The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.. SECTION: 13.7 TOPIC: SECURITY MARKET LINE TYPE: DEFINITIONS... I, II, II
Trang 1Multiple Choice Questions
1 The return on a risky asset which is anticipated being earned in the future is called the _ return
Trang 23 The percentage of a portfolio's total value invested in a particular asset is called that asset's:
Trang 34 Risk that affects a large number of assets is called _ risk
6 The principle of diversification tells us that:
a concentrating an investment in two or three large stocks will eliminate all of the
unsystematic risk
b concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk
c spreading an investment across five diverse companies will not lower the total risk
d spreading an investment across many diverse assets will eliminate all of the systematic risk
E spreading an investment across many diverse assets will eliminate some of the total risk.
SECTION: 13.5
Trang 47 The _ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk
a efficient markets hypothesis
B systematic risk principle
c open markets theorem
d law of one price
Trang 5expected return and its beta coefficient is the:
a reward-to-risk ratio
b portfolio weight
c portfolio risk
D security market line.
e market risk premium
SECTION: 13.7
TOPIC: SECURITY MARKET LINE
TYPE: DEFINITIONS
Trang 610 Which one of the following is the slope of the security market line?
a reward-to-risk ratio
b portfolio weight
c beta coefficient
d risk-free interest rate
E market risk premium
A capital asset pricing model.
b time value of money equation
12 The minimum required return on a new risky investment is called the:
a average arithmetic return
b expected return
c geometric average return
d time value of money
E cost of capital.
SECTION: 13.7
TOPIC: COST OF CAPITAL
TYPE: DEFINITIONS
Trang 713 The expected return on a stock given various states of the economy is equal to the:
a highest expected return given any economic state
b arithmetic average of the returns for each economic state
c summation of the individual expected rates of return
D weighted average of the returns for each economic state.
e return for the economic state with the highest probability of occurrence
SECTION: 13.1
TOPIC: EXPECTED RETURN
TYPE: CONCEPTS
14 The expected return on a stock computed using economic probabilities is:
a guaranteed to equal the actual average return on the stock for the next five years
b guaranteed to be the minimal rate of return on the stock over the next two years
c guaranteed to equal the actual return for the immediate twelve month period
D a mathematical expectation based on a weighted average and not an actual anticipated
Trang 816 Standard deviation measures _ risk
a number of shares owned of each stock
b market price per share of each stock
C market value of the investment in each stock.
d original amount invested in each stock
e cost per share of each stock held
SECTION: 13.2
TOPIC: PORTFOLIO WEIGHT
TYPE: CONCEPTS
Trang 9I percentage of the portfolio invested in each individual security
II projected states of the economy
III the performance of each security given various economic states
IV probability of occurrence for each state of the economy
a I and III only
b II and IV only
c I, III, and IV only
d II, III, and IV only
E I, II, III, and IV
SECTION: 13.2
TOPIC: PORTFOLIO EXPECTED RETURN
TYPE: CONCEPTS
Trang 1019 The expected return on a portfolio:
I can never exceed the expected return of the best performing security in the portfolio
II must be equal to or greater than the expected return of the worst performing security in the portfolio
III is independent of the performance of the overall economy
IV is independent of the allocation of the portfolio amongst individual securities
a I and III only
b II and IV only
C I and II only
d I, II, and III only
e I, II, III, and IV
SECTION: 13.2
TOPIC: PORTFOLIO EXPECTED RETURN
TYPE: CONCEPTS
20 If a stock portfolio is well diversified, then the portfolio variance:
a will equal the variance of the most volatile stock in the portfolio
B may be less than the variance of the least risky stock in the portfolio.
c must be equal to or greater than the variance of the least risky stock in the portfolio
d will be a weighted average of the variances of the individual securities in the portfolio
e will be an arithmetic average of the variance of the individual securities in the portfolio
SECTION: 13.2
TOPIC: PORTFOLIO VARIANCE
TYPE: CONCEPTS
Trang 11a is a weighted average of the standard deviations of the individual securities which comprisethe portfolio.
b can never be less than the standard deviation of the most risky security in the portfolio
c must be equal to or greater than the lowest standard deviation of any single security held in the portfolio
d is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio
E can be less than the standard deviation of the least risky security in the portfolio.
