Risk and Return Practice Exam Quiz

Risk and Return Practice Exam Quiz

1. What does the term “risk” typically refer to in financial management?
A. The potential for losing an investment’s value
B. The ability to gain unlimited returns
C. The guarantee of fixed returns on an investment
D. The certainty of positive future outcomes

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2. Which of the following is NOT considered a measure of risk?
A. Standard deviation
B. Variance
C. Beta coefficient
D. Price-to-earnings ratio

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3. Diversification helps reduce which type of risk?
A. Systematic risk
B. Unsystematic risk
C. Market risk
D. Inflation risk

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4. What does a beta of 1.2 indicate about a stock?
A. The stock has lower volatility than the market.
B. The stock is less risky than the market.
C. The stock is 20% more volatile than the market.
D. The stock moves inversely to the market.

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5. If an investor’s portfolio is well-diversified, what type of risk remains?
A. Unsystematic risk
B. Diversifiable risk
C. Systematic risk
D. Company-specific risk

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6. The capital asset pricing model (CAPM) estimates the return of an asset based on which factor?
A. Dividend yield
B. Market risk premium
C. Past performance
D. Book value

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7. What is the risk-free rate typically based on?
A. Corporate bonds
B. Treasury securities
C. Municipal bonds
D. Junk bonds

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8. Which of the following is an example of systematic risk?
A. A company’s CEO resigns unexpectedly
B. A factory fire affects a single company
C. A global pandemic affects markets worldwide
D. A competitor releases a new product

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9. What is the primary goal of diversification in a portfolio?
A. To increase portfolio risk
B. To maximize returns without reducing risk
C. To eliminate all risks
D. To minimize unsystematic risk

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10. In the context of risk and return, what does the term “expected return” mean?
A. The minimum return guaranteed by the government
B. The return that was earned in the past
C. The weighted average of all possible outcomes
D. The maximum possible return

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11. Which formula represents the total return of an investment?
A. (Ending value – Beginning value) × 100
B. (Ending value – Beginning value + Income) ÷ Beginning value
C. Income ÷ Beginning value × 100
D. (Ending value ÷ Beginning value) × 100

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12. What type of risk can be eliminated through diversification?
A. Interest rate risk
B. Systematic risk
C. Firm-specific risk
D. Inflation risk

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13. What is the purpose of the standard deviation in finance?
A. To measure the central tendency of data
B. To calculate the average return
C. To measure the variability of returns
D. To determine the profitability of a project

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14. If the risk-free rate is 2% and the expected market return is 8%, what is the market risk premium?
A. 6%
B. 10%
C. 4%
D. 8%

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15. Which of the following represents the reward-to-risk ratio?
A. Sharpe ratio
B. Price-to-earnings ratio
C. Dividend yield
D. Debt-to-equity ratio

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16. What is the shape of the security market line (SML) in the CAPM framework?
A. Horizontal
B. Vertical
C. Upward-sloping
D. Downward-sloping

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17. Which of the following is true about unsystematic risk?
A. It affects the entire market.
B. It can be diversified away.
C. It includes market-wide events.
D. It is also known as non-diversifiable risk.

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18. What does a negative beta indicate?
A. The asset moves with the market.
B. The asset moves inversely to the market.
C. The asset is risk-free.
D. The asset has no correlation with the market.

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19. What is the average beta of the market portfolio?
A. 0
B. 1
C. -1
D. 0.5

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20. Which of the following investments is typically considered risk-free?
A. Corporate bonds
B. Treasury bills
C. Preferred stocks
D. Real estate

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21. An investor is risk-averse if they prefer investments with:
A. High risk and high return
B. Low risk and high return
C. High risk and low return
D. Low risk and low return

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22. What is the primary purpose of a risk premium?
A. To compensate for inflation risk
B. To reward investors for taking on additional risk
C. To ensure fixed returns for all investments
D. To minimize losses during economic downturns

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23. Which of the following does NOT affect systematic risk?
A. Changes in interest rates
B. Stock market crashes
C. Individual firm scandals
D. Global economic recessions

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24. The risk-adjusted return of an investment is best measured by which ratio?
A. Sharpe ratio
B. Price-to-earnings ratio
C. Dividend yield
D. Net profit margin

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25. A stock with a beta of less than 1 is considered:
A. More volatile than the market
B. Less volatile than the market
C. Risk-free
D. Equal in volatility to the market

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26. What does the term “market risk premium” refer to?
A. The return on government securities
B. The additional return investors require for taking on market risk
C. The premium paid for insurance against losses
D. The tax benefits of investing in stocks

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27. Which of the following is true about a portfolio’s beta?
A. It is equal to the highest beta of the individual assets.
B. It is the weighted average of the individual betas.
C. It is always greater than 1.
D. It cannot be negative.

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28. The risk-return tradeoff implies that:
A. Higher risk leads to lower returns.
B. Lower risk leads to higher returns.
C. Higher risk leads to potentially higher returns.
D. Risk has no relationship with returns.

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29. The efficient frontier is a concept in:
A. Market timing
B. Modern portfolio theory
C. Behavioral finance
D. Fundamental analysis

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30. The coefficient of variation (CV) measures:
A. The absolute risk of an asset
B. The risk per unit of return
C. The expected return of an asset
D. The total portfolio value

31. Which of the following is an example of a risk-averse behavior?
A. Investing all funds in high-risk stocks
B. Diversifying investments across multiple asset classes
C. Borrowing heavily to invest in speculative markets
D. Ignoring risk assessments in investment decisions

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32. What does a high standard deviation in an investment’s returns indicate?
A. The investment has high consistency in returns.
B. The investment has low risk.
C. The investment has highly volatile returns.
D. The investment has no risk at all.

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33. What is the risk premium in an investment?
A. The guaranteed portion of the return
B. The return required above the risk-free rate
C. The potential loss of the initial investment
D. The yield on government bonds

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34. What does the efficient frontier represent in portfolio theory?
A. The maximum level of risk for a given return
B. The minimum level of return for a given risk
C. The optimal set of portfolios offering the highest return for a given level of risk
D. The relationship between risk-free assets and market risk

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35. A portfolio has a beta of 0.8. What does this imply about the portfolio’s risk?
A. The portfolio is risk-free.
B. The portfolio is less risky than the market.
C. The portfolio is riskier than the market.
D. The portfolio has the same risk as the market.

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36. If two stocks have a correlation coefficient of -1, what does it indicate?
A. The stocks are completely uncorrelated.
B. The stocks move in perfect harmony with each other.
C. The stocks move in perfectly opposite directions.
D. The stocks have no relationship.

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37. Which type of risk cannot be diversified away?
A. Market risk
B. Credit risk
C. Unsystematic risk
D. Business risk

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38. Which of the following best defines systematic risk?
A. Risk caused by factors affecting a single company
B. Risk that is unique to an industry
C. Risk inherent to the entire market or economy
D. Risk that can be controlled through asset allocation

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39. If the risk-free rate is 3% and the expected market return is 9%, what is the expected return on a stock with a beta of 1.5?
A. 6%
B. 12%
C. 13.5%
D. 15%

Explanation: ExpectedReturn=Risk−FreeRate+Beta×(MarketReturn−Risk−FreeRate)Expected Return = Risk-Free Rate + Beta \times (Market Return – Risk-Free Rate)ExpectedReturn=Risk−FreeRate+Beta×(MarketReturn−Risk−FreeRate)
33% + 1.5 \times (9% – 3%) = 3% + 1.5 \times 6% = 13.5%3
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40. Which of the following is NOT a component of the total return on an investment?
A. Capital gains
B. Dividend income
C. Beta
D. Interest income

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41. In which scenario does diversification fail to reduce risk?
A. When investments are negatively correlated
B. When investments are perfectly correlated
C. When investments are uncorrelated
D. When investments are diversified across industries

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42. The Sharpe ratio measures:
A. Return per unit of risk
B. Risk per unit of return
C. Correlation between assets
D. Diversifiable risk in a portfolio

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43. Which of the following factors does NOT directly influence an asset’s beta?
A. The company’s leverage
B. The company’s profitability
C. The sensitivity of the company’s revenues to the economy
D. The company’s industry characteristics

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44. What does it mean if a stock has a beta of 0?
A. The stock has no risk.
B. The stock moves in the same direction as the market.
C. The stock is uncorrelated with the market.
D. The stock has higher risk than the market.

