chapter 7,8 T/F
10) Because returns are more certain for the least risky investments, the required return on these investments should be higher than the required returns on more risky investments.
FALSE
11) If an investor holds earns 10% on her investment in the first year and loses 10% the next year, she will have neither a gain nor a loss.
FALSE
12) If an investor holds a stock for three years, the value at the end of three years will always be the initial cost of the stock times (1 + arithmetic average return) to the third power.
FALSE
12) Investors are always rewarded for taking higher risk with higher realized returns.
FALSE
13) During the financial crisis of 2007-2009, returns on real estate investment trusts (REITS) and stocks moved in opposite directions.
FALSE
14) The higher the standard deviation, the less risk the investment has.
FALSE
18) The standard deviation of a portfolio is always just the weighted average of the standard deviations of assets in the portfolio.
FALSE
20) Adequate portfolio diversification can be achieved by investing in several companies in the same industry.
FALSE
22) Long-term bonds issued by large, established corporations are commonly used to estimate the risk-free rate.
FALSE
23) The market beta changes frequently with economic conditions.
FALSE
24) Portfolio returns can be calculated as the geometric mean of the returns on the individual assets in the portfolio.
FALSE
25) The security market line (SML) intercepts the Y axis at the risk-free rate.
FALSE
25) When constructing a portfolio, it is a good idea to put all your eggs in one basket, then watch the basket closely.
FALSE
26) Total risk equals unique security risk times systematic risk.
FALSE
28) If investors became more risk averse The SML would shift downward and the slope of the SML would fall.
FALSE
29) A security with a beta of zero has a required rate of return equal to the overall market rate of return.
FALSE
29) Stocks with higher betas are usually more stable than stocks with lower betas.
FALSE
30) A stock with a beta of 1.0 would on average earn the risk-free rate.
FALSE
32) Increasing a portfolio from 2 stocks to 4 stocks will reduce risk more than increasing a portfolio from 10 stocks to 12 stocks.
FALSE
33) The market rewards assuming additional unsystematic risk with additional returns.
FALSE
35) Betas for individual stocks tend to be stable.
FALSE
36) A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.
FALSE
6) Riskier investments have traditionally had lower returns than less risky investments have had.
FALSE
7) If a market is weak form efficient, an investor can make higher than expected profits by studying the past price patterns of a stock.
FALSE
9) Arithmetic average rate of return takes compounding into effect.
FALSE
CHAPTER 7 9) The cash return on an investment is calculated as purchase price-selling price.
FALSE
CHAPTER 8 16) The portfolio standard deviation will always be less than the standard deviation of any asset in the portfolio.
FALSE
10) An investor who wishes to hold a stock for five years will be most interested in geometric average rather than in the arithmetic average return.
TRUE
10) Historically, in the United States stocks have had higher returns and greater volatility than have government bonds.
TRUE
11) Even though an investor expects a positive rate of return, it is possible that the actual return will be negative.
TRUE
11) Treasury Bills have less default risk than do Government Bonds.
TRUE
12) The expected rate of return is the weighted average of the possible returns for an investment.
TRUE
13) The expected rate of return is the sum of each possible return times it likelihood of occurrence.
TRUE
17) When assets are positively correlated, they tend to rise or fall together.
TRUE
19) A correlation coefficient of +1 indicates that returns on one asset can be exactly predicted from the returns on another asset.
TRUE
21) A portfolio will always have less risk than the riskiest asset in it if the correlation of assets is less than perfectly positive.
TRUE
21) U. S. Treasury bills can be used to approximate the risk-free rate.
TRUE
22) The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%. The coefficient of correlation between the stocks is .75. The standard deviation of any portfolio combining the two stocks will be less than 20%.
TRUE
23) Most financial assets have correlation coefficients between 0 and 1.
TRUE
24) The S&P 500 Index is commonly used to estimate the market rate of return.
TRUE
25) Beta is a measurement of the relationship between a security's returns and the general market's returns.
TRUE
26) A portfolio containing a mix of stocks, bonds, and real estate is likely to be more diversified than a portfolio made up of only one asset class.
TRUE
26) The security market line can drawn by connecting the risk-free rate and the expected return on the market portfolio.
TRUE
27) An asset with a large standard deviation of returns can lower portfolio risk if its returns are uncorrelated with the returns on the other assets in the portfolio.
TRUE
27) If investors expected inflation to increase in the future, the SML would shift up, but the slope would remain the same.
TRUE
27) The CAPM designates the risk-return tradeoff existing in the market, where risk is defined in terms of beta.
TRUE
28) It is impossible to eliminate all risk through diversification.
TRUE
28) The greater the dispersion of possible returns, the riskier is the investment.
TRUE
29) For the most part, there has been a positive relation between risk and return historically.
TRUE
30) The benefit from diversification is far greater when the diversification occurs across asset types.
TRUE
31) Investing in foreign stocks is one way to improve diversification of a portfolio.
TRUE
31) Unsystematic risk can be eliminated through diversification.
TRUE
34) On average, the market rewards assuming additional systematic risk with additional returns.
TRUE
5) Stock prices go up when there is positive information about a company, and go down when there is negative information about the company.
TRUE
5) The risk-return tradeoff tells us that expected returns should be higher on investments that have higher risk.
TRUE
6) Strategies that exploit market inefficiencies tend to lose their effectiveness when they become widely known.
TRUE
7) Less risky investments have lower standard deviations than do more risky investments.
TRUE
8) If an individual with inside information can make higher than expected profits, the market is no more than semi-strong form efficient.
TRUE
8) Investments in emerging markets have higher volatility than do U.S. Stocks.
TRUE
9) Risky investments have the potential for higher returns, but also larger losses.
TRUE