Finance 355: Investments
QUIZ 3

Quiz Paper A 1, Quiz Paper B 6
Where will a security plot in relation to the security market line (SML) if it has a
beta of 1.1 and is overvalued?
a. to the right of the overall market and above the SML
b. to the right of the overall market and below the SML
c. to the left of the overall market and above the SML
d. to the left of the overall market and below the SML
e. on the SML

Quiz Paper A 2, Quiz Paper B 7
Wilson Farms’ stock has a beta of 1.5 and an expected return of 12%. The risk-free
rate is 3% and the market risk premium is 7%. This stock is _____ because the
CAPM return for the stock is _____ percent.
a. undervalued; 7.5
b. undervalued; 9
c. fairly valued; 12
d. overvalued; 13.5
e. overvalued; 15

Quiz Paper A 3, Quiz Paper B 8
The following portfolio has 50% in stock A and 25% in each of stock B and C. What
is the portfolio standard deviation?
State of Economy Probability of State of Economy Stock A
Returns
Stock B
Returns
Stock C
Returns
Boom 0.5 10% 15% 20%
Bust 0.5 8% 4% 0%
a. 3.830%
b. 6.187%
c. 4.375%
d. 0.191%
e. 5.560%

Quiz Paper A 4, Quiz Paper B 9
Which one of the following is the set of portfolios that provides the maximum return
for a given standard deviation?
a. minimum variance portfolio
b. Markowitz efficient frontier
c. correlated market frontier
d. asset allocation relationship
e. diversified portfolio line

Quiz Paper A 5, Quiz Paper B 10
A company announces that its earnings have decreased 25 percent from the previous
year, but analysts actually expected a 50 percent decrease. What is the likely effect
on the stock price?
a. The stock price will increase.
b. The stock price  will decrease
c. The stock price will increase or decrease.
d. The stock price will not be affected.
e. The stock price will increase, decrease, or remain constant.

Quiz Paper A 6, Quiz Paper B 1
Of the following, Stock _____ has the greatest level of total risk and Stock _____
has the highest risk premium.
a. A; B
b. B; E
4
c. C; D
d. D; C
e. C; E

Quiz Paper A 7, Quiz Paper B 2
Which of the following measures is best applied only to diversified portfolios?
I. Sharpe ratio
II. Treynor ratio
III. Jensen’s alpha
a. I only
b. II only
c. III only
d. I and II only
e. II and III only

Quiz Paper A 8, Quiz Paper B 3
A share of stock sells for $30 today. The beta of the stock is 1.1, and the expected
return on the market is 10%. The stock is expected to pay a dividend of $2 in one
year. If the risk-free rate is 4%, what will the share price be in one year?
a. $30.00
b. $30.11
c. $31.18
d. $33.18
e. $37.75

Quiz Paper A 9, Quiz Paper B 4
A Sharpe-optimal portfolio provides which one of the following for a given set of
securities?
a. highest possible rate of return
b. highest possible level of risk
c. highest level of return for a market-equivalent level of risk
d. highest excess return per unit of systematic risk
e. highest risk premium per unit of total risk

Quiz Paper A 10, Quiz Paper B 5
The collection which represents all possible risk-return combinations which can be created
from portfolios comprised of two individual assets is called the:
a. minimum variance set.
b. financial frontier.
c. efficient portfolio.
d. investment opportunity set.
e. dominated set.

Quiz Paper A 11, Quiz Paper B 16
What is the extra compensation paid to an investor who invests in a risky asset rather
than in a risk-free asset called?
a. efficient return
b. correlated value
c. risk premium
d. expected return
e. realized return

Quiz Paper A 12, Quiz Paper B 17
Which one of the following is eliminated, or at least greatly reduced, by increasing
the number of individual securities held in a portfolio?
a. number of economic states
b. various expected returns caused by changing economic states
c. market risk
d. diversifiable risk
e. non-diversifiable risk

Quiz Paper A 13, Quiz Paper B 18
The risk-free rate is 3.1 percent and the expected return on the market is 11 percent.
Stock A has a beta of 1.34. For a given year, Stock A returned 16.7 percent while the
market returned 12.2 percent. The systematic portion of Stock A’s unexpected return
was _____ percent and the unsystematic portion was _____ percent.
a. 1.41; 1.61
b. 1.61; 1.41
c. 1.61; 3.01
d. 1.41; 1.20
e. 4.62; 1.41

Quiz Paper A 14, Quiz Paper B 19
Which one of the following correlation coefficients can provide the greatest diversification benefit?
a. -1.0
b. -0.5
c. 0.0
d. 0.5
e. 1.0

Quiz Paper A 15, Quiz Paper B 20
Susan has one risk-free asset and one risky stock in her portfolio. The risk-free asset
has an expected return of 4.8 percent. The risky asset has a beta of 1.2 and an
expected return of 13.8 percent. What is the expected return on the portfolio if the
portfolio beta is 1.02?
a. 10.67 percent
b. 11.14 percent
c. 11.53 percent
d. 11.88 percent
e. 12.45 percent

Answer the following three questions based on the information below Portfolio Return Standard Deviation Beta
P 17% 20% 1.1
Q 24% 18% 2.1
R 11% 10% 0.5
S 16% 14% 1.5
The expected market return is 16% and risk-free rate is 5%.

Quiz Paper A 16, Quiz Paper B 11
Assuming uncorrelated returns, the Sharpe ratio for a new portfolio with equal
allocations to Portfolio P and Portfolio R is
a. 0.63
b. 0.71
c. 0.81
d. 1.05
e. 1.40

Quiz Paper A 17, Quiz Paper B 12
Assuming uncorrelated returns, the Treynor ratio for a new portfolio with equal
allocations to Portfolio Q and Portfolio S is
a. 0.08
b. 0.42
c. 0.94
d. 1.05
e. 1.32

Quiz Paper A 19, Quiz Paper B 14
You are comparing three securities and discover they all have identical Sharpe ratios.
Given this information, which one of the following must be true regarding these
three securities?
a. They have identical betas.
b. They have the same rates of return.
c. They earn identical rewards per unit of total risk.
d. They earn identical rewards per unit of systematic risk.
e. They have identical Treynor ratios also.

Quiz Paper A 20, Quiz Paper B 15
According to the systematic risk principle, the reward for bearing risk is based on
which one of the following types of risk?
a. unsystematic
b. firm specific
c. expected
d. systematic
e. diversifiable