Question 1: As diversification increases, the systematic risk of a portfolio approaches:
a. 0
b. An amount equal to the unsystematic risk of the portfolio.
c. The total risk, or standard deviation, of the portfolio.
d. None of the above.
Question 2: The CAPM required return on a stock exceeds the risk-free rate by 11%. The return on the market index is 16%. The risk-free rate of return is 5%. The β of the stock is:
a. 0.67.
b. 0.75.
c. 1.0.
d. 1.33.
e. 1.50.
Question 3: You are evaluating stock Y. It has a beta of 1.5. The risk-free rate is 2 percent. The expected market rate of return is 10 percent. Your independent analysis indicates that Y will produce a return of 12 percent. If the security market line is your benchmark, you should:
a. Buy stock Y because it is overpriced.
b. Short sell Y because it is overpriced.
c. Short sell Y because it is underpriced.
d. Buy stock Y because it is underpriced.
e. None of the above, as the stock is fairly priced.
Question 4: Coca-Cola is one of the Dow Jones Industrial Average components. If Coca-Cola’s stock price rises by $1, the Dow Jones Industrial Average will rise:
a. By more than 1 point because Coca-Cola is one of the larger companies in the Average.
b. By more than 1 point because of the many stock splits that have occurred during the Average’s history.
c. By less than 1 point because there are 30 stocks in the Average.
d. By less than one point because the level of the Average is so high.