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45. The formula for the expected return of a portfolio is based on:
A. The variance of the portfolio’s assets
B. The weighted average of the individual asset returns
C. The correlation of the assets in the portfolio
D. The beta of the portfolio

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46. Which of the following best describes alpha in finance?
A. The risk-free rate of return
B. The excess return of a portfolio above its expected return
C. The measure of a portfolio’s market risk
D. The measure of a portfolio’s diversification

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47. The market risk premium is equal to:
A. The risk-free rate plus the beta coefficient
B. The difference between the expected market return and the risk-free rate
C. The standard deviation of the market returns
D. The return on government bonds

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48. A higher coefficient of variation indicates:
A. Higher returns relative to risk
B. Greater risk per unit of return
C. Lower volatility in returns
D. Lower risk per unit of return

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49. What is the primary difference between systematic and unsystematic risk?
A. Systematic risk affects only a single company, while unsystematic risk affects the entire market.
B. Systematic risk can be diversified, while unsystematic risk cannot.
C. Systematic risk affects the entire market, while unsystematic risk is specific to a company or industry.
D. Systematic risk is caused by internal factors, while unsystematic risk is caused by external factors.

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50. If a portfolio has a Sharpe ratio of 1.2, what does this imply?
A. The portfolio has earned a return 1.2 times greater than its risk-free rate.
B. The portfolio has a low level of diversification.
C. The portfolio’s return exceeds its risk by 1.2 units.
D. The portfolio has earned 1.2 units of return per unit of risk.

51. The capital asset pricing model (CAPM) assumes which of the following?
A. All investors have the same expectations of future returns.
B. There is no risk-free rate in the market.
C. Asset returns are independent of the market.
D. All investors focus solely on unsystematic risk.

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52. Which of the following statements about risk is true?
A. Total risk equals systematic risk plus unsystematic risk.
B. Unsystematic risk is also referred to as market risk.
C. Systematic risk can be eliminated through diversification.
D. Total risk equals unsystematic risk minus systematic risk.

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53. What happens to a portfolio’s risk as the number of assets in the portfolio increases?
A. Systematic risk decreases.
B. Unsystematic risk decreases.
C. Total risk increases.
D. Portfolio risk remains unchanged.

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54. A security’s beta measures its:
A. Systematic risk relative to the market.
B. Total risk relative to the market.
C. Unsystematic risk compared to the market.
D. Average return relative to the risk-free rate.

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55. If an investor is risk-neutral, they will:
A. Avoid all risky investments.
B. Seek the highest return regardless of risk.
C. Require higher returns for higher risks.
D. Be indifferent to risk when selecting investments.

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56. Which of the following best explains the concept of covariance in portfolio theory?
A. The average return of two securities.
B. The relationship between two securities’ returns.
C. The variance of a security relative to the market.
D. The measure of total portfolio return.

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57. The expected return on a stock is 10%, and the standard deviation is 20%. What does this standard deviation indicate?
A. The stock’s risk-free return is 20%.
B. The stock’s returns are expected to fluctuate by 20% on average.
C. The stock has a 20% likelihood of underperforming.
D. The stock’s return is guaranteed to be 10%.

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58. What is the primary goal of diversification in a portfolio?
A. To increase expected returns.
B. To reduce systematic risk.
C. To minimize unsystematic risk.
D. To achieve higher beta values.

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59. If two securities have a correlation coefficient of 0, what does it mean?
A. They are perfectly positively correlated.
B. They are perfectly negatively correlated.
C. There is no relationship between their returns.
D. They have identical risks.

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60. What is the risk-free rate typically based on?
A. The return of the stock market index
B. The average return of corporate bonds
C. The yield on government treasury bonds
D. The expected return of a diversified portfolio

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61. If the beta of a stock is 1.2, and the market return increases by 5%, what is the expected change in the stock’s return?
A. 6%
B. 5%
C. 4%
D. 1.2%

Explanation: ExpectedChange=Beta×MarketReturnExpected Change = Beta \times Market ReturnExpectedChange=Beta×MarketReturn
1.2×5%=6%1.2 \times 5\% = 6\%1.2×5%=6%
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62. Which of the following investments is considered to have the lowest risk?
A. Corporate bonds
B. Treasury bonds
C. Real estate
D. High-growth stocks

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63. What is the primary purpose of calculating the weighted average cost of capital (WACC)?
A. To evaluate the risk of a company’s stock
B. To calculate a company’s risk-free rate
C. To determine the company’s cost of capital across all funding sources
D. To predict a company’s earnings growth

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64. What does a negative alpha indicate?
A. The investment is outperforming the market.
B. The investment is underperforming relative to its expected return.
C. The investment has no risk.
D. The investment has a beta of zero.

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65. Which of the following can increase the systematic risk of a portfolio?
A. Adding highly correlated securities
B. Diversifying into unrelated industries
C. Reducing exposure to market-sensitive sectors
D. Lowering the portfolio’s overall beta

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66. The security market line (SML) represents the relationship between:
A. Risk and beta
B. Beta and alpha
C. Risk and return
D. Alpha and market return

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67. Which metric measures the risk-adjusted performance of a portfolio?
A. Beta
B. Alpha
C. Sharpe ratio
D. Covariance

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68. When the return of a portfolio exceeds the return predicted by the capital asset pricing model, this is called:
A. Negative beta
B. Positive alpha
C. Risk-free return
D. Risk-adjusted return

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69. If an investor focuses only on systematic risk, they are most likely using which model?
A. Arbitrage Pricing Theory
B. Modern Portfolio Theory
C. Capital Asset Pricing Model
D. Efficient Market Hypothesis

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70. Which of the following is NOT true about unsystematic risk?
A. It is also called diversifiable risk.
B. It arises from specific company or industry factors.
C. It can be eliminated through diversification.
D. It affects the entire market.

71. An investor’s required rate of return is typically influenced by:
A. Only systematic risk.
B. Both systematic and unsystematic risks.
C. The risk-free rate and the investment’s beta.
D. The investor’s portfolio size.

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72. If the risk-free rate is 3% and the market risk premium is 5%, what is the required return of a stock with a beta of 1.5?
A. 7.5%
B. 8%
C. 10.5%
D. 11.5%

Explanation: RequiredReturn=Risk−FreeRate+(Beta×MarketRiskPremium)Required Return = Risk-Free Rate + (Beta \times Market Risk Premium)RequiredReturn=Risk−FreeRate+(Beta×MarketRiskPremium)
3%+(1.5×5%)=10.5%3\% + (1.5 \times 5\%) = 10.5\%3%+(1.5×5%)=10.5%
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73. Which of the following is an example of systematic risk?
A. A strike by employees in a specific company
B. A recession that affects the entire economy
C. A product recall in a company
D. Management changes within a firm

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74. Which of the following is the best measure of a portfolio’s total risk?
A. Beta
B. Standard deviation
C. Alpha
D. Risk premium

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75. Diversification is most effective when the returns of assets in a portfolio are:
A. Positively correlated.
B. Negatively correlated.
C. Perfectly positively correlated.
D. Uncorrelated.

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76. A portfolio with a beta of 1.0 is expected to:
A. Be risk-free.
B. Perform better than the market.
C. Match the market’s performance.
D. Exhibit no risk.

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77. The risk premium for an investment is defined as:
A. The return required above the risk-free rate.
B. The standard deviation of the investment’s return.
C. The beta of the investment times its return.
D. The difference between the highest and lowest return.

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78. The coefficient of variation (CV) is calculated as:
A. Standard deviation divided by expected return.
B. Expected return divided by standard deviation.
C. Beta divided by expected return.
D. Risk-free rate divided by market return.

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79. Which of the following is the main assumption of the efficient market hypothesis (EMH)?
A. Investors cannot earn a risk-free return.
B. Markets reflect all available information.
C. All securities have the same level of risk.
D. Historical prices are irrelevant for future returns.

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80. Which of the following statements is TRUE regarding a portfolio with perfectly negatively correlated assets?
A. The portfolio will have the same risk as the riskier asset.
B. The portfolio’s total risk can be reduced to zero.
C. The portfolio’s beta will always be less than 1.
D. The portfolio will always outperform the market.

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81. The Sharpe ratio evaluates an investment’s performance by:
A. Comparing returns to systematic risk.
B. Subtracting unsystematic risk from total risk.
C. Comparing excess return to total risk.
D. Dividing total risk by expected return.

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82. In the CAPM formula, what does the term “Rm−RfR_m – R_fRm−Rf” represent?
A. The market risk premium.
B. The expected market return.
C. The return on the risk-free asset.
D. The expected portfolio return.