SECTION: 13.2
TOPIC: PORTFOLIO STANDARD DEVIATION
TYPE: CONCEPTS
Trang 1222 Which of the following are included in the computation of a portfolio's standard
deviation?
I weight assigned to each security comprising the portfolio
II weighted average of the standard deviations of the individual securities held in the
portfolio
III probability of occurrence for each economic state of the economy
IV rate of return for each individual security held in the portfolio for each economic state
a II only
b III and IV only
C I, III, and IV only
d I, II, and IV only
e I, II, III, and IV
a Given multiple economic states with unequal weights, it is impossible for the portfolio standard deviation to be less than the lowest standard deviation for any one security contained
E Given both the unequal weights of the securities and the unequal weights of the economic
states, a portfolio can be created that has an expected standard deviation of zero
SECTION: 13.2
TOPIC: PORTFOLIO STANDARD DEVIATION
TYPE: CONCEPTS
Trang 1324 Which one of the following events would be included in the expected return on Delta stock?
a The directors of Delta just fired the CEO because of remarks he made this morning to one
of the directors
b A fire just destroyed Delta's main distribution warehouse which will directly impact the firm's sales for at least six months
C This morning, Delta confirmed that its CEO is retiring at the end of the year as anticipated.
d The price of Delta stock suddenly dropped due to rumors concerning company fraud
e Delta's research department just announced that they accidentally discovered a new
substance which could replace plastic in a few years
SECTION: 13.3
TOPIC: EXPECTED AND UNEXPECTED RETURNS
TYPE: CONCEPTS
25 Which one of the following statements is correct?
a The unexpected return is always negative
b The expected return minus the unexpected return is equal to the total return
c Over time, the average return is equal to the unexpected return
d The expected return includes the surprise portion of news announcements
E Over time, the average unexpected return will be zero.
SECTION: 13.3
TOPIC: EXPECTED AND UNEXPECTED RETURNS
TYPE: CONCEPTS
Trang 1426 Which one of the following is true concerning unexpected returns?
a All announcements by a firm affect that firm's unexpected returns
b Unexpected returns over time have a negative effect on the total return of a firm
c Unexpected returns are relatively predictable in the short-term
d Unexpected returns generally cause the actual return to vary significantly from the expectedreturn over the long-term
E Unexpected returns can be either positive or negative in the short term but tend to be zero
over the long-term
SECTION: 13.3
TOPIC: UNEXPECTED RETURNS
TYPE: CONCEPTS
Trang 1527 Which one of the following is an example of systematic risk?
a coal miners go on strike against Deep Vein Coal Company
b Baker's Dozen experiences a kitchen fire which halts operations
C inflation unexpectedly increases by 1.5 percent in the U.S.
d government inspectors stop production at a meat packing plant
e localized flooding affects corn production
SECTION: 13.4
TOPIC: SYSTEMATIC RISK
TYPE: CONCEPTS
28 Unsystematic risk:
A can be effectively eliminated by portfolio diversification.
b is compensated for by the risk premium
c is measured by beta
d is measured by standard deviation
e is related to the overall economy
SECTION: 13.4
TOPIC: UNSYSTEMATIC RISK
TYPE: CONCEPTS
29 Which one of the following is an example of unsystematic risk?
a the exchange rate rises against the other major currencies
b a national sales tax is adopted
C an explosion occurs at a chemical plant
d the Federal Reserve surprisingly raises interest rates by one quarter of a percent
e consumer spending decreases on a nationwide basis
SECTION: 13.4
TOPIC: UNSYSTEMATIC RISK
TYPE: CONCEPTS
Trang 1630 Which one of the following is least apt to reduce the unsystematic risk of a portfolio?
