For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient

between the two stocks is:

A.
greater than zero.

B.
equal to zero.
C.
greater than one.

D.
equal to one.

E.
equal to minus one

The principle of diversification tells us that:

A
. spreading an investment across many diverse assets will eliminate some of the total risk.
B
. spreading an investment across many diverse assets will eliminate all of the systematic risk.
C
. concentrating an investment in two or three large stocks will eliminate all of the unsystematic
risk.

D
. spreading an investment across five diverse companies will not lower the total risk.
E.
concentrating an investment in three companies all within the same industry will greatly
reduce the systematic risk.

You own a portfolio comprised of equal amounts of a risk-free asset and two stocks (so each asset is onethird of the portfolio). One of the stocks is equally as risky as the overall market and the total portfolio
has a beta of 0.75. What is the beta of the second stock?

A.
1.10

B.
0.94
C.
1.50
D.
1.00
E.
1.25

The risk-free rate is 5% and the market risk premium is 12%. If Jayhawk Co. has a beta of -0.2, what is
the required return for Jayhawk Co.?

A.
-0.6%
B.
3.6%
C.
2.6%
D.
-4.2%
E.
-2.4%
A stock has a beta of 1.85 and an expected return of 16 percent. A risk-free asset currently earns 2.8
percent. The beta of a portfolio comprised of these two assets is 0.5. What percentage of the portfolio is
invested in the stock?

A.
73%
B.
43%
C.
23%

D.
27%
E.
71%
Which one of the following should earn the most risk premium based on CAPM?
A.
U.S. Treasury bill

B.
diversified portfolio with returns similar to the overall market

C.
portfolio with a beta of 1.01

D.
stock with a beta of 1.38

E.
stock with a beta of 0.74

The expected return on Stillwater stock is 19.45 percent while the expected return on the market
is 12 percent. The stock's beta is 2.25. What is the risk-free rate of return?

A.
3.63%
B.
3.79%
C.
4.18%
D.
6.04%

E.
3.22%
The common stock of Wildcat Inc. has a beta of 1.8 and, given the current market price, an actual
expected return of 21.25 percent. The risk-free rate of return is 2.85 percent and the market rate of return
is 12.01 percent. Which one of the following statements is true given this information?

A
. The stock is correctly priced according to CAPM.
B
. The actual expected stock return indicates the stock is currently underpriced.
C
. To be correctly priced according to CAPM, the stock should have an expected return of 24.47
percent.

D
. The actual expected stock return will graph below the Security Market Line.
E.
The stock has less systematic risk than the overall market.

A stock has annual returns of 6 percent, 14 percent, -3 percent, and 2 percent for the past four years. The
arithmetic average of these returns is _____ percent while the geometric average return for the period is
_____ percent.

A.
6.19; 6.33

B.
6.33; 6.19

C.
4.75; 4.57

D.
6.33; 6.33

E.
4.57; 4.75

Security C has a standard deviation of 25% and a beta of 0.95, and Security K has a standard deviation of
20% and a beta of 1.75. Security ____ has more total risk; Security ____ has more systematic risk; and
Security ____ has the higher expected return.

A.
K;K;K
B.
K;C;K
C.
C;K;K
D.
C;C;C
E.
K;C;C