Assessment 7

The following is idiosyncratic risk: the risk that the economy slows, decreasing demand for firm x's products

false

a theoretical probability distribution can be described using more parameters than an empirical frequency distribution

false

according to the CAPM, the risk premium for a security with high diversifiable risk and high systematic risk is greater than the risk premium for a security with low diversifiable risk and high systematic risk

false

an investor should not concern herself with firm-specific uncertainty even if she holds only equity of one particular firm

false

insurance policies are useful primarily because they transfer risk from one party to another

false

standard deviation is a good measure of risk for somebody who is primarily worried about loss of capital

false

the geometric mean is greater than the arithmetic mean

false

the risk premium for every asset is positive

false

which of the following is true?

idiosyncratic risk is less important for diversified investors than market risk

market-wide risk is more relevant for asset pricing than idiosyncratic-risk because

investors generally hold diversified portfolios

the variance of asset returns is measured in the following units

percent-squared

Suppose we had created portfolios of investment in different asset categories in 1925, with an initial investment of $100.......

portfolio of small US stocks, portfolio of large US stocks, portfolio of US corporate bonds, one-month treasury bills

it is often useful to classify assets in different categories that vary in risk from a very safe class to a very risky class. which of the following is a common list of asset categories in order of increasing risk

treasury bills, corporate bonds, large stocks, small stocks

The market risk premium is always positive

true

the following is idiosyncratic risk: the risk that the main production plant of company x is shut down due to a tornado

true

which of the following is true

we should be interested in historical return data because return distributions are relatively stable across time

if we plot the volatilities of returns on individual stocks against their historical average returns, the resulting line would

zero slope

a probability distribution is

A) a summary of the different values that random variable can take, along with their relative likelihoods

which of these statements is true:

A) an empirical return distribution is more useful to describe the past, which a theoretical return distribution is more useful to predict the future

an efficient portfolio is one which

A) has no diversifiable risk D) can have reduced variance only by accepting lower accepted return

Firms with the highest equity beta have A) high operating leverage and high financial leverage B) low operating leverage and low financial leverage C) high operating leverage and low financial leverage D) low operating leverage and high financial leverage

A) high operating leverage and high financial leverage

Which of the following is true? A) idiosyncratic risk is less important for diversified investors than market risk B) both idiosyncratic risk and market risk are equally relevant for diversified investors C) idiosyncratic risk is more important for diversified investors than market risk D) market risk is always relevant for diversified investors, but idiosyncratic risk is relevant for diversified short-term horizons

A) idiosyncratic risk is less important for diversified investors than market risk

An asset's beta A) A measure of an asset's exposure to system-wide risk B) proportional to the asset's return variance C) is a measure of how the asset's price movements in the past relate to overall market movement D) is the covariance between the return on the asset and the return on the market portfolio di on the market portfolio E) the ratio of the asset's return variance of the market portfolio

A,D A) A measure of an asset's exposure to system-wide risk D) is the covariance between the return on the asset and the return on the market portfolio di on the market portfolio

Firms in the following sectors tend to have high betas A) services B) clothing C) restaurants D) technology

A,D services and technology

The CAPM is

B) a model that predicts the expected return for an asset C) a model that says only market-related or systematic risk is relevant for an asset's price F) an equilibrium model

the following firms are likely to have high asset betas

B) firms with niche appeal D) firms that sell luxury goods

market-wide risk is more relevant for asset pricing than idiosyncratic-risk because

B) investors generally hold diversified portfolios

the crucial assumption that allows insurance to work is that

B) shocks are relatively uncorrelated across people

An asset with a beta less than 1 A) is a good investment B) is a good ivnestment C) is less risky than the market portfolio D) how lower return variance than the market portfolio

C) is less risky than the market portfolio

A theoretical probability distribution can be described using more parameters than an empirical frequency distribution

False

The following is idiosyncratic risk: the risk that the Fed will increase interest rates, thus decreasing demand for real estate company X's products

False

The standard error of the estimate of the expected return is higher than the standard deviation of return

False

The following is idiosyncratic risk: the risk that the new firm x's employees will be hired away by competitors

True

The following is idiosyncratic risk: the risk that the new product firm x's manager expects his r&d division to produce will not materialize

True