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83. A portfolio consisting only of the risk-free asset and the market portfolio is referred to as:
A. A balanced portfolio.
B. The efficient portfolio.
C. The capital market portfolio.
D. The two-asset portfolio.

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84. A high beta stock is expected to:
A. Be less volatile than the market.
B. Have lower returns in bull markets.
C. Be more sensitive to market movements.
D. Provide a lower return than the risk-free rate.

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85. Which type of risk is measured by standard deviation?
A. Systematic risk
B. Unsystematic risk
C. Total risk
D. Market risk

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86. If a portfolio’s beta is less than 1, it indicates that the portfolio:
A. Is risk-free.
B. Is less volatile than the market.
C. Will always outperform the market.
D. Has more unsystematic risk than systematic risk.

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87. The market risk premium is defined as:
A. The difference between the market return and the risk-free rate.
B. The return required for an investment in a risk-free asset.
C. The total return of the market portfolio.
D. The difference between beta and the expected return.

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88. Which of the following is NOT a benefit of diversification?
A. It reduces unsystematic risk.
B. It increases the expected return of a portfolio.
C. It improves the risk-return trade-off.
D. It provides exposure to a variety of assets.

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89. Which of the following statements about the security market line (SML) is correct?
A. The SML plots unsystematic risk against return.
B. Securities above the SML are undervalued.
C. The SML represents the relationship between risk-free assets and alpha.
D. Securities below the SML are outperforming the market.

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90. What is the best way to reduce the total risk in a portfolio?
A. Invest in high-beta securities.
B. Diversify across unrelated asset classes.
C. Hold securities with high correlation coefficients.
D. Focus on short-term investments.

91. A security with a beta of zero is expected to:
A. Provide returns equal to the market.
B. Provide returns equal to the risk-free rate.
C. Be more volatile than the market.
D. Have no relationship with the market’s returns.

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92. If two assets have a correlation coefficient of -1, combining them will:
A. Eliminate all risk in the portfolio.
B. Have no impact on the portfolio’s risk.
C. Increase the portfolio’s risk.
D. Only reduce systematic risk.

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93. What is the main purpose of calculating the beta of an asset?
A. To measure the total risk of the asset.
B. To measure the unsystematic risk of the asset.
C. To measure the asset’s sensitivity to market risk.
D. To determine the risk-free rate of the asset.

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94. Which of the following best describes the term “market portfolio”?
A. A portfolio with only risk-free assets.
B. A portfolio consisting of all available risky investments.
C. A portfolio with the highest unsystematic risk.
D. A portfolio that includes only stocks with beta greater than 1.

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95. What happens to a portfolio’s risk as the number of assets increases?
A. Total risk increases.
B. Systematic risk decreases.
C. Unsystematic risk decreases.
D. Systematic risk increases.

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96. Which of the following would likely have the highest expected return?
A. A government bond.
B. A diversified portfolio of large-cap stocks.
C. A high-beta stock.
D. A risk-free treasury bill.

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97. If an investor moves from a portfolio on the efficient frontier to one below it, they are:
A. Increasing risk and decreasing return.
B. Decreasing risk and increasing return.
C. Decreasing both risk and return.
D. Reducing efficiency in risk-return trade-off.

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98. Which of the following represents unsystematic risk?
A. Changes in interest rates.
B. A new competitor entering the market.
C. A global economic downturn.
D. An increase in oil prices affecting all industries.

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99. According to the capital asset pricing model (CAPM), an asset’s return depends on:
A. Its standard deviation.
B. Its systematic risk relative to the market.
C. The risk-free rate only.
D. Total risk including unsystematic risk.

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100. If the expected return of a portfolio is 8% and the risk-free rate is 3%, the Sharpe ratio of the portfolio with a standard deviation of 10% is:
A. 0.3
B. 0.5
C. 1.0
D. 2.0

Explanation: SharpeRatio=Portfolio Return – Risk-Free RateStandard DeviationSharpe Ratio = \frac{\text{Portfolio Return – Risk-Free Rate}}{\text{Standard Deviation}}SharpeRatio=Standard DeviationPortfolio Return – Risk-Free Rate
8%−3%10%=0.5\frac{8\% – 3\%}{10\%} = 0.510%8%−3%=0.5
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101. What does the alpha of a security indicate?
A. The expected return based on market risk.
B. The excess return above the risk-free rate.
C. The risk-adjusted return relative to the benchmark.
D. The return due to unsystematic risk.

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102. The Treynor ratio uses which measure of risk?
A. Standard deviation.
B. Beta.
C. Variance.
D. Coefficient of variation.

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103. The capital market line (CML) represents the relationship between:
A. Risk and return for individual assets.
B. Risk and return for efficient portfolios.
C. Systematic risk and unsystematic risk.
D. Risk-free assets and market risk.

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104. Which portfolio is considered efficient under modern portfolio theory?
A. A portfolio with the highest standard deviation.
B. A portfolio that minimizes risk for a given return.
C. A portfolio that only includes risk-free assets.
D. A portfolio that has a beta equal to zero.

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105. Systematic risk is also referred to as:
A. Market risk.
B. Asset-specific risk.
C. Diversifiable risk.
D. Idiosyncratic risk.

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106. Which of the following factors is NOT used in calculating the weighted average cost of capital (WACC)?
A. Cost of equity.
B. Market risk premium.
C. Cost of debt.
D. Proportion of equity in the capital structure.

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107. If an investment has a standard deviation of 12% and an expected return of 6%, its coefficient of variation is:
A. 0.5
B. 1.0
C. 2.0
D. 0.25

Explanation: CV=Standard DeviationExpected ReturnCV = \frac{\text{Standard Deviation}}{\text{Expected Return}}CV=Expected ReturnStandard Deviation
12%6%=2.0\frac{12\%}{6\%} = 2.06%12%=2.0
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108. When comparing two investments, the one with a higher Sharpe ratio is considered:
A. Riskier for the same return.
B. More efficient for risk-adjusted returns.
C. Better only if beta is higher.
D. Less diversified.

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109. In portfolio management, the main goal of diversification is to:
A. Increase expected returns.
B. Reduce systematic risk.
C. Eliminate unsystematic risk.
D. Enhance risk-free returns.

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110. An investor who seeks the lowest possible risk should allocate their portfolio to:
A. 100% market portfolio.
B. 50% stocks and 50% bonds.
C. A mix of risk-free assets and the market portfolio.
D. 100% risk-free assets.

111. Which of the following is true about the risk-free rate?
A. It is affected by market risk.
B. It represents compensation for time value of money.
C. It is equal to the average market return.
D. It includes unsystematic risk.

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112. What is the primary assumption of the Efficient Market Hypothesis (EMH)?
A. All investors behave rationally.
B. Stock prices fully reflect all available information.
C. Only institutional investors affect market prices.
D. Risk-free assets outperform in the long run.

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113. The standard deviation of a portfolio is influenced most significantly by:
A. The risk-free rate.
B. The correlation between asset returns.
C. The beta of individual securities.
D. The number of assets in the portfolio.

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114. If an investor is risk-averse, they will:
A. Only invest in risk-free assets.
B. Accept higher risk for the same return.
C. Require higher returns to take on additional risk.
D. Avoid diversifying their portfolio.

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115. What is the slope of the Security Market Line (SML)?
A. Risk-free rate.
B. Market risk premium.
C. Beta of the market.
D. Total risk of the portfolio.

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116. Which of the following portfolios is on the efficient frontier?
A. A portfolio with the highest risk for a given return.
B. A portfolio with the lowest standard deviation for a given return.
C. A portfolio consisting only of high-beta stocks.
D. A portfolio with equal weights for all assets.

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117. Which type of risk is NOT reduced through diversification?
A. Business risk.
B. Systematic risk.
C. Credit risk.
D. Operational risk.

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118. Which of the following statements about beta is FALSE?
A. Beta measures an asset’s sensitivity to market movements.
B. A beta greater than 1 indicates higher risk than the market.
C. A beta of 0 indicates no risk.
D. Negative beta assets move opposite to the market.

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119. If two stocks have a correlation coefficient of +1, their returns will:
A. Move independently.
B. Move in opposite directions.
C. Move together perfectly.
D. Have no impact on each other.

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120. What does the Jensen’s alpha measure?
A. Total risk of a portfolio.
B. Excess return over the market portfolio.
C. Risk-adjusted return based on CAPM.
D. Systematic risk of an asset.

