Chapter 12 MC Questions

which one of the following measures systematic risk?

beta

which of the following correctly identifies the factors included in the Fama-French three factor model?

beta, company size, and book-to-market ratios

what is the beta of a risk-free security?

.00

a stock with which one of the following betas has an expected return that most resembles the overall market expected rate of return?

.99

what is the beta of an average asset?

1

which one of the following betas represents the greatest level of systematic risk?

1.27

the security market line depicts the graphical relationship between which two of the following?

I. expected return III. systematic risk

according to the CAPM, which of the following will increase the expected rate of return on a security that has a beta that is less than that of the market? Assume the market rate of return is greater than the risk-free rate and both are positive:

I. increase in the risk-free rate III. increase in the market risk premium

which of the following will affect the beta value of an individual security?

I. interval of time frequency used for the data sample II. length of time period used for the data sample III. particular time period selected for the sampling IV. choice of index used as the measure of the market

which two of the following determine how sensitive a security is relative to movements in the overall market?

II. correlation between the security's return and the market return III. the volatility of the security relative to the market

all else held constant, which of the following will increase the expected return on a security based on CAPM? Assume the market return exceeds the risk-free rate and both values are positive. Also assume the beta exceeds 1.0:

II. increase in the market risk premium III. decrease in the risk-free rate IV. increase in the market rate of return

which of the following are needed to compute the beta of an individual security?

II. standard deviation of the security and the market IV. correlation of the security to the market

which one of the following is most commonly used as the measure of the overall market rate of return?

S&P 500

where will a security plot in relation to the security market line (SML) if it is considered to be a good purchase because it is underpriced?

above the SML

which one of the following announcements is most apt to cause the price of a firm's stock to increase?

an unpopular CEO unexpectedly announced he is resigning effective immediately

stocks D, E, and F have actual reward-to-risk ratios of 7.1, 6.8, and 7.4. Given this, you know for certain that:

at least two of the securities are mispriced

which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money, the reward for bearing systematic risk, and the amount of systematic risk?

capital asset pricing model (CAPM)

you own three stocks which have betas of 1.16, 1.34, and 1.02. You would like to add a fourth security such that your portfolio beta will match that of the market. Given this situation, the new security:

could be as U.S. Treasury bill

which one of the following terms is the measure of the tendency of two things to move or vary together?

covariance

which one of the following is the best example of unsystematic risk?

decrease in company sales

retail specialities just announced that its chief operating officer is retiring at the end of this month. This announcement will cause the firms stock price to:

either increase, decrease, or remain constant

which one of the following is the best example of systematic risk?

gas prices rise sharply

which one of the following will increase the slope of the security market line? Assume all else constant:

increasing the market risk premium

you own a portfolio which is invested equally in two stocks and a risk-free security. The stock betas are .89 for stock A and 1.26 for stock B. Which one of the following will increase portfolio beta, all else constant?

increasing the weight of stock A, and decreasing the weight of the risk free asset

which one of the following has the highest expected risk premium?

individual stock with a beta of 1.46

which one of the following statements is true?

investing has two dimensions: risk and return

which one of the following statements applies to unsystematic risk?

it can be eliminated through portfolio diversification

which one of the following terms is another name for systematic risk?

market risk

the slope of the security market line is equal to the:

market risk premium

which one of the following is expressed as E(Rm) -Rf?

market risk premium

which one of the following is the best example of risk associated with stock ownership?

one of the firm's patent applications was unexpectedly rejected

which one of the following must be equal for two individual securities with differing betas if those securities are correctly priced according the CAPM?

reward-to-risk ratio

which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three factor model? Assume beta is constant in all cases

small market capitalization and high book-to-market ratio

according to the systematic risk principle, the reward for bearing risk is based on which one of the following types of risk?

systematic

which one of the following is the type of risk that affects a large number of assets?

systematic

the amount of risk premium allocated to security A is dependent upon which one of the following?

systematic risk associated with security A

a portfolio of securities has a beta of 1.14. Given this, you know that:

the expected return on the portfolio is greater than the expected market return

which one of the following qualifies as diversifiable risk?

the unsystematic portion of an unexpected return

a security has a zero covariance with the market. This means that:

there is no identifiable relationship between the return on the security and that of the market

where will a security plot in relation to the security market line (SML) if it has a beta of 1.1 and is overvalued?

to the right of the overall market and below the SML

which one of the following is the type of risk that only affects either a single firm or just a small number of firms?

unsystematic

a portfolio beta is computed as which one of the following?

weighted average