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1. The investments with the highest expected return have the lowest risk.
A. True
B. False

2. The relationship between risk and expected return is positive because

A. investors must be offered lower expected returns to take on more risk
B. investors must be offered lower expected returns to take on less risk

C. investors must be offered higher expected returns to take on more risk

D. investors must be offered higher expected returns to take on less risk

3. Anna purchased a share of stock one year ago for $22. Today, she received a dividend of $0.97 and sold the stock for $25.30.
Her total holding period return is
A. 3.8%
B. 16.8%

C. 19.4%
D. $4.27

4. Total holding period return is the dollar gain (or loss) from purchasing an asset and selling it later.
A. True
B. False

5. The expected return on a stock is the weighted average of the possible returns that might occur.
A. True
B. False

6. Based on the table below, what is the expected return of the stock?
Probability
.20

Return
8%

.10

10%

.20

15%

.40
.10

12%
20%

A. 12.4%
B. 12.6%

C. 12.8%
D. 13.0%

7. Historically, the standard deviation of the returns from investing in large U.S. stocks has been greater than the standard
deviation of the returns from investing in small U.S. stocks.
A. True
B. False

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8. An investor will choose between Asset Q with an expected return of 6.5% and a standard deviation of 4.3%, Asset U with an
expected return of 8.8% and a standard deviation of 5.5%, and Asset B with an expected return of 8.8% and a standard
deviation of 6.5%. Which one should she prefer?
A. Asset Q
B. Asset U

C. Asset B

D. cannot be determined

9. Diversification provides a benefit to investors when the investor

A. buys only risk-free Treasury securities

B. finds the one security with the optimal expected rate of return

C. selects two or more securities whose returns are highly correlated with each other

D. selects two or more securities whose returns are not highly correlated with each other

10. Why is there a limit to the benefits of diversification?

A. Diversification cannot eliminate firm-specific risk.
B. Diversification cannot eliminate market risk.

C. Diversification cannot eliminate unique risk.

D. Diversification cannot eliminate unsystematic risk.

11. The compensation received for assuming the risk in a balanced portfolio of risky assets is the
A. default risk premium
B. market risk premium
C. real risk premium

D. security risk premium

12. The Security Market Line is the graphic representation of the Capital Asset Pricing Model.
A. True
B. False

13. A stock's beta is a measure of its

A. default risk
B. diversifiable risk

C. undiversifiable risk
D. unsystematic risk

14. What is the expected return for a stock that has a beta of 1.5 if the risk-free rate is 6% and the market rate of return is 11%?
A. 13.5%
B. 15%

C. 16.5%
D. 22.5%

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15. If the expected return on an asset is greater than its required return given on the Security Market Line, the stock is
A. fairly priced
B. overpriced

C. randomly priced
D. underpriced

16. Risk and return

A. are independent of each other.
B. are inversely related.
C. are directly related.

D. are indirectly related.

17. The total holding period return on an investment

A. is the difference between its selling price and its income component.
B. is the difference between the selling price and the purchase price.

C. consists of a capital appreciation component and an income component.

D. stays constant every year.

18. You purchased a share of Blyton Industries common stock 1 year ago for $37.50. During the year you received dividends
totaling $.60 and today the stock can be sold for $39.28. What total return did you earn on this stock over the past year?
A. 1.6%
B. 4.7%

C. 6.1%
D. 6.3%

19. The greater the risk associated with an investment, the greater is its ___________
A. expected return.
B. realized return
C. price.

D. market appeal.

20. Which of the following statements regarding variance is false?

A. Variance is a measure of the uncertainty surrounding an outcome.
B. Variance is a measure of systematic risk.

C. Variance is the same thing as squared standard deviation.

D. Variance is a measure of total risk.

This is the end of the test. When you have completed all the questions and reviewed your answers, press the button below to
grade the test.

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100% (20 out of 20 correct)

1. The investments with the highest expected return have the lowest risk.
A. True

B. False

2. The relationship between risk and expected return is positive because

A. investors must be offered lower expected returns to take on more risk
B. investors must be offered lower expected returns to take on less risk

C. investors must be offered higher expected returns to take on more risk

D. investors must be offered higher expected returns to take on less risk

3. Anna purchased a share of stock one year ago for $22. Today, she received a dividend of $0.97 and sold the stock for
$25.30. Her total holding period return is
A. 3.8%

B. 16.8%

C. 19.4%
D. $4.27

4. Total holding period return is the dollar gain (or loss) from purchasing an asset and selling it later.
A. True

B. False

5. The expected return on a stock is the weighted average of the possible returns that might occur.
A. True

B. False

6. Based on the table below, what is the expected return of the stock?
Probability
.20

10%

.20

15%

.10

B. 12.6%

C. 12.8%

8%

.10
.40

A. 12.4%

Return
12%
20%

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D. 13.0%

7. Historically, the standard deviation of the returns from investing in large U.S. stocks has been greater than the standard
deviation of the returns from investing in small U.S. stocks.
A. True

B. False

8. An investor will choose between Asset Q with an expected return of 6.5% and a standard deviation of 4.3%, Asset U
with an expected return of 8.8% and a standard deviation of 5.5%, and Asset B with an expected return of 8.8% and a
standard deviation of 6.5%. Which one should she prefer?
A. Asset Q
B. Asset U

C. Asset B

D. cannot be determined

9. Diversification provides a benefit to investors when the investor

A. buys only risk-free Treasury securities

B. finds the one security with the optimal expected rate of return

C. selects two or more securities whose returns are highly correlated with each other

D. selects two or more securities whose returns are not highly correlated with each other

10. Why is there a limit to the benefits of diversification?

A. Diversification cannot eliminate firm-specific risk.
B. Diversification cannot eliminate market risk.

C. Diversification cannot eliminate unique risk.

D. Diversification cannot eliminate unsystematic risk.

11. The compensation received for assuming the risk in a balanced portfolio of risky assets is the
A. default risk premium
B. market risk premium
C. real risk premium

D. security risk premium

12. The Security Market Line is the graphic representation of the Capital Asset Pricing Model.
A. True

B. False

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13. A stock's beta is a measure of its

A. default risk

B. diversifiable risk

C. undiversifiable risk
D. unsystematic risk

14. What is the expected return for a stock that has a beta of 1.5 if the risk-free rate is 6% and the market rate of return is
11%?
A. 13.5%
B. 15%

C. 16.5%
D. 22.5%

15. If the expected return on an asset is greater than its required return given on the Security Market Line, the stock is
A. fairly priced
B. overpriced

C. randomly priced
D. underpriced

16. Risk and return

A. are independent of each other.
B. are inversely related.
C. are directly related.

D. are indirectly related.

17. The total holding period return on an investment

A. is the difference between its selling price and its income component.
B. is the difference between the selling price and the purchase price.

C. consists of a capital appreciation component and an income component.

D. stays constant every year.

18. You purchased a share of Blyton Industries common stock 1 year ago for $37.50. During the year you received
dividends totaling $.60 and today the stock can be sold for $39.28. What total return did you earn on this stock over the
past year?
A. 1.6%
B. 4.7%

C. 6.1%
D. 6.3%

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19. The greater the risk associated with an investment, the greater is its ___________
A. expected return.
B. realized return
C. price.

D. market appeal.

20. Which of the following statements regarding variance is false?

A. Variance is a measure of the uncertainty surrounding an outcome.
B. Variance is a measure of systematic risk.

C. Variance is the same thing as squared standard deviation.

D. Variance is a measure of total risk.

Retake Test