FIN 311 - CH13

The weighted average of the standard deviations of the assets in Portfolio C is 12.9%. Which of the following are possible values for the standard deviation of the portfolio?

12.9% 10.9% *The standard deviation of a portfolio is less than or equal to the weighted average of the standard deviations of the assets in the portfolio.

The ______ coefficient is the amount of systematic risk present in a particular risky asset relative to that in an average asset.

beta

The risk of owning an asset comes from: forecasts unanticipated events expectations surprises

unanticipated events surprises

The security market line (SML) shows that the relationship between a security's expected return and its beta is ______.

positive *According the the CAPM, the relationship is positive - the higher the beta, the higher the expected return.

The _________ risk principle argues that the market does not reward unnecessary risk that is taken on by the investor.

systematic

Which of the following are examples of a portfolio?

- Holding $100,000 investment in a combination of stocks and bonds - Investing $100,000 in the stocks of 50 publicly traded corporations - Investing $100,000 in a combination of U.S. and Asian stocks

By definition, what is the beta of the average asset equal to?

1

Asset A has an expected return of 17 percent and standard deviation of 5 percent. Asset B has an expected return of 15 percent and standard deviation of 5 percent. Which asset would a rational investor choose?

Asset A *Asset A offers higher expected return at the same level of risk. *standard deviation represents the level of risk

True or false: A well-diversified portfolio will eliminate all risks.

False * Even if the portfolio is well diversified, the investor is still exposed to systematic, or nondiversifiable risk.

True or false: The process to calculate a portfolio's beta is opposite of the process to calculate a portfolio's expected return.

False *The processes are similar.

Which type of risk is unaffected by adding securities to a portfolio?

Systematic risk

Which type of risk does not change as we add more securities to a portfolio?

Systematic, or market, risk

If you wish to create a portfolio of stocks, what is the required minimum number of stocks?

You must invest in stocks of more than one corporation.

The minimum required return on a new project when its risk is similar to that of projects the firm currently owns is known as the _____.

cost of capital

When we _________ an announcement or a news item, we say that it has less of an impact on price because the market already factored it in.

discounted

True or false: Systematic risk will impact all securities in every portfolio equally.

false

The variance of a portfolio (is/isn't) generally a simple combination of the variances of the assets in the portfolio.

isn't

There is ______ correlation between the unsystematic risk of two companies from different industries.

no *it is unrelated to the unsystematic portion of the return on most other assets.

The SML (security market line) is very important because it tells us the "going rate" for bearing ____________ in the economy.

risk

The principle of diversification tells us that spreading an investment across a number of assets will eliminate _________ of the risk

some

The principle of diversification tells us that, to a diversified investor, the only type of risk that matters is __________ risk.

systematic

When an investor is diversified only ________ risk matters.

systematic

The systematic risk principle argues that the market does not reward risks _____.

that are borne unnecessarily

The portfolio weight is _____.

the percentage of the total value that is invested in an asset

The standard deviation is ___.

the square root of the variance

Which of the following are examples of information that may impact the risky return of a stock? - Last year's net income as a percentage of sales and gross fixed assets. - The trend in sales growth over the last 10 years. - The Fed's decision on interest rates at their meeting next week - The outcome of an application currently pending with the Food and Drug Administration.

- The Fed's decision on interest rates at their meeting next week - The outcome of an application currently pending with the Food and Drug Administration.

What does the security market line depict?

It is a graphical depiction of the capital asset pricing model. It shows the relationship between expected return and beta.

What is systematic risk?

It is a risk that pertains to a large number of assets. = market risk

If a security's expected return is equal to the risk-free rate of return, and the market-risk premium is greater than zero, what can you conclude about the value of the security's beta based on CAPM?

It is equal to 0.

As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?

It is likely to decrease. It may eventually be almost totally eliminated.

What is an uncertain or risky return?

It is the portion of return that depends on information that is currently unknown.

What is the definition of expected return?

It is the return that an investor expects to earn on a risky asset in the future.

According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero?

The risk-free rate of return

How are the unsystematic risks of two different companies in two different industries related?

There is no relationship.

The calculation of a portfolio beta is similar to the calculation of _____.

a portfolio's expected return

When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market _____.

already knew about most of the news item

When new securities are added to a portfolio, the total unsystematic risk portion of that portfolio is most likely to _____.

decrease

To determine whether an investment has a positive NPV, you can compare the expected return on that new investment to what the financial market offers on an investment with _____.

the same beta

The true risk of any investment is the _____ portion.

unanticipated

The ______ is the squared standard deviation.

variance / variation

The percentage of a portfolio's total value that is invested in a particular asset is the portfolio ___________.

weight

The risk-free asset has a beta of _____.

zero