Finance 355: InvestmentsQUIZ 3Quiz Paper A 1, Quiz Paper B 6Where will a security plot in relation to the security market line (SML) if it has abeta of 1.1 and is overvalued?a. to the right of the overall market and above the SMLb. to the right of the overall market and below the SMLc. to the left of the overall market and above the SMLd. to the left of the overall market and below the SMLe. on the SMLQuiz Paper A 2, Quiz Paper B 7Wilson Farms’ stock has a beta of 1.5 and an expected return of 12%. The risk-freerate is 3% and the market risk premium is 7%. This stock is _____ because theCAPM return for the stock is _____ percent.a. undervalued; 7.5b. undervalued; 9c. fairly valued; 12d. overvalued; 13.5e. overvalued; 15Quiz Paper A 3, Quiz Paper B 8The following portfolio has 50% in stock A and 25% in each of stock B and C. Whatis the portfolio standard deviation?State of Economy Probability of State of Economy Stock AReturnsStock BReturnsStock CReturnsBoom 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 9Which one of the following is the set of portfolios that provides the maximum returnfor a given standard deviation?a. minimum variance portfoliob. Markowitz efficient frontierc. correlated market frontierd. asset allocation relationshipe. diversified portfolio lineQuiz Paper A 5, Quiz Paper B 10A company announces that its earnings have decreased 25 percent from the previousyear, but analysts actually expected a 50 percent decrease. What is the likely effecton the stock price?a. The stock price will increase.b. The stock price will decreasec. 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 1Of the following, Stock _____ has the greatest level of total risk and Stock _____has the highest risk premium.a. A; Bb. B; E4c. C; Dd. D; Ce. C; EQuiz Paper A 7, Quiz Paper B 2Which of the following measures is best applied only to diversified portfolios?I. Sharpe ratioII. Treynor ratioIII. Jensenâs alphaa. I onlyb. II onlyc. III onlyd. I and II onlye. II and III onlyQuiz Paper A 8, Quiz Paper B 3A share of stock sells for $30 today. The beta of the stock is 1.1, and the expectedreturn on the market is 10%. The stock is expected to pay a dividend of $2 in oneyear. If the risk-free rate is 4%, what will the share price be in one year?a. $30.00b. $30.11c. $31.18d. $33.18e. $37.75Quiz Paper A 9, Quiz Paper B 4A Sharpe-optimal portfolio provides which one of the following for a given set ofsecurities?a. highest possible rate of returnb. highest possible level of riskc. highest level of return for a market-equivalent level of riskd. highest excess return per unit of systematic riske. highest risk premium per unit of total riskQuiz Paper A 10, Quiz Paper B 5The collection which represents all possible risk-return combinations which can be createdfrom 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 16What is the extra compensation paid to an investor who invests in a risky asset ratherthan in a risk-free asset called?a. efficient returnb. correlated valuec. risk premiumd. expected returne. realized returnQuiz Paper A 12, Quiz Paper B 17Which one of the following is eliminated, or at least greatly reduced, by increasingthe number of individual securities held in a portfolio?a. number of economic statesb. various expected returns caused by changing economic statesc. market riskd. diversifiable riske. non-diversifiable riskQuiz Paper A 13, Quiz Paper B 18The 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 themarket returned 12.2 percent. The systematic portion of Stock A’s unexpected returnwas _____ percent and the unsystematic portion was _____ percent.a. 1.41; 1.61b. 1.61; 1.41c. 1.61; 3.01d. 1.41; 1.20e. 4.62; 1.41Quiz Paper A 14, Quiz Paper B 19Which one of the following correlation coefficients can provide the greatest diversification benefit?a. -1.0b. -0.5c. 0.0d. 0.5e. 1.0Quiz Paper A 15, Quiz Paper B 20Susan has one risk-free asset and one risky stock in her portfolio. The risk-free assethas an expected return of 4.8 percent. The risky asset has a beta of 1.2 and anexpected return of 13.8 percent. What is the expected return on the portfolio if theportfolio beta is 1.02?a. 10.67 percentb. 11.14 percentc. 11.53 percentd. 11.88 percente. 12.45 percentAnswer the following three questions based on the information below Portfolio Return Standard Deviation BetaP 17% 20% 1.1Q 24% 18% 2.1R 11% 10% 0.5S 16% 14% 1.5The expected market return is 16% and risk-free rate is 5%.Quiz Paper A 16, Quiz Paper B 11Assuming uncorrelated returns, the Sharpe ratio for a new portfolio with equalallocations to Portfolio P and Portfolio R isa. 0.63b. 0.71c. 0.81d. 1.05e. 1.40Quiz Paper A 17, Quiz Paper B 12Assuming uncorrelated returns, the Treynor ratio for a new portfolio with equalallocations to Portfolio Q and Portfolio S isa. 0.08b. 0.42c. 0.94d. 1.05e. 1.32Quiz Paper A 19, Quiz Paper B 14You are comparing three securities and discover they all have identical Sharpe ratios.Given this information, which one of the following must be true regarding thesethree 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 15According to the systematic risk principle, the reward for bearing risk is based onwhich one of the following types of risk?a. unsystematicb. firm specificc. expectedd. systematice. diversifiable
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