Finance Chapter 13 Smartbook Questions

a, c

As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk? Multiple select question. a. It may eventually be almost totally eliminated. b. It is likely to increase. c. It is likely to decrease. d. It will not change.

d. Asset A

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? a. Neither A or B since they are both risky b. Asset A or B since they both are equally risky c. Asset B d. Asset A

a. Asset A

Assets A and B each have an expected return of 10 percent. Asset A has a standard deviation of 12 percent while Asset B has a standard deviation of 13 percent. Which asset would a rational investor choose? a. Asset A b. Either Asset A or B since they both offer the same expected return. c. Asset B d. Neither Asset A nor B since they are both risky

c. 1

By definition, what is the beta of the average asset equal to? a. 2 b. 0 c. 1 d. Between 0 and 1

b. There is no relationship.

How are the unsystematic risks of two different companies in two different industries related? a. There is a positive relationship. b. There is no relationship. c. There is a negative relationship. d. The relationship can be either positive or negative.

a. It is equal to 0.

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? a. It is equal to 0. b. It is equal to -1. c. It is equal to the market portfolio's beta. d. It is equal to 1.

b. You must invest in stocks of more than one corporation.

If you wish to create a portfolio of stocks, what is the required minimum number of stocks? a. You must invest in the stocks of at least 30 corporations. b. You must invest in stocks of more than one corporation. c. You must invest in at least 2 stocks of 1 corporation. d. You must invest in stocks of at least 10 corporations.

false

T/F: A well-diversified portfolio will eliminate all risks.

false

T/F: Systematic risk can be eliminated by diversification

false

T/F: Systematic risk will impact all securities in every portfolio equally.

false

T/F: The process to calculate a portfolio's beta is opposite of the process to calculate a portfolio's expected return.

risk

The SML is very important because it tells us the "going rate" for bearing __________ in the economy.

systematic

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

expected

The ___________ return is the return that an investor will probably earn on a risky asset in the future.

beta

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

variance

The ____________ is the squared standard deviation.

a. a portfolio's expected return

The calculation of a portfolio beta is similar to the calculation of _____. a. a portfolio's expected return b. a portfolio's variance c. a portfolio's standard deviation d. the value of a put option

capital

The cost of _______ is the minimum required return on a new investment.

a. increases; increases

The expected return on the market will increase if the risk-free rate _________ or if the market risk premium _____. a. increases; increases b. decreases; decreases c. decreases; increases d. increases; decreases

b. cost of capital

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 _____. a. payback period b. cost of capital c. dividend yield d. internal rate of return

weight

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

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

The portfolio weight is _____. a. the amount of return versus the overall market b. the percentage of the total value that is invested in an asset c. always equal to 10 d. the square root of the standard deviation

a. some

The principle of diversification tells us that spreading an investment across a number of assets will eliminate ______ of the risk. a. some b. almost none c. an insignificant portion d. all

systematic

The principle of diversification tells us that, to a diversified investor, the only type of risk that matters is _________ (systematic/unsystematic) risk.

a, b

The risk of owning an asset comes from: Multiple select question. a. unanticipated events b. surprises c. expectations d. forecasts

b. 0.00

The risk-free asset has a beta of _____. a. 3.00 b. 0.00 c. 1.00 d. 0.75

c. positive

The security market line (SML) shows that the relationship between a security's expected return and its beta is ______. a. overrated b. negative c. positive d. insignificant

c. the square root of the variance

The standard deviation is ___. a. equal to the sum of deviations divided by the number of observations b. equal to the sum of the deviations of actual returns from the average return c. the square root of the variance d. the square of the variance

b. that are borne unnecessarily

The systematic risk principle argues that the market does not reward risks _____. a. in any circumstances b. that are borne unnecessarily c. that are systematic d. that are dangerous

c. unanticipated

The true risk of any investment is the _____ portion. a. risk-free b. anticipated c. unanticipated d. compounding

isn't

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

b, c

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? Multiple select question. a. 14.9% b. 12.9% c. 10.9%

b. the same beta

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 _____. a. half the variance b. the same beta c. half the beta d. twice the standard deviation

a, c

What are the two components of the market risk premium? a. The expected return on the market b. Beta c. The risk-free rate d. The default spread

a, c

What are the two components of unexpected return (U) in the total return equation? a. The systematic portion b. The expected return portion c. The unsystematic portion d. The expected risk portion

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

What does the security market line depict? a. It depicts the relationship between the return on the S&P 500 and an individual security's return. b. It depicts the relationship between systematic risk and unsystematic risk. c. It is a graphical depiction of the capital asset pricing model. It shows the relationship between expected return and beta. d. It depicts the relationship between expected return and the standard deviation of returns.

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

What is systematic risk? a. It is a risk that affects only one or a few assets. b. It is a risk that increases in a systematic, gradual fashion. c. It is a risk that pertains to a large number of assets. d. It is a risk that is caused by failure of the internal control system of a corporation.

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

What is the definition of expected return? a. It is the return that an investor expects to earn on a risky asset in the future. b. It is the variation in return during the last period. c. It is the return that was earned in the past on a risky asset. d. It is the expected variation in return on a risky asset.

b. systematic

When an investor is diversified only ________ risk matters. a. unsystematic b. systematic c. diversifiable d. unnatural

a, b, c

Which of the following are examples of a portfolio? Multiple select question. a. Holding $100,000 investment in a combination of stocks and bonds b. Investing $100,000 in a combination of U.S. and Asian stocks c. Investing $100,000 in the stocks of 50 publicly traded corporations d. Holding $100,000 in cash to buy after five years 100 shares of the best performing stock on the NYSE

b. Systematic, or market, risk

Which type of risk does not change as we add more securities to a portfolio? a. Unsystematic, or diversifiable, risk b. Systematic, or market, risk c. Company-specific risk d. Idiosyncratic risk

c. Systematic risk

Which type of risk is unaffected by adding securities to a portfolio? a. Unsystematic risk b. Neither systematic nor unsystematic risk c. Systematic risk d. Both systematic and unsystematic risk