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Top of Form1.award:1.00 pointWhat are the arithmetic and geometric average returns for a stock with annual returns of 19 percent, 9 percent, 4 percent, and 13 percent? List the arithmetic answer first.9.25 percent; 8.91 percent9.25 percent; 11.11 percent11.11 percent; 9.25 percent11.11 percent; 8.91 percent8.91 percent; 9.25 percentArithmetic average = (0.19 + 0.09 0.04 + 0.13) / 4 = 0.0925 = 9.25 percentGeometric average = (1 + 0.19) (1 + 0.09) (1 0.04) (1 + 0.13) 1 = 0.08913 = 8.91 percent2.award:1.00 pointAs long as the inflation rate is positive, the real rate of return on a security will be _ the nominal rate of return.greater thanequal toless thangreater than or equal tounrelated toRefer to section 12.3Multiple ChoiceLearning Objective: 12-01 How to calculate the return on an investment.Difficulty: EasySection: 12.33.award:1.00 pointWhich one of the following categories of securities had the highest average return for the period 1926-2010?U.S. Treasury billslarge company stockssmall company stockslong-term corporate bondslong-term government bondsRefer to section 12.3Multiple ChoiceLearning Objective: 12-02 The historical returns on various important types of investments.Difficulty: EasySection: 12.34.award:1.00 pointTo convince investors to accept greater volatility (risk), you must:decrease the risk premium.increase the risk premium.decrease the real return.decrease the risk-free rate.increase the risk-free rate.Refer to section 12.4Multiple ChoiceLearning Objective: 12-03 The historical risks on various important types of investments.Difficulty: EasySection: 12.45.award:1.00 pointIndividuals who continually monitor the financial markets seeking mispriced securities:earn excess profits over the long-term.make the markets increasingly more efficient.are never able to find a security that is temporarily mispriced.are overwhelmingly successful in earning abnormal profits.are always quite successful using only historical price information as their basis of evaluation.Refer to section 12.6Multiple ChoiceLearning Objective: 12-04 The implications of market efficiency.Difficulty: EasySection: 12.66.award:1.00 pointA portfolio is invested 20 percent in Stock G, 60 percent in Stock J, and 20 percent in Stock K. The expected returns on these stocks are 10 percent, 14 percent, and 26 percent, respectively. What is the portfolios expected return? Hint: The expected return of a portfolio is a weighted average of the expected returns of the assets in the portfolio.rev: 09_20_201213.33%14.82%16.22%16.38%15.60%The expected return of a portfolio is the sum of the weight of each asset times the expected return of each asset. So, the expected return of the portfolio is:E(Rp) = 0.20(0.10) + 0.60(0.14) + 0.20(0.26) = 0.1560 or 15.60%If we own this portfolio, we would expect to get a return of 15.60 percent.Multiple ChoiceDifficulty: BasicLearning Objective: 13-01 How to calculate expected returns.7.award:1.00 pointA stock has a beta of 1.7, the expected required return on the market is 15 percent, and the risk-free rate is 9 percent. What must the expected required return on this stock be?rev: 09_20_201220.16%18.24%19.2%19.97%34.5%CAPM states the relationship between the risk of an asset and its expected return. CAPM is:E(Ri) = Rf+ E(RM) Rf iSubstituting the values we are given, we find:E(Ri) = 0.09 + (0.15 0.09)(1.7) = 0.192 or 19.2%Multiple ChoiceDifficulty: BasicLearning Objective: 13-04 The security market line and the risk-return trade-off.8.award:1.00 pointYou own a portfolio that has $2,100 invested in Stock A and $3,600 invested in Stock B. If the expected returns on these stocks are 10 percent and 18 percent, respectively, what is the expected return on the portfolio? Hint: The expected return of a portfolio is a weighted average of the expected returns of the assets in the portfolio. (Do not round your intermediate calculations.)rev: 09_20_201215.35%12.95%15.05%15.81%14.00%The expected