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Chapter 13 Return, Risk, and the Security Market Line Multiple Choice Questions 1. You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? A. arithmetic return B. historical return C. expected return D. geometric return E. required return 10. Which one of the following is represented by the slope of the security market line? A. reward to risk ratio B. market standard deviation C. beta coefficient D. risk free interest rate E. market risk premium 11. Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk? A. capital asset pricing model B. time value of money equation C. unsystematic risk equation D. market performance equation E. expected risk formula 12. Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the: A. average arithmetic return. B. expected return. C. market rate of return. D. internal rate of return. E. cost of capital. 13. The expected return on a stock given various states of the economy is equal to the: A. highest expected return given any economic state. B. arithmetic average of the returns for each economic state. C. summation of the individual expected rates of return. D. weighted average of the returns for each economic state. E. return for the economic state with the highest probability of occurrence. 14. The expected return on a stock computed using economic probabilities is: A. guaranteed to equal the a ctual average return on the stock for the next five years. B. guaranteed to be the minimal rate of return on the stock over the next two years. C. guaranteed to equal the actual return for the immediate twelve month period. D. a mathematical expectation based on a weighted average and not an actual anticipated outcome. E. the actual return you should anticipate as long as the economic forecast remains constant. 15. The expected risk premium on a stock is equal to the expected return on the stock minus the: A. expected market rate of return. B. risk free rate. C. inflation rate. D. standard deviation. E. variance. 16. Standard deviation measures which type of risk? A. total B. nondiversifiable C. unsystematic D. systematic E. economic 17. The expected rate of return on a stock portfolio is a weighted average where the weights are based on the: A. number of shares owned of each stock. B. market price per share of each stock. C. market value of the investment in each stock. D. original amount invested in each stock. E. cost per share of each stock held. 18. The expected return on a portfolio considers which of the following factors? I. percentage of the portfolio inve sted in each individual security II. projected states of the economy III. the performance of each security given various economic states IV. probability of occurrence for each state of the economy A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV 19. The expected return on a portfolio: I. can never exceed the expected return of the best performing security in the portfolio. II. must be equal to or greater than the expected return of the worst performing security in the portfolio. III. is independent of the unsystematic risks of the individual securities held in the portfolio. IV. is independent of the allocation of the portfolio amongst individual securities. A. I and III onl y B. II and IV only C. I and II only D. I, II, and III only E. I, II, III, and IV