test

The risk of owning an asset comes from:

- unanticipated events - surprises

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

1

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?

10.9% 12.9%

A firm faces many risks. Which of the following are examples of unsystematic risks faced by a firm?

A hostile takeover attempt by a competitor The death of the CEO

A firm is exposed to both systematic and unsystematic risks. Which of the following are examples of systematic risks?

An increase in the Federal funds rate An increase in the corporate tax rate

Which of the following are examples of unsystematic risk?

Changes in management Labor strikes

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

False

True or false: Systematic risk can be eliminated by diversification

False

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

False

Which of the following are examples of a portfolio?

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

Which of the following are examples of a portfolio?

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

What is unsystematic risk?

It is a risk that affects a single asset or a small group of assets

What is systematic risk?

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

What is a risk premium?

It is additional compensation for taking risk, over and above the risk-free rate

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.

Which of the following are examples of systematic risk?

Regulatory changes in tax rates Future rates of inflation

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

Which of the following are examples of information that may impact the risky return of a stock?

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 are the two components of the market risk premium?

The risk-free rate The expected return on the market

What are the two components of unexpected return (U) in the total return equation?

The systematic portion The unsystematic portion

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

There is no relationship.

What is the equation for total return as a function of expected and unexpected returns?

Total return = Expected return + Unexpected return

What two factors determine a stock's total return?

Unexpected return Expected return

When is it profitable to convert convertible bonds to common stock at the maturity date?

When the conversion value exceeds the straight bond value.

When should an investor not convert convertible bonds to common stocks at the maturity date?

When the conversion value is less than the straight bond value

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

a portfolio's expected return

What is the term for the excess return an asset earns based on the level of risk taken?

alpha

is the excess return an asset earns based on the level of risk taken.

alpha

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

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

beta

_ is the minimum required return on a new investment.

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 _____.

cost of capital

The increase in the number of stocks in a portfolio results in a(n)

decline

Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio _____.

declines

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

decrease

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

discount

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

expected

The variance of a portfolio

isn't

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

no

Systematic risk will ____ when securities are added to a portfolio.

not change

If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be _____.

positive

The SML is very important because it tells us the "going rate" for bearing

risk

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

some

The first step to calculate the variances of the returns on two stocks is to determine the

squared

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

systematic

When an investor is diversified only ________ risk matters.

systematic

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

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

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 standard deviation is ___.

the square root of the variance

The true risk of any investment is the _____ portion.

unanticipated

The risk that affects a single asset or a small group of assets is ______ risk.

unsystematic

is the squared standard deviation.

variation

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

weight