A adding additional shares of each stock in a portfolio to that portfolio
b adding bonds to a stock portfolio
c adding international securities into a portfolio of U.S stocks
d adding U.S Treasury bills to a risky portfolio
e adding technology stocks to a portfolio of utility stocks
SECTION: 13.4
TOPIC: UNSYSTEMATIC RISK
TYPE: CONCEPTS
31 Which one of the following statements is correct concerning unsystematic risk?
a Assuming unsystematic risk is rewarded by the market place
B Eliminating unsystematic risk is the responsibility of the individual investor.
c Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk
d The Capital Asset Pricing Model specifically rewards investors for assuming unsystematic risk via the application of beta in the formula
e The higher the beta, the higher the unsystematic risk
Trang 1733 Which one of the following risks is irrelevant to a well-diversified investor?
34 Which of the following are examples of diversifiable risk?
I tornado strikes an industrial park in Kansas
II federal government imposes new workplace safety laws
III local government increases property tax rates
IV cost of worker's compensation insurance increases nationwide
A I and III only
Trang 1835 Which of the following statements are correct concerning diversifiable risks?
I Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities
II The market rewards investors for diversifiable risk by paying a risk premium
III Diversifiable risks are generally associated with an individual firm or industry
IV Beta measures diversifiable risk
A I and III only
b II and IV only
c I and IV only
d II and III only
e I, II, and III only
SECTION: 13.5
TOPIC: DIVERSIFIABLE RISKS
TYPE: CONCEPTS
Trang 1936 Which of the following are examples of diversifiable risks?
I the inflation rate spikes suddenly
II terrorists strike the United States
III the price of corn increases due to a nationwide drought
IV taxes are increased on hotel room rentals
a I and III only
b II and IV only
c I and II only
D III and IV only
e I, II, and IV only
SECTION: 13.5
TOPIC: DIVERSIFIABLE RISKS
TYPE: CONCEPTS
37 Which of the following statements concerning risk are correct?
I Nondiversifiable risk is measured by beta
II The risk premium increases as diversifiable risk increases
III Systematic risk is another name for nondiversifiable risk
IV Diversifiable risks are those risks you cannot avoid if you are invested in the financial markets
A I and III only
b II and IV only
c I and II only
d III and IV only
e I, II, and III only
SECTION: 13.5
TOPIC: NONDIVERSIFIABLE RISKS
TYPE: CONCEPTS
Trang 2038 The primary purpose of portfolio diversification is to:
a increase returns and risks
b eliminate all risks
C eliminate asset-specific risk.
d eliminate systematic risk
e lower both returns and risks
SECTION: 13.5
TOPIC: DIVERSIFICATION
TYPE: CONCEPTS
39 Which one of the following indicates a portfolio is being effectively diversified?
a an increase in the portfolio beta
b a decrease in the portfolio beta
c an increase in the portfolio rate of return
d an increase in the portfolio standard deviation
E a decrease in the portfolio standard deviation
Trang 2141 Systematic risk is measured by:
a the mean
B beta.
c the geometric average
d the standard deviation
e the arithmetic average
a variance of the returns on
b standard deviation of the returns on
Trang 2243 Which one of the following statements is correct concerning a portfolio beta?
