MGNT 3125 Chapter 11

True of False: The variance and standard deviation of a portfolio are equal to weighted averages of the corresponding characteristics of the individual securities.

False

Which of the following behaviors would be an evidence of investors risk aversion? I- Investors require higher rates of returns for investments that demonstrate higher variability of returns. II- when investors become more risk averse, they require higher market risk premium, which should increase the slope of the security market line. III- Investors required rate of return will decrease as a response to an increase in the total systematic risk in the market. a- I and II b- I and III c- II and III d- I , II and III

a- I and II

Investors risk aversion is defined as: a- Investors prefer less risk to more risk, all else being equal. They also require more compensation for taking more risk. b- Investors prefer assets with the highest expected returns no matter the level of risk c- Investors prefer more risk to less, all else being equal. d- Investors prefer assets with the highest expected returns and the highest variability in return as measured by the standard deviation.

a- Investors prefer less risk to more risk, all else being equal. They also require more compensation for taking more risk.

The slope of the security market line (SML) is called the: a- reward to risk ratio b- beta coefficient c- risk-free ratio d- market risk ratio

a- reward to risk ratio

A ............................. risk has an impact on all the stocks in a portfolio, and cannot be diversified away; this risk is also called .......................... a- systematic; non-diversifiable b- unsystematic; non-diversifiable c- systematic; diversifiable d- unsystematic; systematic

a- systematic; non-diversifiable

Which of the following statement is true regarding the beta coefficient: a- the beta of a risk-free security is equal to 1.00 b- the beta of the overall market is equal to 0 c- an increase in the unsystematic risk of a portfolio will increase the portfolio's beta d- an increase in the unsystematic risk of a portfolio will decrease the portfolio's beta e- beta is a measure of systematic risk, the higher the beta the higher the expected return.

a- the beta of a risk-free security is equal to 1.00

The security market line indicates that investors are compensated for which of the following? I- diversifiable risk II- market risk III- unsystematic risk IV- systematic risk a- I and III only b- II and IV only c- I, II, and III only d- II, III, and IV only e- I, II, III, and IV

b- II and IV only

The equation that is represented graphically by the security market line is called the: a- market risk model b- capital asset pricing model c- asset term structure d- asset market equilibrium

b- capital asset pricing model

Financial markets do not reward investors for taking ...................... risks, because a rational investor can eliminate this risk, at virtually not cost, by having a ..................... portfolio. a- systematic; non-diversifiable b- diversifiable; diversified c- systematic; diversified d- unsystematic; non-diversified

b- diversifiable; diversified

The slope of the security market line (SML) gives the excess return on the market over the risk-free rate, therefore it is called: a- systematic reward b- market risk premium c- the equilibrium return d- unsystematic reward

b- market risk premium

The graphical linear function depicting the relationship between beta and the expected returns is called the: a- diversification line b- security market line c- market risk line d- term structure of expected returns

b- security market line

Beta measures the amount of an asset's systematic risk relative to the ................... risk for the average asset (market portfolio). The average stock (market portfolio) has a beta of ................. a- unsystematic; 0 b- systematic; 1.00 c- systematic; 10.00 d- unsystematic; 1.00

b- systematic; 1.00

The amount of systematic risk present in a particular risky asset relative to the systematic risk present in a market portfolio is called the: a- standard deviation b- sigma coefficient c- beta coefficient d- risk premium

c- beta coefficient

For a group of securities that are correctly priced, the reward-to-risk ratio should be: a- equal to 1.00 for each security b- equal to 1.00 for the combination of the securities c- equal for each security d- higher for riskier securities

c- equal for each security

The risk premium for a security is based on the ..................... associated with the security. a- total risk b- unsystematic risk c- systematic risk d- diversifiable risk

c- systematic risk

In a fairly large portfolio, the ...................... risk associated with one stock typically has no impact on the portfolio total risk. In this case, it would be reasonable to expect that the effects of ..................... risk on various stocks would offset each other, thereby eliminating the risk to the investor arising from this source of risk. a- unsystematic; systematic b- systematic; unsystematic c- unsystematic; unsystematic d- diversifiable; non-diversifiable

c- unsystematic; unsystematic

An investor's portfolio is the ... the investor owns

combination of assets

Which of the following best define the portfolio weight? a) The total market value of a portfolio divided by the total book value of that portfolio b) the total number of shares invested in a particular asset divided by the total number of shares held in a portfolio. c) The dividends payments divided by the total current market value of a portfolio d) the percentage of a portfolio's total value that is invested in a particular asset.

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

Which of the following is used by the CAPM to estimate the expected return? I- The pure time value of money II- The reward for bearing systematic risk III- The amount of systematic risk a- I and II only b- II and III only c- I and III only d- I , II and III

d- I , II and III

The capital asset pricing model states that the expected return on a security depends on which of the following? I- pure time value of money II- the amount of unsystematic risk as measured by beta III- the reward for bearing systematic risk as measured by the market risk premium IV- the reward for bearing risk as measure by the standard deviation V- the amount of systematic risk a- I and III only b- I and IV only c- I, II, and III only d- I, III, and V only e- I, II, III, and V

d- I, III, and V only

The systematic risk principle states that the reward for bearing risk depends only on .... risk. Thus the expected return for an asset depends only on its ... risk. a- unsystematic; systematic b- non-diversifiable; diversifiable c- unsystematic; unsystematic d- systematic; systematic

d- systematic; systematic

The goal of diversification is to eliminate: a- total risk b- systematic risk c- effects of beta d- unsystematic risk

d- unsystematic risk

What is the process of investing in a portfolio of several assets to reduce risk called?

diversification

The actual return on a security come from what two parts?

expected return and unexpected return

Diversifying a portfolio of equity across sectors and markets will tend to: a- reduce the standard deviation of the portfolio zero b- reduce the standard deviation returns for each stock c- reduce the beta of the portfolio to zero d- increase the market risk premium e- eliminate the market risk f- reduce the firm-specific risk

f- reduce the firm-specific risk

The standard deviation of a portfolio decreases as the number of securities in the portfolio (increase/decrease).

increase

For most portfolios, the standard deviation is generally (greater than/less than) the weighted average of the standard deviations of the securities in the portfolio.

less than

What are the percentages of a portfolio's total value invested in each asset called?

portfolio weights

A ... factor tends to affect a large number of assets to a greater or lesser degree. However, an ... risk factor affects only a single or small group of assets.

systematic; unsystematic

The risk of an asset comes from the (expected/unexpected) part.

unexpected

What is a risk that is eliminated by diversification?

unsystematic or diversifiable