Question

6. Which of the following is an example of systematic risk?
(a) The earnings of a company drop.
(b) The chief executive officer resigns.
(c) A legal suit against a company for environmental pollution.
(d) Changes in the level of interest rates.
(e) The development of a new product line.

7. Suppose a company had earnings per share of $2 over the past year. The industry average PE ratio is 10. Use this information to value this company’s stock price.
(a)$5 (b) $8 (c) $10 (d) $20 (e) $25

8. Which one of the following portfolios should have the most systematic risk?
(a) 50 percent invested in U.S. Treasury bills and 50 percent in a market
index mutual fund
(b) 20 percent invested in U.S. Treasury bills and 80 percent invested in a
stock with a beta of .80
(c) 10 percent invested in a stock with a beta of 1.0 and 90 percent invested
in a stock with a beta of 1.40
(d) 100 percent invested in a mutual fund which mimics the overall market
(e) 100 percent invested in U.S. Treasury bills

9. Which of the following is correct if markets have weak form efficiency?
I) If markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns
II) If the markets are efficient in the weak form, then prices will adjust immediately to public information
III) If the markets are efficient in the weak form, then prices reflect all information
(a) I only (b) II only (c) I and II only (d) II and III only (e) I and III only

10. The market rate of return is 12 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock:
(a) is underpriced.
(b) is correctly priced.
(c) will plot below the security market line.
(d) will plot on the security market line.
(e) will plot to the right of the overall market on a security market line graph.

Answer 1

6. Which of the following is an example of systematic risk?
(d) Changes in the level of interest rates.

Changes in interest rates is not in control of company which makes it best example of Systematic Risk.

7. Suppose a company had earnings per share of $2 over the past year. The industry average PE ratio is 10. Use this information to value this company’s stock price.
(d) $20

Stock Price = PE Ratio * EPS = 10 * 2 = $20

8. Which one of the following portfolios should have the most systematic risk?
(c) 10 percent invested in a stock with a beta of 1.0 and 90 percent invested
in a stock with a beta of 1.40

the stock which has highest beta will obviously result in most systematic risk stock

9. Which of the following is correct if markets have weak form efficiency?

II) If the markets are efficient in the weak form, then prices will adjust immediately to public information

(b) II only

Because in wek form efficiency an investor cannot use past data to find undervalued stocks and in weak form of efficiency insider information is not reflected in the market data.

10. The market rate of return is 12 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock:
(a) is underpriced.

Because systematic risk lower than Market but the return is same as market which makes the stock to be trading at underpriced

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