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121. Which of the following best describes the arbitrage pricing theory (APT)?
A. It focuses solely on market risk.
B. It considers multiple risk factors affecting returns.
C. It assumes no arbitrage opportunities exist.
D. It is based on the efficient frontier.

________________________________________
122. In CAPM, the expected return of a security is directly proportional to:
A. The security’s standard deviation.
B. The risk-free rate.
C. The security’s beta.
D. The security’s unsystematic risk.

________________________________________
123. If an asset has a beta of -0.5, it indicates that:
A. The asset is positively correlated with the market.
B. The asset moves opposite to the market.
C. The asset has no relationship with the market.
D. The asset is risk-free.

________________________________________
124. The concept of risk aversion implies that investors:
A. Prefer risk-free assets over risky assets.
B. Always select assets with the highest return regardless of risk.
C. Only invest in portfolios with a beta of zero.
D. Require higher returns to compensate for higher risk.

________________________________________
125. Which of the following is an example of unsystematic risk?
A. A global pandemic.
B. A company’s CEO resigns unexpectedly.
C. Interest rate hikes by the central bank.
D. Oil prices increasing globally.

________________________________________
126. A portfolio with a Sharpe ratio of zero indicates:
A. The portfolio has no risk.
B. The portfolio’s return equals the risk-free rate.
C. The portfolio’s return equals the market return.
D. The portfolio has no systematic risk.

________________________________________
127. The coefficient of variation is used to:
A. Compare returns of two securities with different risks.
B. Calculate the total risk of a security.
C. Measure correlation between asset returns.
D. Determine the risk-free rate.

________________________________________
128. If an investor allocates all funds to the market portfolio, their portfolio beta will be:
A. 0
B. 1
C. Greater than 1
D. Less than 0

________________________________________
129. Which factor increases a portfolio’s systematic risk?
A. Adding more risk-free assets.
B. Increasing exposure to high-beta assets.
C. Reducing the number of stocks in the portfolio.
D. Adding negatively correlated assets.

________________________________________
130. What does a steep slope in the Security Market Line (SML) suggest?
A. Higher market risk premium.
B. Higher risk-free rate.
C. Decreased market volatility.
D. Increased correlation among assets.

131. The risk-return trade-off implies that investors demand higher returns for:
A. Investments with lower liquidity.
B. Taking on higher levels of risk.
C. Holding risk-free securities.
D. Assets with high correlation to the market.

________________________________________
132. What is the main objective of portfolio diversification?
A. Eliminate all risks.
B. Maximize systematic risk.
C. Reduce unsystematic risk.
D. Minimize investment returns.

________________________________________
133. An asset with a beta of 1.5 is expected to:
A. Be less volatile than the market.
B. Have the same return as the risk-free rate.
C. Be 50% more volatile than the market.
D. Move independently of the market.

________________________________________
134. What does the capital market line (CML) represent?
A. The relationship between beta and expected return.
B. The risk-return trade-off for efficient portfolios.
C. The correlation between two risky assets.
D. The minimum risk level for a portfolio.

________________________________________
135. Which of the following is an example of systematic risk?
A. A labor strike at a major company.
B. A sudden change in government regulations.
C. The resignation of a CEO.
D. The bankruptcy of a single firm.

________________________________________
136. Which of the following describes the correlation coefficient between two assets?
A. It is always positive.
B. It ranges from -1 to +1.
C. It measures only unsystematic risk.
D. It cannot be negative.

________________________________________
137. The Treynor ratio is used to measure:
A. The total risk of a portfolio.
B. The excess return per unit of beta.
C. The proportion of systematic risk.
D. The portfolio’s Sharpe ratio.

________________________________________
138. A portfolio on the efficient frontier offers:
A. The highest return for a given level of risk.
B. Zero systematic risk.
C. The highest unsystematic risk.
D. The lowest beta among all portfolios.

________________________________________
139. Which of the following best describes covariance?
A. The measure of the risk-free rate.
B. The degree to which two assets move together.
C. The square of the correlation coefficient.
D. The total risk of a single asset.

________________________________________
140. If the beta of a security is zero, it means:
A. The security is risk-free.
B. The security is not correlated with the market.
C. The security has no return.
D. The security is perfectly correlated with the market.

________________________________________
141. What is the effect of increasing the number of securities in a portfolio?
A. It increases total risk.
B. It decreases systematic risk.
C. It reduces unsystematic risk.
D. It eliminates systematic risk.

________________________________________
142. Which of the following is true about the beta of the market portfolio?
A. It is always less than 1.
B. It equals 1 by definition.
C. It is greater than 1.
D. It is negative during market downturns.

________________________________________
143. Which measure is used to calculate the degree of risk in relation to expected return?
A. Variance.
B. Coefficient of variation.
C. Correlation coefficient.
D. Standard deviation.

________________________________________
144. What happens when an investor moves from the risk-free asset to the market portfolio on the CML?
A. The portfolio’s beta decreases.
B. The portfolio’s return decreases.
C. The portfolio’s risk increases.
D. The portfolio becomes inefficient.

________________________________________
145. What does a beta of -1 indicate for a security?
A. The security has no risk.
B. The security is inversely correlated with the market.
C. The security has systematic risk equal to the market.
D. The security has zero return.

________________________________________
146. In CAPM, the risk premium is calculated as:
A. Expected return minus risk-free rate.
B. Market return multiplied by beta.
C. Standard deviation of the portfolio.
D. Expected return divided by beta.

________________________________________
147. Which of the following is an assumption of the CAPM?
A. Investors have different expectations of risk.
B. Markets are inefficient.
C. Investors can borrow and lend at the risk-free rate.
D. Asset returns are independent of each other.

________________________________________
148. If two stocks are perfectly negatively correlated, combining them will:
A. Increase the portfolio’s risk.
B. Eliminate all systematic risk.
C. Completely diversify unsystematic risk.
D. Minimize the portfolio’s total risk.

________________________________________
149. Which type of risk affects all securities in the market?
A. Operational risk.
B. Unsystematic risk.
C. Systematic risk.
D. Credit risk.

________________________________________
150. Which measure is most appropriate for comparing risk-adjusted returns?
A. Alpha.
B. Sharpe ratio.
C. Correlation coefficient.
D. Variance.

151. If an investor wants to minimize portfolio risk, which combination of asset correlation is most desirable?
A. Perfectly positively correlated assets.
B. Perfectly negatively correlated assets.
C. Uncorrelated assets.
D. Assets with a correlation of +1.

________________________________________
152. The primary source of systematic risk for most companies is:
A. Operational inefficiencies.
B. The overall market or economic factors.
C. Changes in management.
D. Company-specific lawsuits.

________________________________________
153. Which of the following is an example of unsystematic risk?
A. Interest rate changes.
B. Inflation rate changes.
C. A product recall by a company.
D. Economic recession.

________________________________________
154. What is the formula for the expected return of a portfolio?
A. The weighted average of individual asset returns.
B. The product of returns of all assets.
C. The variance of all asset returns.
D. The total standard deviation of the portfolio.

________________________________________
155. Which of the following increases portfolio diversification benefits?
A. Adding assets with a high positive correlation.
B. Adding assets with low or negative correlation.
C. Adding assets with the same beta.
D. Adding assets from the same industry.

________________________________________
156. What is the primary focus of the Sharpe ratio?
A. Total risk of a portfolio.
B. Risk-free rate of return.
C. Risk-adjusted return.
D. Portfolio correlation.

________________________________________
157. A higher standard deviation in returns implies:
A. Higher risk.
B. Lower expected return.
C. Greater diversification.
D. Lower market correlation.

________________________________________
158. What does the beta of a stock measure?
A. Total risk of the stock.
B. The risk-free rate.
C. The stock’s volatility relative to the market.
D. The stock’s total return.

________________________________________
159. Which of the following portfolios is considered efficient?
A. A portfolio with maximum return and no risk.
B. A portfolio on the efficient frontier.
C. A portfolio with low correlation between assets.
D. A portfolio with zero systematic risk.

________________________________________
160. In CAPM, what is the expected return on the market portfolio?
A. Equal to the risk-free rate.
B. Higher than the risk-free rate.
C. Less than the beta of the market.
D. Equal to zero.

________________________________________
161. Which risk can be diversified away by adding more securities to a portfolio?
A. Market risk.
B. Systematic risk.
C. Unsystematic risk.
D. Total risk.

