chapter 7,8 T/F

10) Because returns are more certain for the least risky investments, the required return on these investments should be higher than the required returns on more risky investments.

FALSE

11) If an investor holds earns 10% on her investment in the first year and loses 10% the next year, she will have neither a gain nor a loss.

FALSE

12) If an investor holds a stock for three years, the value at the end of three years will always be the initial cost of the stock times (1 + arithmetic average return) to the third power.

FALSE

12) Investors are always rewarded for taking higher risk with higher realized returns.

FALSE

13) During the financial crisis of 2007-2009, returns on real estate investment trusts (REITS) and stocks moved in opposite directions.

FALSE

14) The higher the standard deviation, the less risk the investment has.

FALSE

18) The standard deviation of a portfolio is always just the weighted average of the standard deviations of assets in the portfolio.

FALSE

20) Adequate portfolio diversification can be achieved by investing in several companies in the same industry.

FALSE

22) Long-term bonds issued by large, established corporations are commonly used to estimate the risk-free rate.

FALSE

23) The market beta changes frequently with economic conditions.

FALSE

24) Portfolio returns can be calculated as the geometric mean of the returns on the individual assets in the portfolio.

FALSE

25) The security market line (SML) intercepts the Y axis at the risk-free rate.

FALSE

25) When constructing a portfolio, it is a good idea to put all your eggs in one basket, then watch the basket closely.

FALSE

26) Total risk equals unique security risk times systematic risk.

FALSE

28) If investors became more risk averse The SML would shift downward and the slope of the SML would fall.

FALSE

29) A security with a beta of zero has a required rate of return equal to the overall market rate of return.

FALSE

29) Stocks with higher betas are usually more stable than stocks with lower betas.

FALSE

30) A stock with a beta of 1.0 would on average earn the risk-free rate.

FALSE

32) Increasing a portfolio from 2 stocks to 4 stocks will reduce risk more than increasing a portfolio from 10 stocks to 12 stocks.

FALSE

33) The market rewards assuming additional unsystematic risk with additional returns.

FALSE

35) Betas for individual stocks tend to be stable.

FALSE

36) A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.

FALSE

6) Riskier investments have traditionally had lower returns than less risky investments have had.

FALSE

7) If a market is weak form efficient, an investor can make higher than expected profits by studying the past price patterns of a stock.

FALSE

9) Arithmetic average rate of return takes compounding into effect.

FALSE

CHAPTER 7 9) The cash return on an investment is calculated as purchase price-selling price.

FALSE

CHAPTER 8 16) The portfolio standard deviation will always be less than the standard deviation of any asset in the portfolio.

FALSE

10) An investor who wishes to hold a stock for five years will be most interested in geometric average rather than in the arithmetic average return.

TRUE

10) Historically, in the United States stocks have had higher returns and greater volatility than have government bonds.

TRUE

11) Even though an investor expects a positive rate of return, it is possible that the actual return will be negative.

TRUE

11) Treasury Bills have less default risk than do Government Bonds.

TRUE

12) The expected rate of return is the weighted average of the possible returns for an investment.

TRUE

13) The expected rate of return is the sum of each possible return times it likelihood of occurrence.

TRUE

17) When assets are positively correlated, they tend to rise or fall together.

TRUE

19) A correlation coefficient of +1 indicates that returns on one asset can be exactly predicted from the returns on another asset.

TRUE

21) A portfolio will always have less risk than the riskiest asset in it if the correlation of assets is less than perfectly positive.

TRUE

21) U. S. Treasury bills can be used to approximate the risk-free rate.

TRUE

22) The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%. The coefficient of correlation between the stocks is .75. The standard deviation of any portfolio combining the two stocks will be less than 20%.

TRUE

23) Most financial assets have correlation coefficients between 0 and 1.

TRUE

24) The S&P 500 Index is commonly used to estimate the market rate of return.

TRUE

25) Beta is a measurement of the relationship between a security's returns and the general market's returns.

TRUE

26) A portfolio containing a mix of stocks, bonds, and real estate is likely to be more diversified than a portfolio made up of only one asset class.

TRUE

26) The security market line can drawn by connecting the risk-free rate and the expected return on the market portfolio.

TRUE

27) An asset with a large standard deviation of returns can lower portfolio risk if its returns are uncorrelated with the returns on the other assets in the portfolio.

TRUE

27) If investors expected inflation to increase in the future, the SML would shift up, but the slope would remain the same.

TRUE

27) The CAPM designates the risk-return tradeoff existing in the market, where risk is defined in terms of beta.

TRUE

28) It is impossible to eliminate all risk through diversification.

TRUE

28) The greater the dispersion of possible returns, the riskier is the investment.

TRUE

29) For the most part, there has been a positive relation between risk and return historically.

TRUE

30) The benefit from diversification is far greater when the diversification occurs across asset types.

TRUE

31) Investing in foreign stocks is one way to improve diversification of a portfolio.

TRUE

31) Unsystematic risk can be eliminated through diversification.

TRUE

34) On average, the market rewards assuming additional systematic risk with additional returns.

TRUE

5) Stock prices go up when there is positive information about a company, and go down when there is negative information about the company.

TRUE

5) The risk-return tradeoff tells us that expected returns should be higher on investments that have higher risk.

TRUE

6) Strategies that exploit market inefficiencies tend to lose their effectiveness when they become widely known.

TRUE

7) Less risky investments have lower standard deviations than do more risky investments.

TRUE

8) If an individual with inside information can make higher than expected profits, the market is no more than semi-strong form efficient.

TRUE

8) Investments in emerging markets have higher volatility than do U.S. Stocks.

TRUE

9) Risky investments have the potential for higher returns, but also larger losses.

TRUE