114.You hold four stocks in your portfolio: A, B, C, and D. The portfolio beta is 1.20.

Stock C comprises
40% of the dollar value of your holdings and has a beta of 1.60. If you sell all of your holdings in
stock C, and replace it with an equal investment in stock E (which has a beta of 1.25), what will be
your new portfolio beta?
A) 1.00
B) 1.06
C) 1.12
D) 1.25
E) 1.32

Ans: B Level: Basic Subject: Portfolio Beta Type: Problems

115. What is the beta for the following portfolio?

Stock A B C D E
Investment ($) 15,000 10,000 25,000 12,500 17,500
Beta 0.6 0.9 1.6 1.1 0.0

A) 0.80
B) 0.88
C) 0.90
D) 0.93
E) 0.98

Ans: C Level: Basic Subject: Portfolio Beta Type: Problems

116. What is the beta of a portfolio made up of two risky assets and a risk-free asset? You invest 40% in
asset A with a beta of 1.25 and 40% in asset B with a beta of 1.15.
A) 0.84
B) 0.96
C) 1.03
D) 1.12
E) 1.20

Ans: B Level: Basic Subject: Portfolio Beta Type: Problems

117. You form a portfolio by investing equally in A (beta=0.8), B (beta=1.2), the risk-free asset, and the
market portfolio. What is your portfolio beta?
A) 0.67
B) 0.75
C) 0.95
D) 1.12
E) 1.15

Ans: B Level: Basic Subject: Portfolio Beta Type: Problems

118. Given the following information: The risk-free rate is 7%, the beta of stock A is 1.2, the beta of
stock B is 0.8, the expected return on stock A is 13.5%, and the expected return on stock B is
11.0%. Further, we know that stock A is fairly priced and that the betas of stocks A and B are
correct. Which of the following regarding stock B must be true?
A) Stock B is also fairly priced.
B) The expected return on stock B is too high.
C) The expected return on stock A is too high.
D) The price of stock B is too high.
E) The price of stock A is too high.

Ans: D Level: Basic Subject: Reward To Risk Ratio Type: Problems

119. Asset A has a reward to risk ratio of .075 and a beta of 1.5. The risk-free rate is 5%. What is the
expected return on A?
A) 11.25%
B) 12.25%
C) 13.50%
D) 14.25%
E) 16.25%

Ans: E Level: Basic Subject: Reward To Risk Ratio Type: Problems

120. Asset A, which has an expected return of 12% and a beta of 0.8, plots on the security market line.
Which of the following is false about Asset B, another risky asset with a beta of 1.4?
A) If the market is in equilibrium, Asset B also plots on the SML.
B) If Asset B plots on the SML, then Asset B and Asset A have the same reward to risk ratio.
C) Asset B has more systematic risk than both Asset A and the market portfolio.
D) If Asset B plots on the SML with an expected return = 18%, then the risk-free rate must be
4%.
E) If Asset B plots on the SML with an expected return = 18%, the expected return on the
market must be 15%.

Ans: E Level: Basic Subject: Security Market Line Type: Problems

121. What is the expected return on asset A if it has a beta of 0.3, the expected market return is 14%,
and the risk-free rate is 5%?
A) 6.0%
B) 9.2%
C) 7.2%
D) 7.7%
E) 4.5%

Ans: D Level: Basic Subject: CAPM Type: Problems

122. What is the expected market return if the expected return on asset A is 16% and the risk-free rate is
7%? Asset A has a beta of 1.2.
A) 9.5%
B) 14.5%
C) 16.5%
D) 17.5%
E) 20.5%

Ans: B Level: Basic Subject: CAPM Type: Problems

123. Asset A has an expected return of 15%. The expected market return is 14% and the risk-free rate
is 4%. What is asset A's beta?
A) 0.80
B) 1.10
C) 1.40
D) 1.80
E) 2.00

Ans: B Level: Basic Subject: CAPM Type: Problems

124. Asset A has an expected return of 22% and a beta of 1.8. The expected market return is 14%.
What is the risk-free rate?
A) 0.6%
B) 1.2%
C) 3.0%
D) 4.0%
E) 6.0%

Ans: D Level: Basic Subject: CAPM Type: Problems

125. Asset A has an expected return of 12% and a beta of 1.05. The risk-free rate is 4%. What is the
market risk premium?
A) 7.6%
B) 8.2%
C) 9.6%
D) 10.2%
E) 11.6%

Ans: A Level: Basic Subject: CAPM Type: Problems