________________________________________
162. A security with a beta of 0.8 is expected to:
A. Be less volatile than the market.
B. Match the volatility of the market.
C. Be more volatile than the market.
D. Be independent of market movements.

________________________________________
163. The risk-free rate is typically represented by:
A. A stock index.
B. A corporate bond rate.
C. The return on Treasury securities.
D. The return on junk bonds.

________________________________________
164. Which of the following best describes the efficient market hypothesis (EMH)?
A. Markets are never predictable.
B. All available information is already reflected in stock prices.
C. Only large investors can earn abnormal returns.
D. Stock prices are always undervalued.

________________________________________
165. If the correlation between two assets is zero, it means:
A. The assets have no relationship in their returns.
B. The assets move in opposite directions.
C. The assets are perfectly positively correlated.
D. The assets have identical returns.

________________________________________
166. What is the primary difference between variance and standard deviation?
A. Variance measures return; standard deviation measures risk.
B. Variance is the square root of standard deviation.
C. Standard deviation is the square root of variance.
D. They are completely unrelated measures.

________________________________________
167. The capital asset pricing model assumes:
A. All investors have different expectations of risk.
B. Markets are inefficient.
C. Investors are rational and risk-averse.
D. There are transaction costs in trading.

________________________________________
168. The market risk premium is calculated as:
A. The difference between the market return and the risk-free rate.
B. The beta of a security multiplied by the risk-free rate.
C. The total expected return of a portfolio.
D. The product of beta and standard deviation.

________________________________________
169. What happens to portfolio risk as more securities with low correlations are added?
A. Portfolio risk increases.
B. Portfolio risk decreases.
C. Portfolio risk remains unchanged.
D. Portfolio risk becomes zero.

________________________________________
170. What is the main limitation of beta as a risk measure?
A. It only measures total risk.
B. It assumes past performance predicts future returns.
C. It cannot be used for diversification purposes.
D. It ignores systematic risk.

171. What does a security market line (SML) represent?
A. The relationship between risk and return for a portfolio.
B. The relationship between systematic risk (beta) and expected return.
C. The total risk of an asset.
D. The market’s historical returns over time.

________________________________________
172. Which of the following is true about the coefficient of variation (CV) in risk analysis?
A. It measures absolute risk.
B. It is the ratio of standard deviation to expected return.
C. A higher CV indicates lower risk.
D. It only applies to diversified portfolios.

________________________________________
173. Which of the following statements about unsystematic risk is true?
A. It is also called market risk.
B. It can be eliminated through diversification.
C. It affects all securities equally.
D. It is measured by beta.

________________________________________
174. A beta greater than 1 indicates:
A. The asset is less volatile than the market.
B. The asset is independent of market movements.
C. The asset is more volatile than the market.
D. The asset has no risk.

________________________________________
175. In the context of risk and return, what does the term “risk premium” refer to?
A. The additional return expected for taking on extra risk.
B. The guaranteed return on a risk-free asset.
C. The return earned above the standard deviation.
D. The expected loss in a declining market.

________________________________________
176. Which of the following is an assumption of the Capital Market Line (CML)?
A. All investors have different risk aversion levels.
B. All investors can borrow and lend at the risk-free rate.
C. Markets are inefficient and unpredictable.
D. Risk is measured only by unsystematic factors.

________________________________________
177. If an investor prefers a lower risk portfolio, they should:
A. Focus on maximizing unsystematic risk.
B. Invest in assets with high positive correlations.
C. Invest in negatively correlated assets.
D. Choose assets with low betas but high standard deviations.

________________________________________
178. Which of the following assets would have the highest risk premium?
A. Treasury bonds.
B. Corporate bonds.
C. High-growth technology stocks.
D. Dividend-paying utility stocks.

________________________________________
179. Which measure evaluates the risk-adjusted performance of an investment?
A. Beta.
B. Variance.
C. Sharpe ratio.
D. Correlation coefficient.

________________________________________
180. When portfolio diversification eliminates all unsystematic risk, the remaining risk is:
A. Zero.
B. Market risk (systematic risk).
C. Total portfolio risk.
D. Standard deviation.

________________________________________
181. A portfolio consisting of entirely risk-free assets will have a beta of:
A. 1.0.
B. 0.0.
C. Greater than 1.0.
D. Negative.

________________________________________
182. What is the expected return for a portfolio if all assets are perfectly negatively correlated?
A. Zero.
B. The risk-free rate.
C. The weighted average of individual expected returns.
D. The variance of the portfolio.

________________________________________
183. If an investor chooses to invest only in high-beta stocks, they are:
A. Taking on high market risk.
B. Diversifying their portfolio.
C. Reducing portfolio risk.
D. Avoiding systematic risk.

________________________________________
184. Which of the following would decrease portfolio risk?
A. Adding assets with a beta higher than 1.0.
B. Adding more correlated assets.
C. Adding assets with low or negative correlation.
D. Increasing exposure to a single stock.

________________________________________
185. The risk-free rate is subtracted in CAPM to:
A. Measure the absolute risk of a security.
B. Adjust returns for systematic risk only.
C. Evaluate the excess return required for risk-taking.
D. Eliminate unsystematic risk from calculations.

________________________________________
186. The slope of the Security Market Line (SML) represents:
A. The risk-free rate.
B. Market beta.
C. The market risk premium.
D. Total market variance.

________________________________________
187. Which type of investor is most likely to prefer a steep upward-sloping CML?
A. Risk-neutral investors.
B. Risk-seeking investors.
C. Risk-averse investors.
D. Speculative investors.

________________________________________
188. In the context of modern portfolio theory, the efficient frontier represents:
A. The set of all possible portfolios.
B. Portfolios with the highest risk.
C. Portfolios offering the highest return for a given level of risk.
D. Portfolios with the lowest variance.

________________________________________
189. What does a beta of 1.5 indicate about a stock’s expected performance?
A. It is 50% less volatile than the market.
B. It is 50% more volatile than the market.
C. It has the same volatility as the market.
D. It has no correlation to the market.

________________________________________
190. Which of the following is a limitation of using variance as a risk measure?
A. It does not account for upside potential.
B. It only measures systematic risk.
C. It assumes returns are not normally distributed.
D. It cannot be applied to diversified portfolios.

191. What happens to a portfolio’s risk as more assets are added?
A. Total risk increases.
B. Total risk remains constant.
C. Diversifiable risk decreases.
D. Systematic risk increases.

________________________________________
192. If an asset’s expected return lies below the Security Market Line (SML), the asset is considered:
A. Overpriced.
B. Underpriced.
C. Risk-free.
D. A fair investment.

________________________________________
193. What is the risk measure that evaluates the probability of extreme portfolio losses?
A. Beta.
B. Value at Risk (VaR).
C. Alpha.
D. Correlation.

________________________________________
194. Which of the following assets typically has the lowest risk?
A. Corporate bonds.
B. Small-cap stocks.
C. Treasury bills.
D. Real estate investment trusts (REITs).

________________________________________
195. An investor aiming for a risk-free return should invest in:
A. Diversified stocks.
B. Corporate bonds.
C. Treasury securities.
D. International mutual funds.

________________________________________
196. What happens to a portfolio’s beta when high-beta assets are added?
A. Portfolio beta decreases.
B. Portfolio beta increases.
C. Portfolio beta remains unchanged.
D. Portfolio beta becomes zero.

________________________________________
197. Which of the following best describes the Capital Asset Pricing Model (CAPM)?
A. A model to calculate unsystematic risk.
B. A model to estimate expected returns based on systematic risk.
C. A model for market timing strategies.
D. A model to evaluate risk-free investments.

________________________________________
198. When two assets have a correlation of -1, their returns:
A. Are perfectly positively correlated.
B. Are uncorrelated.
C. Are perfectly negatively correlated.
D. Show no relationship.

________________________________________
199. The term “alpha” in investment performance analysis refers to:
A. The asset’s risk-free return.
B. The asset’s market risk premium.
C. The return in excess of the CAPM prediction.
D. The total expected return of the portfolio.

________________________________________
200. A portfolio with no diversifiable risk is referred to as:
A. The market portfolio.
B. A perfectly efficient portfolio.
C. A portfolio with a beta of zero.
D. A portfolio with infinite systematic risk.

________________________________________
201. Which of the following is true about standard deviation in risk measurement?
A. It measures systematic risk only.
B. It represents the total risk of an asset or portfolio.
C. It is unaffected by portfolio diversification.
D. It applies only to assets with high beta values.