a Portfolio betas range between 1.0 and +1.0
B A portfolio beta is a weighted average of the betas of the individual securities contained in
the portfolio
c A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification
d A portfolio of U.S Treasury bills will have a beta of +1.0
e The beta of a market portfolio is equal to zero
SECTION: 13.6
TOPIC: PORTFOLIO BETA
TYPE: CONCEPTS
Trang 2344 The systematic risk of the market is measured by:
I asset standard deviation
II asset beta
III risk-free rate of return
IV market risk premium
a I and III only
B II and IV only
c III and IV only
d I, III, and IV only
e I, II, III, and IV
SECTION: 13.6
TOPIC: PORTFOLIO BETA
TYPE: CONCEPTS
Trang 2446 Total risk is measured by _ and systematic risk is measured by _
a beta; epsilon
b beta; standard deviation
c epsilon; beta
D standard deviation; beta
e standard deviation; variance
SECTION: 13.6
TOPIC: MEASURING RISK
TYPE: CONCEPTS
Trang 2547 The intercept point of the security market line is the rate of return which corresponds to:
A the risk-free rate.
b the market rate
48 A stock with an actual return that lies above the security market line has:
a more systematic risk than the overall market
b more risk than warranted based on the realized rate of return
C yielded a higher return than expected for the level of risk assumed.
d less systematic risk than the overall market
e yielded a return equivalent to the level of risk assumed
a is underpriced
b is correctly priced
C will plot below the security market line.
d will plot on the security market line
e will plot to the left of the overall market on a security market line graph
SECTION: 13.7
Trang 2650 If the market is efficient and securities are priced fairly then the _ will be constant forall securities
a stock A is riskier than stock B and both stocks are fairly priced
b stock A is less risky than stock B and both stocks are fairly priced
C either stock A is underpriced or stock B is overpriced or both.
d both stock A and stock B are correctly priced since stock A is riskier than stock B
e either stock A is overpriced or stock B is underpriced or both
SECTION: 13.7
TOPIC: REWARD-TO-RISK RATIO
TYPE: CONCEPTS
52 The market risk premium is computed by:
a adding the risk-free rate of return to the inflation rate
b adding the risk-free rate of return to the market rate of return
c subtracting the risk-free rate of return from the inflation rate
D subtracting the risk-free rate of return from the market rate of return.
e multiplying the risk-free rate of return by a beta of 1.0
SECTION: 13.7
TOPIC: MARKET RISK PREMIUM
Trang 2753 The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-free asset is referred to as the:
a market rate of return
B market risk premium.
Trang 2855 The capital asset pricing model (CAPM) assumes:
I a risk-free asset has no systematic risk
II beta is a reliable estimate of total risk
III the risk-to-reward ratio is constant
IV the market rate of return can be approximated
a I and III only
b II and IV only
C I, III, and IV only
d II, III, and IV only
e I, II, III, and IV
SECTION: 13.7
TOPIC: CAPITAL ASSET PRICING MODEL (CAPM)
TYPE: CONCEPTS
Trang 2956 According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:
a amount of total risk assumed and the market risk premium
B market risk premium and the amount of systematic risk inherent in the security.
c risk free rate, the market rate of return, and the standard deviation of the security
d beta of the security and the market rate of return
e beta of the security and the risk-free rate of return
SECTION: 13.7
TOPIC: CAPITAL ASSET PRICING MODEL (CAPM)
TYPE: CONCEPTS
57 Which one of the following should earn the most risk premium based on CAPM?
a diversified portfolio with returns similar to the overall market
B stock with a beta of 1.23
c stock with a beta of 98
d U.S Treasury bill
e portfolio with a beta of 1.16
AACSB TOPIC: ANALYTIC
SECTION: 13.7
TOPIC: RISK PREMIUM
TYPE: PROBLEMS
Trang 3058 You want your portfolio beta to be 1.10 Currently, your portfolio consists of $3,000 invested in stock A with a beta of 1.65 and $2,000 in stock B with a beta of 72 You have another $5,000 to invest and want to divide it between an asset with a beta of 1.48 and a risk-free asset How much should you invest in the risk-free asset?
59 You have a $9,000 portfolio which is invested in stocks A, B, and a risk-free asset $4,000
is invested in stock A Stock A has a beta of 1.84 and stock B has a beta of 0.68 How much needs to be invested in stock B if you want a portfolio beta of 95?