period 1927 to 1990 indicating more than 50 years of
data are necessary for proper CAPM testing.
C) Annual data based estimates of beta show positive relationships to average returns, while
monthly betas do not.
D) All of the above.
E) None of the above.
Answer: D Difficulty: Hard Page: 295-296
Essay Questions
54. Given the following data:
Year Returns – Ink, Inc. Returns – S & P 500 1 10% 15% 2 0% -2% 3 -5% -2% 4 15 10% 5 5% 0%
Calculate the covariance between Ink and the S&P 500.
Difficulty: Hard Page: 258-259 Answer:
R I I
R
R I - I
R R SP SP R R SP –SP R
.10 .05 .05 .15 .042
.108 .00 .05 -.05 -.02 .042 -.062 -.05 .05 -.10 -.02 .042 -.062 .15 .05 .10 .10 .042 .058 .05
.05
.00 .00 .0421
-.042
(R I - I R ) x (R SP –SP R )
.05 x.108 .0054 -.05 x -.062 .0031 -.10 x -.062 .0062 .10 x .058 .0058
0 x -.402
.0205/5=.0041
55. A portfolio is made up of 75% of stock 1, and 25% of stock 2. Stock 1 has a variance of .08, and
stock 2 has a variance of .035. The covariance between the stocks is -.001. Calculate both the variance and the standard deviation of the portfolio. Difficulty: Medium Page: 262 Answer: σ² = (.75)²(.08) + (.25)²(.035) + 2(.25)(.75)(-.001) = .0468 σ = .2163
56. Illustrate and explain the impact of adding securities to a portfolio assuming the securities are of
average correlation with each other. Difficulty: Medium Page: 274
Answer:
As N increases, portfolio risk decreases. As N gets large, portfolio risk approaches the market risk.
For details please refer to the text Figure 10.7 page 274.
57. Given the following information on 3 stocks:
Stock A Stock B Stock C T-Bills Market Port
Exp. Return .19 .15 .09 .07 .18
Variance .0200 .1196 .0205 .0000 .0064
Covariance with
Mkt Portfolio .007 .0045 .0013 .0000 .0064
Using the CAPM, calculate the expected return for Stock's A, B, and C. Which stocks would you recommend purchasing?
Difficulty: Hard Page: 285-287
Answer:
B A = .0070/.0064 = 1.094; ra = .07 + (.18-.07)1.094 = .1903
B B = .0045/.0064 = 0.703; rb = .07 + (.18-.07)0.703 = .1473
B C = .0013/.0064 = 0.203; rc = .07 + (.18-.07)0.203 = .0.923
Indifferent on A as .1903 = .19.
Would buy B as .15 > .1473.
Would not buy C as .09 < .0923.
58. Returns for the IC Company and for the S&P 500 Index over the previous 4-year period are given
below:
Year IC Co. S & P 500
1 30% 17%
2 0% 20%
3 -8% 7%
4 0% 5%
What are the average returns on IC and on the S&P 500 index? If you had invested $1.00 in IC, how much would you have had after 4 years? What is the correlation between the returns on IC and the S&P?
Difficulty: Medium Page: 259
Answer:
Average return is 22/4 = 5.5% for IC and 49/4 = 12.25% for the S&P.
After 4 years $1.00 in IC grows to $1.00(1.30)(.92) = 1.196 = $1.20.
For n=4
σIC = 14.52, σSP = 6.38, σIC,SP = 46.125, determining ( r IC,SP ) =0.498
For n-1 = 3
σIC = 16.76 σSP = 7.37 σIC,SP = 61.50 determining (r IC,SP ) =. 498
59. Draw and explain the relationship between the opportunity set for a two asset portfolio when the
correlation is: [Choose from -1, -.5, 0, +.5, and +1] Difficulty: Hard Page: 267-268 Answer: ∙ Opportunity set is made up of a portfolio of two asset combinations with weights from (0,100) to (100,0). ∙ Upper point--maximum return portfolio, 100% in highest return sec. ∙ Inflection point--minimum variance portfolio ∙ See diagram, pg. 267
MRP
Std. Deviation
Rp
Opportunity Set
Between the MVP (Minimum Variance Portfolio) and
the MRP (Maximum Return Portfolio) is the efficient set of portfolios.
60. The diagram below represents an opportunity set for a two asset combination. Indicate the correct
efficient set with labels; explain why it is so. Difficulty: Hard Page: 267-268 Answer: ∙ Efficient set is portion of opportunity set that dominates. ∙ Provides maximum return for given risk or converse.
MRP
Std. Deviation
Rp
Opportunity Set
A is on the efficient frontier with the best return to risk combination. Portfolios
on the frontier dominate all other portfolios. A dominates both B and C. B has a higher standard deviation for the same return while C has a lower return for the same standard deviation.
A
B
C
X
X。