________________________________________
202. What is the main implication of an efficient market hypothesis?
A. All assets are risk-free.
B. Security prices reflect all available information.
C. Portfolio diversification eliminates all risk.
D. Investors can easily achieve alpha.

________________________________________
203. When is the portfolio risk equal to the weighted average risk of its assets?
A. When the assets are perfectly positively correlated.
B. When the assets are perfectly negatively correlated.
C. When the portfolio is diversified.
D. When systematic risk is eliminated.

________________________________________
204. Which of the following is a characteristic of systematic risk?
A. It can be eliminated through diversification.
B. It arises from factors specific to an individual company.
C. It is measured by beta.
D. It has no impact on expected returns.

________________________________________
205. The Sharpe ratio evaluates:
A. The risk-free return of an investment.
B. Portfolio performance relative to risk-free assets.
C. The ratio of unsystematic risk to total risk.
D. Return per unit of total risk.

________________________________________
206. A portfolio with the highest Sharpe ratio is considered to be:
A. Fully diversified.
B. The optimal risk-adjusted portfolio.
C. Exposed only to systematic risk.
D. Dominated by high-beta assets.

________________________________________
207. Which of the following will not affect the beta of an individual stock?
A. Market volatility.
B. Changes in the stock’s correlation with the market.
C. Variance of the stock’s returns.
D. Interest rate changes.

________________________________________
208. What does a positive alpha indicate about an investment?
A. The investment is underperforming the market.
B. The investment has outperformed its expected return.
C. The investment has less risk than the market.
D. The investment is perfectly correlated with the market.

________________________________________
209. A portfolio with zero correlation among its assets will have:
A. Maximum risk.
B. No risk.
C. Reduced overall risk.
D. The same risk as the market portfolio.

________________________________________
210. Diversifiable risk is also referred to as:
A. Systematic risk.
B. Beta risk.
C. Market risk.
D. Unique risk.

211. What does the term “diversification” refer to in portfolio management?
A. Investing in a single asset to minimize risk.
B. Investing in different types of assets to reduce risk.
C. Investing in risk-free assets to eliminate risk.
D. Investing in high-risk assets to maximize returns.

________________________________________
212. Which of the following best describes a negatively correlated portfolio?
A. A portfolio where assets move in the same direction.
B. A portfolio where assets move in opposite directions.
C. A portfolio that only includes risk-free assets.
D. A portfolio with high total risk.

________________________________________
213. What is the relationship between risk and return according to modern portfolio theory?
A. Higher returns are always associated with lower risk.
B. Higher risk is associated with higher potential returns.
C. Risk has no effect on returns.
D. Lower risk leads to higher returns.

________________________________________
214. In the context of the Capital Asset Pricing Model (CAPM), what does the market risk premium represent?
A. The return on risk-free assets.
B. The difference between the market return and the risk-free rate.
C. The expected return of a particular stock.
D. The total risk of the portfolio.

________________________________________
215. Which of the following is an example of systematic risk?
A. A company-specific labor strike.
B. A recession affecting the entire economy.
C. A product recall by a company.
D. A new CEO appointment in a corporation.

________________________________________
216. The expected return of a portfolio is:
A. The weighted average of the expected returns of the individual assets in the portfolio.
B. Always equal to the risk-free rate.
C. Determined by the highest beta asset in the portfolio.
D. The return of the market portfolio.

________________________________________
217. The capital market line (CML) represents the optimal combination of:
A. Risk-free assets and risky assets.
B. Bonds and stocks with equal expected returns.
C. Portfolios that lie on the efficient frontier with the least risk.
D. The highest-risk portfolios available in the market.

________________________________________
218. Which of the following would likely result in a higher beta for a stock?
A. A stock with stable earnings and a low correlation to the market.
B. A stock with volatile earnings and a high correlation to the market.
C. A stock with a high dividend payout.
D. A stock with a low market share in its industry.

________________________________________
219. What does the standard deviation of a portfolio measure?
A. The correlation between the assets in the portfolio.
B. The total risk of the portfolio.
C. The expected return of the portfolio.
D. The unsystematic risk of the portfolio.

________________________________________
220. A stock has an expected return of 12% and a beta of 1.3. If the market return is 10%, what is the expected return of the stock according to CAPM?
A. 12%.
B. 14.9%.
C. 18%.
D. 13%.

________________________________________
221. What is the primary advantage of investing in a portfolio rather than in individual securities?
A. Diversification, which reduces risk.
B. Higher expected returns.
C. Elimination of systematic risk.
D. Increased potential for high returns.

________________________________________
222. What type of risk is eliminated when a portfolio is perfectly diversified?
A. Systematic risk.
B. Market risk.
C. Unsystematic risk.
D. Interest rate risk.

________________________________________
223. A portfolio with an expected return of 10% and a standard deviation of 15% is said to have a risk-adjusted return of 0.67. What does this indicate?
A. The portfolio is more risky than the market.
B. The portfolio provides 0.67 units of return for each unit of risk.
C. The portfolio has eliminated all risk.
D. The portfolio’s expected return is too low.

________________________________________
224. Which of the following best describes the relationship between risk and return for a portfolio with assets that are perfectly correlated?
A. The portfolio risk is the weighted average of the individual asset risks.
B. The portfolio risk is always zero.
C. The portfolio risk is higher than the weighted average of the individual asset risks.
D. The portfolio risk is the same as the highest risk asset.

________________________________________
225. Which of the following is true about a security with a beta of 0?
A. It is perfectly correlated with the market.
B. It has no systematic risk.
C. It has the same risk as the market.
D. It will always provide the market return.

________________________________________
226. What is the main purpose of the Security Market Line (SML) in CAPM?
A. To show the relationship between the total risk and return of an asset.
B. To display the risk-free rate relative to the market return.
C. To represent the relationship between expected return and systematic risk (beta).
D. To determine the most efficient portfolio.

________________________________________
227. What happens to the risk of a portfolio as more assets are added, assuming they are not perfectly correlated?
A. Risk decreases, but the returns increase.
B. Risk increases as more assets are added.
C. Risk decreases until all unsystematic risk is eliminated.
D. Risk remains constant regardless of the number of assets added.

________________________________________
228. A portfolio with a beta of 1.2 is expected to:
A. Be less volatile than the market.
B. Have the same volatility as the market.
C. Be more volatile than the market.
D. Be risk-free.

________________________________________
229. What is the major disadvantage of using beta to measure risk?
A. It cannot be used for diversified portfolios.
B. It only measures total risk, not systematic risk.
C. It assumes that past price movements accurately predict future performance.
D. It ignores the impact of economic factors.

________________________________________
230. What is the primary characteristic of a portfolio with a high Sharpe ratio?
A. High returns and low risk.
B. High returns relative to the risk-free rate.
C. High risk with low expected returns.
D. Low risk and low return.

231. What is the main purpose of the capital market line (CML)?
A. To show the relationship between a portfolio’s return and risk.
B. To demonstrate the return of a portfolio at varying levels of systematic risk.
C. To identify the most efficient portfolio.
D. To show the risk-free rate of return.

________________________________________
232. What does a beta value of 1.5 imply about a stock?
A. The stock is less volatile than the market.
B. The stock is 50% more volatile than the market.
C. The stock moves in the opposite direction of the market.
D. The stock’s return is completely unrelated to the market.

________________________________________
233. The expected return of a stock is 8%, and its beta is 0.8. The risk-free rate is 3%, and the market return is 10%. According to the CAPM, what is the expected return of the stock?
A. 7.6%
B. 8.8%
C. 9.2%
D. 9.6%

________________________________________
234. Which of the following best describes unsystematic risk?
A. Risk that is specific to a particular company or industry.
B. Risk that affects all investments in the market equally.
C. Risk that cannot be diversified away.
D. Risk that is eliminated by holding a diversified portfolio.

________________________________________
235. If the correlation between two assets is -1, the portfolio formed with those two assets would:
A. Have no risk.
B. Have maximum risk.
C. Have a risk equal to the weighted average of the individual assets.
D. Have the lowest possible risk.

________________________________________
236. Which of the following factors is not included in the calculation of a stock’s beta?
A. The stock’s correlation with the market.
B. The volatility of the stock compared to the market.
C. The risk-free rate of return.
D. The market return.

________________________________________
237. A stock has an expected return of 15%, and the risk-free rate is 4%. What is the risk premium for the stock?
A. 11%
B. 15%
C. 4%
D. 19%

________________________________________
238. Which of the following statements is true regarding a well-diversified portfolio?
A. It eliminates systematic risk.
B. It eliminates all types of risk.
C. It reduces unsystematic risk.
D. It cannot generate positive returns.

