1. Which one of the following categories of securities had the highest average return for the period 1926–2013?

A. Long-term government bonds

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B. Small-company stocks

C. Long-term corporate bonds

D. Large-company stocks

2. A stock has a beta of 1.2 and an expected return of 17 percent. A risk-free asset currently earns 5.1 percent. The beta of a portfolio comprised of these two assets is 0.85. What percentage of the portfolio is invested in the stock?

A. 92 percent

B. 77 percent

C. 71 percent

D. 81 percent

3. _______ market efficiency suggests that at a minimum, the current price of the stock reflects the stock’s own past prices.

A. Weak form

B. Strong form

C. Semistrong

D. Loose form

4. Six months ago, you purchased 100 shares of stock in Global Trading at a price of $38.70 a share. The stock pays a quarterly dividend of $.15 a share. Today, you sold all of your shares for $40.10 per share. What’s the total amount of your dividend income on this investment?

A. $15

B. $45

C. $50

D. $30

5. 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?

A. Evenly distributed market

B. Blume’s market

C. Efficient capital market

D. Zero volatility market

6. Suppose that you purchased 300 shares of a stock at $36 per share, ignoring all commissions. Assume the stock paid a dividend of $2.15 per share for the year. The stock price rose to $41.05 per share and was then sold at that price. What was the dividends yield? (Round your answer to the nearest tenth of a percent.)

A. 5.2 percent

B. 6 percent

C. 5 percent

D. 6.5 percent

7. Aimee is the owner of a stock with annual returns of 27 percent, –32 percent, 11 percent, and 23 percent for the last four years, respectively. She thinks the stock may be able to achieve a return of 50 percent or more in a single year. What’s the probability that your friend is correct?

A. Greater than 1 percent but less than 2.5 percent

B. Greater than 16 percent

C. Greater than .5 percent but less than 1 percent

D. Greater than 2.5 percent but less than 16 percent

8. Eliminating unsystematic risk by holding a portfolio of different assets reflects

A. the elimination of systematic risk.

B. beta coefficiency.

C. the principle of diversification.

D. portfolio variance spreading.

9. West Wind Tours stock is currently selling for $48 a share. The stock has a dividend yield of 3.2 percent. How much dividend income will you receive per year if you purchase 200 shares of this stock?

A. $307.20

B. $362.00

C. $24.96

D. $36.20

10. Systematic risk is measured by the

A. beta.

B. arithmetic average.

C. mean.

D. geometric average.

11. The market risk premium—the concept that investors should be rewarded for taking on extra risk—is illustrated as the

A. slope of the SML.

B. y-access intersection of the SML.

C. x-access intersection of the SML.

D. peak of the SML.

12. One year ago, you purchased a stock at a price of $32.15. The stock pays quarterly dividends of $.20 per share. Today, the stock is selling for $33.09 per share. What’s your capital gain on this investment?

A. $1.14

B. $.94

C. $1.04

D. $.74

13. With regard to the efficient markets hypothesis (EMH), which of the following answers illustrates market inefficiencies?

A. Delayed reactions, overreactions, and corrections

B. Insider trading, corruption, and government bailouts

C. An immediate price fall after bad news is announced

D. An immediate price jump after good news is announced

14. The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B. Stock A has a beta of 0.82 and stock B has a beta of 1.29. This information implies that

A. stock A is riskier than stock B, and both stocks are fairly priced.

B. either stock A is overpriced, stock B is underpriced, or both.

C. either stock A is underpriced, stock B is overpriced, or both.

D. stock A is less risky than stock B, and both stocks are fairly priced.

15. Suppose you estimate a boom will occur only 45 percent of the time and that the expected return on the portfolio in such an environment is 40 percent. You also estimate that a recession will occur 55 percent of the time and that the expected return in such an environment is 5 percent. What’s the expected return of the portfolio?

A. 20.75 percent

B. 5 percent

C. 40 percent

D. 22.5 percent

16. How can the expected return of a portfolio be calculated?

A. Take a weighted average by taking the expected return of each asset and multiplying by their proportion in the portfolio. Add the results.

B. Square the expected returns before multiplying by the portfolio weights. Add each of the results, and then take the square root of the sum.

C. If the portfolio has two assets, multiply the expected returns by 50 percent, and then add the results. If the portfolio has three assets, multiply the expected returns by 1/3, and so on. Then multiply the result. The proportions of each asset do not affect the answer.

D. Expected return can be calculated only with Excel.

17. How do you calculate risk premium?

A. The risk-free rate minus the expected return

B. Expected return plus the risk-free rate

C. Expected return divided by the risk-free rate

D. Expected return minus the risk-free rate

18. The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent. The risk-free rate of return is 3.7 percent. What’s the expected market risk premium?

A. 7.90 percent

B. 7.02 percent

C. 11.22 percent

D. 10.63 percent

19. The term “unsystematic risk” is synonymous with which of the following?

A. Undiversifiable risk

B. Systematic risk

C. Beta risk

D. Diversifiable risk

20. The intercept point of the security market line is the rate of return that corresponds to

A. a return of zero.

B. the market rate.

C. the risk-free rate.

D. the market risk premium.

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