CFA Level 1 – Portfolio Management Session 12 – Reading 53
CFA Level 1 – Portfolio Management, Session 12 – Reading 53 – LOS e
Portfolio Risk and Return
(Notes, Practice Questions, Sample Questions)
1. The expected rate of return is 1.5 times the 16% expected rate of return from the market. What is the beta if the risk free rate is 8%?
A) 3.
B) 2.
C) 4.
Explanation — 24 = 8 + β (16 ? 8)
24 = 8 + 8β
16 = 8β
16 / 8 = β
β = 2
2. The expected rate of return is twice the 12% expected rate of return from the market. What is the beta if the risk-free rate is 6%?
A) 2.
B) 3.
C) 4.
Explanation — 24 = 6 + β (12 ? 6)
18 = 6β
β = 3
3. Given the following data, what is the correlation coefficient between the two stocks and the Beta of stock A?
standard deviation of returns of Stock A is 10.04%
standard deviation of returns of Stock B is 2.05%
standard deviation of the market is 3.01%
covariance between the two stocks is 0.00109
covariance between the market and stock A is 0.002
Correlation Coefficient Beta (stock A)
A) 0.6556 2.20
B) 0.5296 0.06
C) 0.5296 2.20
Explanation — correlation coefficient = 0.00109 / (0.0205)(0.1004) = 0.5296.
beta of stock A = covariance between stock and the market / variance of the market
Beta = 0.002 / 0.03012 = 2.2
4. Beta is a measure of:
A) systematic risk.
B) total risk.
C) company-specific risk.
Explanation — Beta is a measure of systematic risk
5. Beta is least accurately described as:
A) a standardized measure of the total risk of a security.
B) a measure of the sensitivity of a security’s return to the market return.
C) the covariance of a security’s returns with the market return, divided by the variance of market returns
Explanation — Beta is a standardized measure of the systematic risk of a security. β = Covr,mkt / σ2mkt. Beta is multiplied by the market risk premium in the CAPM: E(Ri) = RFR + β[E(Rmkt) – RFR]
6. An analyst has developed the following data for two companies, PNS Manufacturing (PNS) and InCharge Travel (InCharge). PNS has an expected return of 15% and a standard deviation of 18%. InCharge has an expected return of 11% and a standard deviation of 17%. PNS’s correlation with the market is 75%, while InCharge’s correlation with the market is 85%. If the market standard deviation is 22%, which of the following are the betas for PNS and InCharge?
Beta of PNS Beta of InCharge
A) 0.61 0.66
B) 0.66 0.61
C) 0.92 1.10
Explanation — Betai = (si/sM) × rI, M
BetaPNS = (0.18/0.22) × 0.75 = 0.6136
BetaInCharge = (0.17/0.22) × 0.85 = 0.6568
7. If the standard deviation of the market’s returns is 5.8%, the standard deviation of a stock’s returns is 8.2%, and the covariance of the market’s returns with the stock’s returns is 0.003, what is the beta of the stock?
A) 0.05.
B) 1.07.
C) 0.89.
Explanation — The formula for beta is: (Covstock,market)/(Varmarket), or (0.003)/(0.058)2 = 0.89
8. Which of the following statements about a stock’s beta is CORRECT? A beta greater than one is:
A) riskier than the market, while a beta less than one is less risky than the market.
B) risky, while a beta less than one is risk-free.
C) undervalued, while a beta less than one is overvalued
Explanation — Beta is a measure of the volatility of a stock. The overall market’s beta is one. A stock with higher systematic risk than the market will have a beta greater than one, while a stock that has a lower systematic risk will have a beta less than one
9. The expected rate of return is 2.5 times the 12% expected rate of return from the market. What is the beta if the risk-free rate is 6%?
A) 5.
B) 3.
C) 4
Explanation — 30 = 6 + β (12 – 6)
24 = 6β
β = 4
Remember! This is just a sample.
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