________________________________________
239. What does the term “market portfolio” refer to in the context of the Capital Asset Pricing Model (CAPM)?
A. A portfolio consisting of risk-free assets.
B. A portfolio consisting of all risky assets, weighted by their market values.
C. A portfolio that only includes high-risk assets.
D. A portfolio consisting of stocks from the same industry.

________________________________________
240. What is the risk-free rate in the CAPM model?
A. The return on the market portfolio.
B. The return on government bonds or Treasury bills.
C. The return on stocks.
D. The return on high-risk assets.

________________________________________
241. Which of the following would likely lead to an increase in a stock’s beta?
A. A stock with a stable earnings history.
B. A stock in a defensive industry.
C. A stock with high volatility and sensitivity to market changes.
D. A stock with a low correlation to the overall market.

________________________________________
242. In the context of risk and return, which of the following is true about a portfolio with a beta of 1?
A. It has the same risk as the market portfolio.
B. It is risk-free.
C. It has a lower risk than the market.
D. It has higher volatility than the market.

________________________________________
243. What does a Sharpe ratio of 0.5 indicate about a portfolio?
A. The portfolio is generating more risk-adjusted return.
B. The portfolio has no risk.
C. The portfolio is underperforming relative to its risk.
D. The portfolio is highly risky.

________________________________________
244. What is the primary risk measured by the beta of a stock?
A. Systematic risk.
B. Unsystematic risk.
C. Total risk.
D. Risk of liquidation.

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245. A portfolio has a return of 12% and a standard deviation of 10%. What is the coefficient of variation for this portfolio?
A. 0.83
B. 1.2
C. 0.5
D. 1.0

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246. What is the term for the risk that is inherent to the entire market, such as economic downturns?
A. Systematic risk.
B. Unsystematic risk.
C. Credit risk.
D. Liquidity risk.

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247. Which of the following is an example of systematic risk?
A. A company’s management change.
B. A nationwide natural disaster affecting all industries.
C. A company’s product recall.
D. A company’s earnings report.

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248. What is the primary limitation of using the Capital Asset Pricing Model (CAPM) for predicting future returns?
A. It assumes that markets are perfectly efficient.
B. It only applies to large-cap stocks.
C. It ignores the risk-free rate.
D. It cannot be used for diversified portfolios.

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249. If the return on the market increases, and a stock has a beta of 1.2, what will happen to the expected return of the stock?
A. It will decrease.
B. It will remain unchanged.
C. It will increase by 1.2 times the market return increase.
D. It will increase at a slower rate than the market.

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250. Which of the following best describes a portfolio with a higher Sharpe ratio?
A. The portfolio has high risk but also high return.
B. The portfolio has low return but high diversification.
C. The portfolio has high returns for each unit of risk taken.
D. The portfolio has low risk and low return.

251. The efficient frontier represents:
A. The combination of assets that yields the highest return for a given risk.
B. The portfolio with the highest risk for the lowest return.
C. The set of portfolios that minimize risk for a given return.
D. The combination of assets that eliminates all risk.

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252. A stock’s risk premium is best defined as:
A. The difference between the stock’s expected return and the risk-free rate.
B. The difference between the risk-free rate and the stock’s return.
C. The total return on the stock.
D. The stock’s total risk.

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253. Which of the following is true about a stock with a beta greater than 1?
A. The stock is less volatile than the market.
B. The stock has higher volatility than the market.
C. The stock moves in the opposite direction of the market.
D. The stock’s returns are unaffected by market movements.

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254. In the context of modern portfolio theory, what does diversification help achieve?
A. It eliminates both systematic and unsystematic risk.
B. It maximizes the potential return of the portfolio.
C. It reduces the portfolio’s total risk by combining assets with low correlation.
D. It increases the beta of the portfolio.

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255. Which of the following is the correct formula for the Capital Asset Pricing Model (CAPM)?
A. Expected return = Risk-free rate + Beta × (Market return – Risk-free rate)
B. Expected return = Risk-free rate + (Market return × Beta)
C. Expected return = Market return – Beta × Risk-free rate
D. Expected return = Risk-free rate × (Market return + Beta)

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256. If two assets have a correlation of +1, then:
A. The assets are perfectly negatively correlated.
B. The assets move in exactly the same direction.
C. The assets are independent of each other.
D. The assets have zero risk when combined.

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257. A portfolio has a return of 10%, a risk-free rate of 2%, and a standard deviation of 5%. What is the Sharpe ratio of the portfolio?
A. 1.6
B. 2.0
C. 1.8
D. 1.0

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258. Which of the following is a characteristic of systematic risk?
A. It can be eliminated through diversification.
B. It is related to the overall market or economy.
C. It is caused by factors specific to an individual company.
D. It is independent of the market return.

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259. What does the term “security market line” (SML) represent?
A. The relationship between the risk-free rate and the market return.
B. The relationship between an asset’s return and its beta.
C. The efficient frontier for a given portfolio.
D. The line that represents total portfolio risk.

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260. Which of the following is considered an example of unsystematic risk?
A. A recession affecting all industries.
B. A company experiencing a product recall.
C. A change in interest rates.
D. An economic depression.

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261. The total risk of a stock can be broken down into:
A. Systematic risk and unsystematic risk.
B. Systematic risk and diversifiable risk.
C. Market risk and individual risk.
D. Company-specific risk and market risk.

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262. What does a positive alpha value indicate?
A. The stock has underperformed relative to its expected return.
B. The stock has outperformed relative to its expected return.
C. The stock has a beta of zero.
D. The stock has the same return as the market.

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263. A beta of 0.8 means that:
A. The stock is expected to be less volatile than the market.
B. The stock is expected to be more volatile than the market.
C. The stock moves exactly with the market.
D. The stock’s return is independent of the market return.

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264. A portfolio with a Sharpe ratio of 1 means:
A. The portfolio has no risk.
B. The portfolio’s return equals the risk-free rate.
C. The portfolio generates one unit of return for each unit of risk.
D. The portfolio is poorly diversified.

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265. In a well-diversified portfolio, the total risk of the portfolio is primarily determined by:
A. The risk of individual assets.
B. The correlation between the assets in the portfolio.
C. The beta of the individual stocks.
D. The risk-free rate.

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266. A risk premium is:
A. The return over and above the risk-free rate that an investor requires for taking on risk.
B. The total return on a risk-free asset.
C. The extra return earned from a government bond.
D. The difference between expected return and actual return.

________________________________________
267. The relationship between risk and return in a perfectly efficient portfolio is shown by:
A. The Capital Market Line.
B. The Security Market Line.
C. The Efficient Frontier.
D. The market return line.

________________________________________
268. Which of the following is true about diversification?
A. It reduces systematic risk but not unsystematic risk.
B. It increases the total risk of a portfolio.
C. It can reduce both systematic and unsystematic risk.
D. It eliminates systematic risk.

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269. If a stock has a high beta, it is expected to:
A. Have lower volatility than the market.
B. Be less sensitive to market movements.
C. Have higher volatility than the market.
D. Be completely independent of the market’s performance.

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270. In the context of risk and return, a “zero-beta portfolio” means:
A. A portfolio with no risk.
B. A portfolio with no systematic risk.
C. A portfolio that offers the highest return for any given level of risk.
D. A portfolio that has the same return as the market.

271. Which of the following best describes the concept of risk premium?
A. The additional return required to compensate for the risk of investing in a risky asset.
B. The return above the risk-free rate that an investor earns by holding a diversified portfolio.
C. The portion of return from an investment that exceeds the expected return.
D. The risk of losing money on a particular asset.

________________________________________
272. The correlation coefficient between two assets is -1. This means:
A. The assets will move in the opposite direction by the same amount.
B. The assets will move in the same direction.
C. The assets have no correlation.
D. The assets will have zero risk when combined.

________________________________________
273. What does the risk-free rate of return represent?
A. The return on an investment with zero risk.
B. The return on a portfolio of high-risk assets.
C. The return from investing in highly speculative securities.
D. The expected return on a market portfolio.

________________________________________
274. A portfolio’s beta is a measure of:
A. The risk-free rate of the portfolio.
B. The portfolio’s sensitivity to overall market returns.
C. The risk of an individual asset within the portfolio.
D. The diversification level of the portfolio.