return of a portfolio is the sum of the weight of each asset times the expected return of each asset. The total value of the portfolio is:Total value = $2,100 + 3,600 = $5,700So, the expected return of this portfolio is:E(Rp) = ($2,100/$5,700)(0.10) + ($3,600/$5,700)(0.18) = 0.1505 or 15.05%Multiple ChoiceDifficulty: BasicLearning Objective: 13-01 How to calculate expected returns.9.award:1.00 pointA news flash just appeared that caused a few stocks to suddenly drop in value by about 20 percent. What type of risk does this news flash represent?portfolionondiversifiablemarketunsystematictotalRefer to section 13.4Multiple ChoiceLearning Objective: 13-03 The systematic risk principle.Difficulty: EasySection: 13.410.award:1.00 pointWhich one of the following is represented by the slope of the security market line?reward-to-risk ratiomarket standard deviationbeta coefficientrisk-free interest ratemarket risk premiumRefer to section 13.7Multiple ChoiceLearning Objective: 13-04 The security market line and the risk-return trade-off.Difficulty: EasySection: 13.711.award:1.00 pointThe expected risk premium on a stock is equal to the expected return on the stock minus the:expected market rate of return.risk-free rate.inflation rate.standard deviation.variance.Refer to section 13.1Multiple ChoiceLearning Objective: 13-01 How to calculate expected returns.Difficulty: EasySection: 13.112.award:1.00 pointSystematic risk is measured by:the mean.beta.the geometric average.the standard deviation.the arithmetic average.Refer to section 13.6Multiple ChoiceLearning Objective: 13-03 The systematic risk principle.Difficulty: EasySection: 13.613.award:1.00 pointA stock with an actual return that lies above the security market line has:more systematic risk than the overall market.more risk than that warranted by CAPM.a higher return than would be required per the CAPM for the level of risk assumed.less systematic risk than the overall market.a return equivalent to the level of risk assumed.Refer to section 13.7Multiple ChoiceLearning Objective: 13-04 The security market line and the risk-return trade-off.Difficulty: EasySection: 13.714.award:1.00 pointWhich one of the following should earn the most risk premium based on CAPM?diversified portfolio with returns similar to the overall marketstock with a beta of 1.38stock with a beta of 0.74U.S. Treasury billportfolio with a beta of 1.01Refer to section 13.7Multiple ChoiceLearning Objective: 13-04 The security market line and the risk-return trade-off.Difficulty: EasySection: 13.715.award:1.00 pointWhat is the beta of the following portfolio?.951.011.051.091.23ValuePortfolio= $6,700 + $3,000 + $8,500 = $18,200BetaPortfolio= ($6,700/$18,200 1.41) + ($4,900/$18,200 1.23) + ($8,500/$18,200 0.79) = 1.09Multiple ChoiceLearning Objective: 13-04 The security market line and the risk-return trade-off.Difficulty: EasySection: 13.616.award:1.00 pointWhich one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium is 8.8 percent?ABCDEE(r)A= 0.037 + (0.64 0.088) = 0.0933E(r)B= 0.037 + (0.97 0.088) = 0.1224E(r)C= 0.037 + (1.22 0.088) = 0.1444 Stock C is correctly priced.E(r)D= 0.037 + (1.37 0.088) = 0.1576E(r)E= 0.037 + (1.68 0.088) = 0.1848Multiple ChoiceLearning Objective: 13-04 The security market line and the risk-return trade-off.Difficulty: EasySection: 13.717.award:1.00 pointYou are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _ form efficient.WeakSemi-weakSemi-strongStrongPerfect18.award:1.00 pointUnsystematic risk:can be effectively eliminated by portfolio diversification.is compensated for by the risk premium.is measured by beta.is measured by standard deviation.is related to the overall economy.19.award:1.00 pointTotal risk is measured by _ and systematic risk is measured by _.beta; alphabeta; standard deviationalpha; betastandard deviation; betastandard deviation; variance20.award:1.00 pointFor a normal distribution, the probability that falls within +/- one and two standard deviation(s) of the mean is, resp