11.

New information regarding a security, when received by the market, leads to a(n):
A) Unexpected return.
B) Expected return.
C) Actual return.
D) Systematic return.
E) Non-diversifiable return.
Answer: A

12. You own 50 shares of stock A, which has a price of $12 per share, and 100 shares of stock B,
which has a price of $3 per share. What is the portfolio weight for stock A in your portfolio?
A) 25%
B) 33%
C) 50%
D) 67%
E) 75%
Answer: D
Response: 50($12) + 100(3) = $900; wA = $600 / 900 = .67

13. What is the expected return for the following stock?

State Probability Return

Average .50 .25
Recession .35 .05
Depression .15 –.35

A) .05
B) .08
C) .09
D) .10
E) .12
Answer: C
Response: 50(.25) + .35(.05) + .15(-.35) = .09

14. What is the risk premium for the following returns if the risk-free rate is 4%?

State Probability Return

Boom .20 .75
Good .55 .25
Recession .15 –.10
Depression .10 –.50

A) 0.3325
B) 0.1525
C) 0.0525
D) 0.1825
E) 0.2225
Answer: D
Response: .20(.75) + .55(.25) + .15(-10)+ .10(-50) = .2225; RP = .2225 - .04 = .1825

15. What is the expected portfolio return given the following information:
Asset Portfolio weight Return
A .35 20%
B .15 35%
C .25 6%
D .25 12%

A) 6.75%
B) 9.50%
C) 16.75%
D) 18.25%
E) 21.50%
Answer: C
Response: .35(.20) + .15(.35) + .25(.06) + .25(.12) = .1675