chapter 11 finance study guide questions

stock A comprises 28 percent of susans portfolio. Which term applies to the 28 percetn?

portfolio weight

assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward to risk ratio of each security must?

equal the slope of the SML

mary owns a risky stock and anticiaptes earning 16.5 percent on her investmnet in that stock. Which one of the following best describes the 16.5 rate?

expected return

the security market line is a linear funciton that is graphed by plotting data points based on the relationship between which two variables?

expected return and beta

which best dest describes a portfolio?

group of assets held by an investor

which is an example of systematic risk?

increase in consumption created by reduciton in personal tax rates

Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives

invest 2,500 in a risk free asset and 2500 in a stock with a beta of 2.0

if a risky security is correctly priced?

its expected risk premium will be positive

the systematic risk principle states that the expected return on a risky asset depends only on what?

market risk

which of the following is teh slope of the security line?

market risk premium

based on CAPM, investors are compensated based on which of teh following?

market risk premium, portfolio beta, risk free rate

if a security plots to the right and below security market line, then the security has?

more systematic risk than the market and is overpriced

the addition of a risky seuciryt to a fully diversified protfolio may or may not affect?

portfolio beta

Consider a portfolio comprised of four risky securities. Assume the economy has three states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero

portfolio expected rate of return must be same for each economic state

diversifying a portfolio across variosu sectors and industries might do more than one ofthe following. However, this diversfication must do which of the following?

reduce a portfolio's unique risk

which is teh vertical intercept of security market line?

risk free rate

the expected return on a security depends on what?

risk free rate of return, market rate of return,

which best describes systematic risk?

risk that affects a large number of assets

which portfolio will have a beta of zero

porfolio soley of us treasury bills

Which one of the following is the computation of the risk premium for an individual security?

E(R) is the expected return on the security, Rf is the risk-free rate, β is the security's beta, and E(RM) is the expected rate of return on the market β[E(RM) - Rf]

which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

diversification

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock

a decrease in the probability of an economic boom

which of the following related to sMl is correct?

a security with a beta of 1. 54 will plot on security line if it is correctly priced

an underpriced security will plot?

above the security market line

World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stock's rate of return without affecting the risk level of the stock,

all else constant, increase in the market risk-reward ratio

which of teh following terms can be used to describe unsystematic risk?

asset specific risk, diversifiable risk, unique risk

systematic risk is measured by?

beta

the securiyt market line is defined as a positively sloped straight line that displays the relationship between?

beta and expected return

which of the following measures the amoutn of systematic risk present ina particular irksy asset relative to that in an average risky asset?

beta coefficient

a risky security has less risk than the overall market. what must beta of this security be?

between 0 and 1

a portfolio is comprised of 35 securities with varying betas. The lowest individual beta for an individual security is .74 and the highest security betas of 1. 51. Given this info you know portfolio beta is?

between those two numbers

which is the minimum required rate of reutrn on a new investment that makes the investment attractive?

cost of capital

which is example of systematic risk

decrease in gross domestic product

The expected return on a security is currently based on a 22 percent chance of a 15 percent return given an economic boom and a 78 percent chance of a 12 percent return given a normal economy. Which of the following changes will decrease the expected return on this security

decrease in rate of return given a normal economy and an increase in prob of a normal economy

based on CAPM which must increase the expected return on an individual security all else constant

decrease in the risk free rate given a security beta of 1.06

which is the best example of an announcement that is most apt to result in an unexpected return?

statement by a firm that is has just discovered a manufacturing defect and is recalling product

You are assigned the task of computing the expected return on a portfolio containing several individual stocks. Which one of the following statements is correct concerning this task

summation of the return deviation from the portfolio expected return for each economic state must equal zero

risk premium for an individual security is based on which of the following types of risk?

systematic

beta of a risky portfolio cannot be less than ?

the lowest individual beta or above highest individual beta in portfolio

CAPM considers?

time value of money

standard deviation measures? beta measures?

total risk, systematic risk

which best exemplifies unsystematic risk?

unexpected increase in variables cost for a firm

portfolio diversificaiton eliminates which of the following?

unsystematic risk

The expected rate of return on Delaware Shores, Inc. stock is based on three possible states of the economy. These states are boom, normal, and recession which have probabilities of occurrence of 20 percent, 75 percent, and 5 percent, respectively. Which one of the following statements is correct concerning the variance of the returns on this stock?

variance must be positive provided that each state of economy produces a different expected state of return

which is best example of unsystematic risk?

warehouse fire

which of the following represents teh amount of compensation an investor should expect to recieve for accepting hte unsystematic risk associated with an individual securiyt?

zero