Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all of her investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will be:

Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock
A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If
Nicole sells all of her investment in A and invests the proceeds in the risk-free asset,
her new portfolio beta will be:
(a) 0.60.
(b) 0.88.
(c) 1.00.
(d) 1.25.
Answer: D
Level of Difficulty: 4
Learning Goal: 5
Topic: Portfolio Beta (Equation 5.7)
72. Nico owns 100 shares of stock X which has a price of $12 per share and 200 shares of
stock Y which has a price of $3 per share. What is the proportion of Nico’s portfolio
invested in stock X?
(a) 77%
(b) 67%
(c) 50%
(d) 33%
Answer: B
Level of Difficulty: 3
Learning Goal: 5
Topic: Portfolio Weights (Equation 5.5)
73. Nico wants to invest all of his money in just two assets: the risk free asset and the
market portfolio. What is Nico’s portfolio beta if he invests a quarter of his money in
the market portfolio and the rest in the risk free asset?
(a) 0.00
(b) 0.25
(c) 0.75
(d) 1.00
Answer: B
Level of Difficulty: 3
Learning Goal: 5
Topic: Portfolio Weights (Equation 5.5)
74. What is the expected market return if the expected return on asset X is 20 percent, its
beta is 1.5, and the risk free rate is 5 percent?
(a) 5.0%
(b) 7.5%
(c) 15.0%
(d) 22.5%
Answer: C
Level of Difficulty: 3
Learning Goal: 5
Topic: Capital Asset Pricing Model (CAPM) (Equation 5.8)
75. What is the expected risk-free rate of return if asset X, with a beta of 1.5, has an
expected return of 20 percent, and the expected market return is 15 percent?
(a) 5.0%
(b) 7.5%
(c) 15.0%
(d) 22.5%
Answer: A
Level of Difficulty: 3
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM) (Equation 5.8)
76. What is the expected return for asset X if it has a beta of 1.5, the expected market return
is 15 percent, and the expected risk-free rate is 5 percent?
(a) 5.0%
(b) 7.5%
(c) 15.0%
(d) 20.0%
Answer: D
Level of Difficulty: 3
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM) (Equation 5.8)
77. What is Nico’s portfolio beta if he invests an equal amount in asset X with a beta of
0.60, asset Y with a beta of 1.60, the risk-free asset, and the market portfolio?
(a) 1.20
(b) 1.00
(c) 0.80
(d) 0.60
Answer: C
Level of Difficulty: 3
Learning Goal: 5
Topic: Portfolio Beta (Equation 5.7)
Consider the following two securities X and Y.
Table 5.3
Security Return Standard Deviation Beta
X 20.0% 20.0% 1.50
Y 10.0% 30.0% 1.0
Risk-free asset 5.0%
78. Which asset (X or Y) in Table 5.3 has the least total risk? Which has the least
systematic risk?
(a) X; X.
(b) X; Y.
(c) Y; X.
(d) Y; Y.
Answer: B
Level of Difficulty: 3
Learning Goal: 5
Topic: Systematic and Unsystematic Risk
79. Using the data from Table 5.3, what is the systematic risk for a portfolio with twothirds
of the funds invested in X and one-third invested in Y?
(a) 0.88
(b) 1.17
(c) 1.33
(d) 1.67
Answer: C
Level of Difficulty: 2
Learning Goal: 5
Topic: Portfolio Beta (Equation 5.7)
80. Using the data from Table 5.3, what is the portfolio expected return and the portfolio
beta if you invest 35 percent in X, 45 percent in Y, and 20 percent in the risk-free asset?
(a) 12.5%, 0.975
(b) 12.5%, 1.975
(c) 15.0%, 0.975
(d) 15.0%, 1.975
Answer: A
Level of Difficulty: 3
Learning Goal: 5
Topic: Portfolio Return and Portfolio Beta (Equation 5.5 and Equation 5.7)
81. Using the data from Table 5.3, what is the portfolio expected return if you invest 100
percent of your money in X, borrow an amount equal to half of your own investment at
the risk free rate and invest your borrowings in asset X?
(a) 15.0%
(b) 22.5%
(c) 25.0%
(d) 27.5%
Answer: D
Level of Difficulty: 4
Learning Goal: 5
Topic: Portfolio Return (Equation 5.5)