Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 12 Systematic Risk and the Equity Risk Premium
12.1 The Expected Return of a Portfolio
1) Stocks have both diversifiable risk and undiversifiable risk, but only diversifiable risk is
rewarded with higher expected returns.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) The volatility of an individual stock is more than the volatility of a well-diversified
portfolio of stocks.
Answer: TRUE
Diff: 2 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) A portfolio comprises two stocks, A and B, with equal amounts of money invested in
each. If stock A's stock price increases and that of stock B decreases, the weight of stock A
in the portfolio will increase.
Answer: TRUE
Diff: 3 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
1
Copyright © 2015 Pearson Education, Inc.
,4) A portfolio has three stocks — 240 shares of Yahoo (YHOO), 150 Shares of General
Motors (GM), and 40 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO
is $30, the price of GM is $30, and the price of SPY is $130, calculate the portfolio weight
of YHOO and GM.
A) 42.6%, 26.6%
B) 23.4%, 49.3%
C) 12.8%, 16.0%
D) 40.5%, 28.0%
Answer: A
Explanation: A) Compute the value of each stock in the portfolio by multiplying stock price
by number of shares of each. Compute total portfolio value by adding each component.
Divide YHOO value by portfolio value to compute its weight. Similarly, calculate weight for
GM.
Thus,
weight of
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
5) A portfolio has three stocks — 300 shares of Yahoo (YHOO), 300Shares of General
Motors (GM), and 80 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO
is $20, the price of GM is $30, and the price of SPY is $150, calculate the portfolio weight
of YHOO and GM.
A) 11.1%, 20.0%
B) 16.7%, 28.3%
C) 22.2%, 33.3%
D) 22.2%, 43.3%
Answer: C
Explanation: C) Compute the value of each stock in the portfolio by multiplying stock price
by number of shares of each. Compute total portfolio value by adding each component.
Divide YHOO value by portfolio value to compute its weight. Similarly, calculate weight for
GM.
weight of
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
2
Copyright © 2015 Pearson Education, Inc.
,6) A portfolio has three stocks — 110 shares of Yahoo (YHOO), 210 Shares of General
Motors (GM), and 70 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO
is $20, the price of GM is $20, and the price of SPY is $130, calculate the portfolio weight
of YHOO and GM.
A) 10.6%, 13.5%
B) 9.9%, 25.7%
C) 13.5%, 24.4%
D) 14.2%, 27.1%
Answer: D
Explanation: D) Compute the value of each stock in the portfolio by multiplying stock price
by number of shares of each. Compute total portfolio value by adding each component.
Divide YHOO value by portfolio value to compute its weight. Similarly, calculate weightfor
GM.
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
7) Suppose you invest in 100 shares of Harley-Davidson (HOG) at $40 per share and 230
shares of Yahoo (YHOO) at $25 per share. If the price of Harley-Davidson increases to $50
and the price of Yahoo decreases to $20 per share, what is the return on your portfolio?
A) -1.54%
B) 12.25%
C) -10.50%
D) -5.20%
Answer: A
Explanation: A) Compute value of HOG stock (stock price times number of shares) and the
value of YHOO stock. Add values of both to compute portfolio value. Repeat with new price
of stocks. Divide new portfolio value by old portfolio value and subtract 1 to compute
return.
Initial portfolio value = 100 × $40 + 230 × $25 = $9750;
final portfolio value = 100 × $50 + 230 × $20 = $9600;
hence portfolio return = $9600 / $9750 - 1 = -1.54%.
Diff: 2 Var: 36
Skill: Analytical
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
3
Copyright © 2015 Pearson Education, Inc.
, 8) Suppose you invest in 220 shares of Johnson and Johnson (JNJ) at $70 per share and 240
shares of Yahoo (YHOO) at $20 per share. If the price of Johnson and Johnson increases to
$80 and the price of Yahoo decreases to $18 per share, what is the return on your
portfolio?
A) 12.77%
B) 8.51%
C) 9.37%
D) 10.22%
Answer: B
Explanation: B) Compute value of JNJ stock (stock price times number of shares) and the
value of Yahoo stock. Add values of both to compute portfolio value. Repeat with new price
of stocks. Divide new portfolio value by old portfolio value and subtract 1 to compute
return.
Diff: 2 Var: 36
Skill: Analytical
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
9) Suppose you invest in 110 shares of Merck (MRK) at $40 per share and 120 shares of
Yahoo (YHOO)at $25 per share. If the price of Merck increases to $45 and the price of
Yahoo decreases to $22 per share, what is the return on your portfolio?
A) 7.70%
B) 4.11%
C) 2.57%
D) 3.47%
Answer: C
Explanation: C) Compute value of MRK stock (stock price times number of shares) and the
value of YHOO stock. Add values of both to compute portfolio value. Repeat with new price
of stocks. Divide new portfolio value by old portfolio value and subtract 1 to compute
return.
Diff: 2 Var: 36
Skill: Analytical
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4
Copyright © 2015 Pearson Education, Inc.
