Ch 13 Finance Practice

Which one of the following indicates a portfolio is being effectively diversified?

A decrease in the portfolio standard deviation

Which one of the following is an example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously

Systematic risk is measured by:

beta

The expected return on a portfolio considers which of the following factors? I. 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

everything

The expected risk premium on a stock is equal to the expected return on the stock minus the:

risk-free rate.

Which one of the following statements is correct concerning a portfolio beta?

A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.

Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.

I and III only

Which of the following are examples of diversifiable risk? I. An earthquake damages an entire town II. The federal government imposes a $100 fee on all business entities III. Employment taxes increase nationally IV. All toymakers are required to improve their safety standards

I and IV only

At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? I. Asset's standard deviation II. Asset's beta III. Risk-free rate of return IV. Market risk premium

II and IV only

Which one of the following is represented by the slope of the security market line?

Market risk premium

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

Market value of the investment in each stock

Which one of the following is an example of unsystematic risk?

National decrease in consumer spending on entertainment

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

Portfolio weight

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?

Reward-to-risk ratio

Which one of the following should earn the highest risk premium based on CAPM?

Stock with highest beta

Which one of the following is a risk that applies to most securities?

Systematic

Which one of the following risks is irrelevant to a well-diversified investor?

Unsystematic risk

A stock with an actual return that lies above the security market line has:

a higher return than expected for the level of risk assumed.

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?

beta

The systematic risk of the market is measured by a:

beta of 1.

Unsystematic risk

can be effectively eliminated by portfolio diversification.

The standard deviation of a portfolio:

can be less than the standard deviation of the least risky security in the portfolio.

If a stock portfolio is well diversified, then the portfolio variance:

may be less than the variance of the least risky stock in the portfolio.

The principle of diversification tells us that:

spreading an investment across many diverse assets will eliminate some of the total risk.

Total risk is measured by _____ and systematic risk is measured by _____.

standard deviation; beta

The market risk premium is computed by:

subtracting the risk-free rate of return from the market rate of return.

The intercept point of the security market line is the rate of return which corresponds to:

the risk-free rate.

The expected return on a stock given various states of the economy is equal to the:

weighted average of the returns for each economic state.