1. In which of the following situations would get the largest reduction in risk by spreading your investment across two stocks?

A. The two stocks are perfectly correlated.
B. There is no correlation.
C. There is modest negative correlation.
D. There is perfect negative correlation.

2. As the number of stocks in a portfolio is increased:
A. Unique risk decreases and approaches zero.  
B. Market risk decreases.  
C. Unique risk decreases and becomes equal to market risk.
D. Total risk approaches zero.

3. If the covariance between stock A and stock B is 100, the standard deviation of stock A is 10% and that of stock B is 20%, what is the correlation coefficient between the two securities?  
A. -0.50
B. +0.50
C. -1.00
D. +0.75
E. None of the above.  3 of 4

4. The correlation coefficient between stock A and the market portfolio is +0.60. The standard deviation of return of the stock is 30% and that of the market portfolio is 20%. What is the beta of the stock?
A. 0.90.
B. 1.50
C. 0.40
D. 0.25
E. None of the above.

5. Consider Table 4.
Table 4
Asset                             Return
Treasury Bill                   5%
Market Portfolio           12%

On the basis of the Capital Asset Pricing Model (CAPM), what is the required return on an investment with a beta of 1.50?
A. 15.50%
B. 11.50%
C. 10.50%
D. 20.50%
E. None of the above.  

6. Consider Table 4. If the market expects a return of 14.00% from stock X, what is its beta?
A. 0.99
B. 1.29
C. 2.99
D. 1.00
E. None of the above.  

7. If the average annual rate of return for common stocks is 13% and treasury bills is 3.80%, what is the average market risk premium?
A. 9.20%
B. 13%
C. 3.80%
D. 16.80%  E. None of the above. 

8. The Capital Asset Pricing Model (CAPM) states that:

A. The expected risk premium on an investment is proportional to its beta.
B. The expected rate of return on an investment is proportional to its beta.
C. The expected rate of return on an investment depends on the risk-free rate and the market rate of return.
D. The expected rate of return on an investment is dependent on the risk-free rate.  

9. Project Z generates the following cash flows outlined in Table 1.  Given a discount rate of 4%, what is the profitability index of Z (to the nearest decimal)?
A. 1.24
B. 1.45
C. 1.35
D. 1.95
E. None of the above.
Table 1
Year  Cash flows (€)
0          -2,000
1           2,000
2           3,000
Use the following information to answer questions 15
The Treasury bill rate is 5% and the expected return on the market portfolio is 12%.  On the basis of the
capital asset pricing model (CAPM)