________________________________________
275. If an investor is willing to take on more risk in order to achieve higher returns, this is called:
A. Risk aversion.
B. Risk neutrality.
C. Risk tolerance.
D. Risk diversification.

________________________________________
276. Which of the following is a key characteristic of a negatively correlated asset pair?
A. The assets tend to move in the same direction.
B. The assets tend to move in opposite directions.
C. The assets have zero correlation.
D. The assets are completely independent of each other.

________________________________________
277. Which of the following statements is true regarding a stock with a beta of 1.5?
A. The stock is expected to be 50% more volatile than the market.
B. The stock’s returns are expected to move in the opposite direction of the market.
C. The stock is less volatile than the market.
D. The stock’s volatility is the same as the market.

________________________________________
278. The Capital Market Line (CML) represents:
A. The relationship between a portfolio’s return and its total risk (standard deviation).
B. The relationship between an asset’s return and its beta.
C. The risk-free rate and the market return.
D. The portfolios that can be formed from a risk-free asset and the market portfolio.

________________________________________
279. According to the Capital Asset Pricing Model (CAPM), an asset’s expected return is based on:
A. Its risk-free rate, its beta, and the market return.
B. The market’s historical returns and the asset’s price-to-earnings ratio.
C. The past returns of the asset and its volatility.
D. The risk-free rate and the asset’s volatility.

________________________________________
280. If an asset has a high standard deviation, it indicates that:
A. The asset’s returns are very consistent.
B. The asset’s returns are highly volatile.
C. The asset has little correlation with the market.
D. The asset’s return is equal to the risk-free rate.

________________________________________
281. The efficient frontier represents:
A. The set of portfolios that provide the highest expected return for a given level of risk.
B. The set of portfolios that minimize risk and maximize return.
C. The risk-free rate and the market return.
D. The set of portfolios that lie above the security market line.

________________________________________
282. A well-diversified portfolio will most effectively reduce:
A. Systematic risk.
B. Unsystematic risk.
C. Both systematic and unsystematic risk.
D. Market risk.

________________________________________
283. Which of the following is a characteristic of a stock with a negative alpha?
A. The stock has outperformed its expected return.
B. The stock has underperformed its expected return.
C. The stock is risk-free.
D. The stock has zero correlation with the market.

________________________________________
284. The SML (Security Market Line) shows the relationship between:
A. The expected return of an asset and its risk (beta).
B. The return of the asset and the overall market return.
C. The risk-free rate and the market return.
D. The risk-free rate and the total portfolio risk.

________________________________________
285. Which of the following best describes a portfolio with a Sharpe ratio greater than 1?
A. The portfolio offers a return less than the risk-free rate.
B. The portfolio’s return is high relative to the risk taken.
C. The portfolio is inefficient in terms of risk and return.
D. The portfolio has no risk.

________________________________________
286. The “market risk” is also known as:
A. Diversifiable risk.
B. Systematic risk.
C. Unsystematic risk.
D. Non-diversifiable risk.

________________________________________
287. What is the primary advantage of diversification in a portfolio?
A. It eliminates the need to track the market’s overall performance.
B. It reduces the total risk of a portfolio by combining assets with low correlation.
C. It increases the portfolio’s expected return.
D. It guarantees a higher return than the risk-free rate.

________________________________________
288. If a portfolio has a standard deviation of zero, this implies:
A. The portfolio has no risk.
B. The portfolio’s returns are perfectly correlated with the market.
C. The portfolio is highly volatile.
D. The portfolio has a very high expected return.

________________________________________
289. The concept of “beta” measures:
A. The total risk of an asset.
B. The risk of the asset relative to the risk-free rate.
C. The volatility of an asset in relation to the market as a whole.
D. The expected return of an asset in a diversified portfolio.

________________________________________
290. A stock has an expected return of 15%, the risk-free rate is 4%, and the market return is 12%. Using CAPM, what is the stock’s beta?
A. 1.33
B. 1.5
C. 0.5
D. 1.0

291. What is the primary purpose of the Security Market Line (SML)?
A. To show the risk-free rate of return.
B. To depict the relationship between expected return and systematic risk (beta).
C. To calculate the Sharpe ratio.
D. To indicate the efficient frontier.

________________________________________
292. A portfolio with a low beta is considered to be:
A. More volatile than the market.
B. Less volatile than the market.
C. Equal in volatility to the market.
D. Completely risk-free.

________________________________________
293. The standard deviation of returns is a measure of:
A. Total risk.
B. Systematic risk.
C. Diversifiable risk.
D. Non-diversifiable risk.

________________________________________
294. If two stocks have a correlation of +1, this means:
A. The stocks will move in opposite directions.
B. The stocks will move in the same direction in perfect synchrony.
C. One stock is risk-free.
D. The stocks are unrelated in terms of their price movements.

________________________________________
295. A stock has an expected return of 10%, and the risk-free rate is 3%. The market’s return is 8%. Using the CAPM, what is the stock’s alpha?
A. 0%
B. 1%
C. 2%
D. 5%

________________________________________
296. According to the Efficient Market Hypothesis (EMH), it is:
A. Possible to consistently outperform the market using insider information.
B. Impossible to consistently outperform the market using public information.
C. Best to invest only in low-risk assets.
D. Possible to predict the market with certainty.

________________________________________
297. The Total Risk of a portfolio includes:
A. Only systematic risk.
B. Only unsystematic risk.
C. Both systematic and unsystematic risk.
D. Market risk.

________________________________________
298. Which of the following is an example of systematic risk?
A. A company’s management changes.
B. A stock’s price fluctuates due to earnings announcements.
C. A change in the interest rate by the central bank.
D. A company’s labor strike.

________________________________________
299. A portfolio with a negative Sharpe ratio implies:
A. The portfolio has performed better than the risk-free rate.
B. The portfolio’s return is negative after adjusting for risk.
C. The portfolio is risk-free.
D. The portfolio has higher returns relative to its risk.

________________________________________
300. The primary objective of the Capital Asset Pricing Model (CAPM) is to:
A. Calculate the expected return based on risk-free rate, beta, and market return.
B. Determine the most efficient portfolio.
C. Estimate the expected return based on historical data.
D. Eliminate unsystematic risk.

________________________________________
301. A well-diversified portfolio can eliminate:
A. Systematic risk.
B. Non-systematic risk.
C. Market risk.
D. Total risk.

________________________________________
302. The beta of a portfolio is the:
A. Weighted average of the betas of individual assets in the portfolio.
B. Total risk of the portfolio.
C. Standard deviation of the portfolio.
D. Return of the portfolio relative to the market return.

________________________________________
303. The price of a stock is highly correlated with changes in interest rates. This is an example of:
A. Market risk.
B. Unsystematic risk.
C. Liquidity risk.
D. Interest rate risk.

________________________________________
304. The term “diversification” refers to:
A. Reducing a portfolio’s return by adding risk-free assets.
B. Reducing a portfolio’s total risk by combining assets with different risks.
C. Combining only stocks in a portfolio.
D. Holding a large number of stocks in a portfolio to increase risk.

________________________________________
305. If the market risk premium increases, the expected return on a stock will:
A. Decrease, assuming the stock’s beta remains the same.
B. Increase, assuming the stock’s beta remains the same.
C. Stay the same.
D. Decrease due to lower beta.

________________________________________
306. The security market line (SML) in the CAPM model represents the:
A. Relationship between an asset’s expected return and its total risk.
B. Return an investor should expect for a given level of risk (beta).
C. Historical return of the market portfolio.
D. The return of a risk-free asset.

________________________________________
307. If a portfolio has a higher-than-expected return compared to its risk (as measured by the Sharpe ratio), it:
A. Has outperformed the risk-free rate.
B. Indicates the portfolio has taken excessive risk.
C. Is considered efficient.
D. Is poorly diversified.

________________________________________
308. A negative alpha for a stock suggests that:
A. The stock has outperformed the expected return based on its risk.
B. The stock is less volatile than the market.
C. The stock has underperformed relative to its expected return.
D. The stock’s beta is less than 1.

________________________________________
309. If an investor holds a portfolio of perfectly correlated assets, the total risk of the portfolio is:
A. The same as the risk of an individual asset.
B. Less than the risk of an individual asset.
C. Zero.
D. Greater than the risk of an individual asset.

________________________________________
310. The higher the correlation between two assets, the:
A. Lower the risk when they are combined in a portfolio.
B. More diversification benefits they provide in a portfolio.
C. Less effective the diversification is.
D. More negative the beta.

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