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Some Sample Problems for Final Exam

Advanced Financial Management

(Solutions on last page)

1. Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?

A. Squared deviation

B. Beta coefficient

C. Standard deviation

D. Mean

E. Variance

2. The security market line is a linear function which is graphed by plotting data points based on the relationship between which two of the following variables?

A. Risk-free rate and beta

B. Market rate of return and beta

C. Market rate of return and the risk-free rate

D. Risk-free rate and the market rate of return

E. Expected return and beta

3. Which one of the following is the slope of the security market line?

A. Risk-free rate

B. Market risk premium

C. Beta coefficient

D. Risk premium on an individual asset

E. Market rate of return

4. Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

A. Risk-free rate

B. Market risk premium

C. Expected return minus the risk-free rate

D. Market rate of return

E. Cost of capital

5. Systematic risk is:

A. totally eliminated when a portfolio is fully diversified.

B. defined as the total risk associated with surprise events.

C. risk that affects a limited number of securities.

D. measured by beta.

E. measured by standard deviation.

6. You would like to invest $18,000 and have a portfolio expected return of 12.3 percent. You are considering two securities, A and B. Stock A has an expected return of 15.6 percent and B has an expected return of 10.3 percent. How much should you invest in stock A if you invest the balance in stock B?

A. $5,807

B. $6,792

C. $7,411

D. $7,937

E. $8,626

7. A portfolio has an expected return of 12.3 percent. This portfolio contains two stocks and one risk-free security. The expected return on stock X is 9.7 percent and on stock Y it is 17.7 percent. The risk-free rate...

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