Chapter 12 Systematic Risk and the Equity Risk Premium
12.1 The Expected Return of a Portfolio
1) Stocks have both diversifiable risk and undiversifiable risk, but only diversifiable risk is
rewarded with higher expected returns.
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
2) The volatility of an individual stock is more than the volatility of a well-diversified
portfolio of stocks.
Answer: TRUE
Diff: 2 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
3) A portfolio comprises two stocks, A and B, with equal amounts of money invested in
each. If stock A's stock price increases and that of stock B decreases, the weight of stock A
in the portfolio will increase.
Answer: TRUE
Diff: 3 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
1
Copyright © 2015 Pearson Education, Inc.
,4) A portfolio has three stocks — 240 shares of Yahoo (YHOO), 150 Shares of General
Motors (GM), and 40 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO
is $30, the price of GM is $30, and the price of SPY is $130, calculate the portfolio weight
of YHOO and GM.
A) 42.6%, 26.6%
B) 23.4%, 49.3%
C) 12.8%, 16.0%
D) 40.5%, 28.0%
Answer: A
Explanation: A) Compute the value of each stock in the portfolio by multiplying stock price
by number of shares of each. Compute total portfolio value by adding each component.
Divide YHOO value by portfolio value to compute its weight. Similarly, calculate weight for
GM.
Thus,
weight of
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
5) A portfolio has three stocks — 300 shares of Yahoo (YHOO), 300Shares of General
Motors (GM), and 80 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO
is $20, the price of GM is $30, and the price of SPY is $150, calculate the portfolio weight
of YHOO and GM.
A) 11.1%, 20.0%
B) 16.7%, 28.3%
C) 22.2%, 33.3%
D) 22.2%, 43.3%
Answer: C
Explanation: C) Compute the value of each stock in the portfolio by multiplying stock price
by number of shares of each. Compute total portfolio value by adding each component.
Divide YHOO value by portfolio value to compute its weight. Similarly, calculate weight for
GM.
weight of
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
2
Copyright © 2015 Pearson Education, Inc.
,6) A portfolio has three stocks — 110 shares of Yahoo (YHOO), 210 Shares of General
Motors (GM), and 70 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO
is $20, the price of GM is $20, and the price of SPY is $130, calculate the portfolio weight
of YHOO and GM.
A) 10.6%, 13.5%
B) 9.9%, 25.7%
C) 13.5%, 24.4%
D) 14.2%, 27.1%
Answer: D
Explanation: D) Compute the value of each stock in the portfolio by multiplying stock price
by number of shares of each. Compute total portfolio value by adding each component.
Divide YHOO value by portfolio value to compute its weight. Similarly, calculate weightfor
GM.
Diff: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
7) Suppose you invest in 100 shares of Harley-Davidson (HOG) at $40 per share and 230
shares of Yahoo (YHOO) at $25 per share. If the price of Harley-Davidson increases to $50
and the price of Yahoo decreases to $20 per share, what is the return on your portfolio?
A) -1.54%
B) 12.25%
C) -10.50%
D) -5.20%
Answer: A
Explanation: A) Compute value of HOG stock (stock price times number of shares) and the
value of YHOO stock. Add values of both to compute portfolio value. Repeat with new price
of stocks. Divide new portfolio value by old portfolio value and subtract 1 to compute
return.
Initial portfolio value = 100 × $40 + 230 × $25 = $9750;
final portfolio value = 100 × $50 + 230 × $20 = $9600;
hence portfolio return = $9600 / $9750 - 1 = -1.54%.
Diff: 2 Var: 36
Skill: Analytical
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
3
Copyright © 2015 Pearson Education, Inc.
, 8) Suppose you invest in 220 shares of Johnson and Johnson (JNJ) at $70 per share and 240
shares of Yahoo (YHOO) at $20 per share. If the price of Johnson and Johnson increases to
$80 and the price of Yahoo decreases to $18 per share, what is the return on your
portfolio?
A) 12.77%
B) 8.51%
C) 9.37%
D) 10.22%
Answer: B
Explanation: B) Compute value of JNJ stock (stock price times number of shares) and the
value of Yahoo stock. Add values of both to compute portfolio value. Repeat with new price
of stocks. Divide new portfolio value by old portfolio value and subtract 1 to compute
return.
Diff: 2 Var: 36
Skill: Analytical
AACSB Objective: Analytic Skills
Author: KB
Question Status: Revised
9) Suppose you invest in 110 shares of Merck (MRK) at $40 per share and 120 shares of
Yahoo (YHOO)at $25 per share. If the price of Merck increases to $45 and the price of
Yahoo decreases to $22 per share, what is the return on your portfolio?
A) 7.70%
B) 4.11%
C) 2.57%
D) 3.47%
Answer: C
Explanation: C) Compute value of MRK stock (stock price times number of shares) and the
value of YHOO stock. Add values of both to compute portfolio value. Repeat with new price
of stocks. Divide new portfolio value by old portfolio value and subtract 1 to compute
return.
Diff: 2 Var: 36
Skill: Analytical
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
4
Copyright © 2015 Pearson Education, Inc.
