1)Part 1Diversification is _____. It _____.

buying more than three stocks; reduces overall portfolio risk

the mixing of different assets within a portfolio; increases the expected return

the mixing of different assets within a portfolio; reduces overall portfolio risk

buying more than three stocks; increases the expected return

2)Part 1As different securities are added to a portfolio, the portfolio’s total risk _____.

falls to zero

is unaffected

decreases

increases

3)IntroNautilus Clothing’s stock has a 40% chance of producing a 15% return, a 20% chance of producing a 18% return, and a 40% chance of producing a -13% return.

Part 1What is the stock’s expected return?

4)IntroThe table below shows the expected rates of return for three stocks and their weight in some portfolio:

Stock AStock BStock CExpected return0.080.030.12Weight0.20.20.6Part 1What is the expected portfolio return

5)IntroThe table below shows the expected rates of return for three stocks and their weights in some portfolio:

Stock AStock BStock CPortfolio weights0.40.20.4StateProbabilityExpected returnsRecession0.30.060.030.15Boom0.70.110.050.16Part 1What is the portfolio return during a recession?

Part 2What is the expected portfolio return?

Part 3What is the standard deviation of the portfolio returns?

6)Part 1Securities whose prices move less than the market have _____ betas.

lower

higher

negative

no

7)IntroThe table below shows the betas and portfolio weights for 3 stocks:

Portfolio weightsStockBetaPortfolio 1Portfolio 2A1.70.30.1B1.10.50.4C0.40.20.5Calculate the beta of each portfolio.

Part 1What is the beta of portfolio 1?

Part 2What is the beta of portfolio 2?

Part 3If you are more concerned about risk than return, which portfolio should you pick?

Portfolio 1

Portfolio 2

8)IntroYou’ve assembled the following portfolio:

StockExpected returnBetaPortfolio weight10.0741.80.220.0531.10.530.0470.90.3Part 1What is the beta of the portfolio?

Part 2What is the expected return of your portfolio?

9)Part 1The graphical representation of the CAPM is called the _____.

security characteristic line

yield curve

CAPM line

security market line

10)IntroA stock has a beta of 1.8. The risk-free rate is 4%. Assume that the CAPM holds.

Part 1What is the expected return for the stock if the expected return on the market is 8%?

Part 2What is the expected return for the stock if the expected market risk premium is 8%?

11)IntroUse the expected return-beta equation from the CAPM.

Part 1What is the expected return for a stock if the risk-free rate is 2%, beta 0.6 and the expected return for the market portfolio is 6%?

Part 2What is the risk-free rate if beta is 1.1, the expected return 6.3% and the expected return for the market portfolio is 6%?

Part 3What is beta if the risk-free rate is 2%, the expected return 12% and the expected return for the market is 6%?

Part 4What is the expected return for the market if the risk-free rate is 2%, beta 0.6 and the expected return 12%?

12)IntroWe know the following expected returns for stocks A and B, given different states of the economy:

State (s)ProbabilityE(rA,s)E(rB,s)Recession0.3-0.040.04Normal0.50.110.07Expansion0.20.190.11The expected return on the market portfolio is 0.08 and the risk-free rate is 0.02.

Part 1What is the standard deviation of returns for stock A?

.

Part 2What is the standard deviation of returns for stock B?

Part 3What is the beta for stock A?

Part 4What is the beta for stock B?

Part 5Which stock has more total risk?

The stock with the lower standard deviation

The stock with the higher standard deviation

The stock with the higher beta

The stock with the lower beta

Part 6Which stock has more systematic risk?

The stock with the lower beta

The stock with the higher beta

The stock with the higher standard deviation

The stock with the lower standard deviation

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