FIN3403- FINAL EXAM (ch. 13)

Expected return

Do you own a stock that you think will produce a return of 11% in a good economy and 3% in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5% next year. Which of the following terms applies to the 6.5%?

Market value of the investment in each stock

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

portfolio weight

Raffia owns stock of 15 different companies. Together, the stocks have a value of $78, 640. twelve percent of the total value is from one company, Gambrell and Valdes. The twelve percent figure is called a:

Total

Standard deviation measures which type of risk?

Portfolio weight

Steve has invested in twelve different stocks that have a combined value today of $121,300. 15% of the total is invested in Wiseman foods. The 15% is a measure of which one of the following?

Portfolio

Susie owns five different bonds valued at $36, 000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Susie's investment?

beta

Systematic risk is measured by:

cost of capital

TREYNOR industries is investing in a new project. The minimum rate of return the fIrm requires on this project is referred to as the:

Systematic risk principle

The ________tells us that the expected return on a risky asset depends only on the assets nondiversifiable risk.

Weighted average of the returns for each economic state

The expected return of a stock, based on the likelihood of various economic outcomes, equals the:

Weighted average of the returns for each economic state.

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

Risk-free rate

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

The risk-free rate

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

underpriced

The market rate of return is 11% and the risk-free rate of return is 3%. Lexant stock has 3% less systematic risk than the market and has an actual return of 12%. The stock is:

Eliminate asset-specific risk

The primary purpose of portfolio diversification is to:

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

The standard deviation of a portfolio:

Can't be less than the weighted average of the standard deviation of the individual securities held in that portfolio

The standard deviation of a portfolio:

A beta of 1.0

The systematic risk of the market is measured by:

Risk-free rate

To calculate the expected risk premium on a stock, one must subtract the__________ from the stocks expected return

standard deviation; beta

Total risk is measured by________ and systematic risk is measured by______

I: earthquake damages as entire town IV: toy makers are required to improve their safety standards.

Which of the following are examples of diversable risk?

Unsystematic risk

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

Maybe less than the variance of the least risky stocks in the portfolio

given a well-diversified stock portfolio, the variance of the portfolio:

I: Non-diversifiable is measured by beta III: systematic risk is another name for non-diversifiable.

which of the following states concerning risk is correct?

A firms sales decrease

Which of the following is the best example of a Diversifiable risk?

It can be effectively eliminated by portfolio diversification

Which of the following statements regarding unsystematic risk is accurate?

beta

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?

expected return

While evaluating a stock, you estimate that it will earn a return of 11 percent if the economic conditions are favorable and a 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2% figure is called the?

A higher return than expected for the level of risk assumed

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

unsystematic

A news flash just appeared that cost about it doesn't Stocks to suddenly drop in value by about 20%. What type of risk does this new flash represent?

Market risk premium in the amount of systematic risk inherent in the security

According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

portfolio

Bucci on several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n):

25

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?

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

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

Systematic

Most financial securities have some level of ___________risk

A national decrease in consumer spending on entertainment

Of the options listed below, which is the best example of an systemic risk?

Investors panic causing security prices around the globe to fall precipitously

Of the options listed below, which is the best example of systematic risk?

Spreading an investment across many diverse assets will eliminate some of the total risk?

The principle of diversification tells us that:

Market value of the investment in each stock

When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the:

A mathematical expectation based on weighted average and not a guaranteed outcome

When using economic probabilities to compute the expected return on a stock, the result is:

I: Diversifiable risk can be essentially eliminated by investing in 30 unrelated securities II: there is no reward for excepting diversifiable risk III:Diversifiable wrists are generally associated with an individual firm or industry

Which of the following are examples of diversifiable risk?

Investors panic causing security prices around the globe to fall PRECEIPITOUSLY

Which of the following is an example of systematic risk?

Consumer spending on entertainment decrease nationally

Which of the following is an example of unsystematic risk?

I: percentage of the portfolio invest in each individual security II: projected states of economy III: the performance of each security given various economic states IV: probability of occurrence for each state of the economy *ALL THE ABOVE*

Which of the following items are included when calculating the expected return on a portfolio?

I: it cannot exceed the expected return of the best performing security in the portfolio. II: it must be equal to or greater than the expected return of the worst performing security in the portfolio. III: it is independent of the unsystematic risk of the individual securities held in the portfolio. *I,II,III*

Which of the following statements are true of a well diversified portfolio's expected return?

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

Which of the following statements is true of a portfolio standard deviation?

A decrease in the portfolio standard deviation

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

Security market line

Which one of the following is a positively slope linear function that is created when expected returns are graphed against security Betas?

systematic

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

Reducing the number of stocks held in the portfolio.

Which one of the following is leased apt to reduce the the unsystematic risk of a portfolio?

Expected rate of return

Which one of the following is most directly affected by the level of systematic risk in a security?

Market risk premium

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

Capital asset pricing model (CAPM)

Which one of the following is the formula that explains the relationship between the expected return on a security in the level of that security systematic risk?

Stock with a beta of 1.38* highest beta in answer options.

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

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

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

Given both the unequal weight of the securities in economic state, an investor might be able to create a portfolio that has an expected standard deviation of zero.

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities in the economic state have unequal weights

Eliminating unsystematic risk is the responsibility of the individual investor.

Which one of the following statements is correct concerning unsystematic risk?

Overtime the average expected return will be zero

Which one of the following statements is correct?

The systematic risk of a portfolio can be affectively lowered by adding T-bills to the portfolio.

Which one of the following statements related to risk is correct?

Unexpected returns can either be positive or negative in the short term , but tend to be zero over the long term

Which one of the following statements related to unexpected returns is correct

Reward to risk ratio

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

Overtime, the average unexpected return will be zero.

With respect to returns, which one of the following statements is accurate?