chapter six finance review
11. A stock that contributes twice as much risk to a well-diversified portfolio than an average stock would have a beta coefficient of _____, while a stock with a beta of 0.5 would contribute only ______ as much risk to a well-diversified portfolio as an average stock.
2.0 half
Which of the following statements is most correct?
According to the text, it is theoretically possible to combine two stocks, each of which would be quite risky if held as your only asset, and to form a 2-stock portfolio that is riskless. However, the stocks would have to have a correlation coefficient of expected future returns of -1.0, and it is hard to find such stocks in the real world.
Which of the following statements is most correct?
If you plotted the returns of a given stock against those of the market, and if you found that the slope of the regression line was negative, then the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue on into the future. The SML relates required returns to firms' market risk. The slope and intercept of this line cannot be controlled by the financial manager.
If investors expected inflation to increase in the future, and they also became more risk averse, what could be said about the change in the Security Market Line (SML)?
The SML would shift up and the slope would increase.
Which of the following statements is most correct?
The returns on a stock might be highly uncertain in the sense that they could actually turn out to be much higher or much lower than the expected rate of return (that is, the stock has a high standard deviation of returns), yet the stock might still be regarded by most investors as being less risky than some other stock whose returns are less variable.
A group of 200 stocks each has a beta of 1.0. We can be certain that each of the stocks was positively correlated with the market.
a - true
Refer to Self-Test Question 26. The standard deviation of the portfolio of these 200 stocks would be lower than the standard deviations of the individual stocks.
a - true
Refer to Self-Test Question 25. If we combined these same 200 stocks into a portfolio, market risk would be reduced below the average market risk of the stocks in the portfolio.
b - false
Suppose rRF = 7% and rM = 12%. If investors became more risk averse, rM would be likely to decrease.
b - false
The Y-axis intercept of the Security Market Line (SML) indicates the required rate of return on an individual stock with a beta of 1.0.
b - false
If a stock has a beta of zero, it will be riskless when held in isolation.
b- false
Refer to Self-Test Question 28. The required rate of return for a stock with b = 0.5 would increase more than for a stock with b = 2.0.
b- false
Refer to Self-Test Questions 28 and 29. If the expected rate of inflation increased, the required rate of return on a b = 2.0 stock would rise by more than that of a b = 0.5 stock.
b- false
The ______ coefficient measures a stock's relative contribution to the risk of a well-diversified portfolio.
beta
The risk premium for a particular stock may be calculated by multiplying the market risk premium times the stock's ______
beta coefficient
Which is the best measure of risk for an asset held in a well diversified portfolio?
c - beta
In a portfolio of three different stocks, which of the following could not be true?
c -The beta of the portfolio is less than the beta of each of the individual stocks.
The _____________ ____ ___________ shows the risk per unit of return, and it provides a more meaningful basis for comparison when the expected returns on two alternatives are not the same.
coefficient of variation
That part of a stock's risk that can be eliminated is known as _______________ risk, while the portion that cannot be eliminated is called ________ risk.
diversifiable; market
Owning a portfolio of securities enables investors to benefit from _________________.
diversification
Investment returns can be expressed in ________ terms or as _______ ____ ________, or percentage returns.
dollar; rates of return
The ___________ _________ ____________ holds that stocks are always in equilibrium and that it is impossible for an investor to consistently "beat the market."
efficient markets hypothesis
Only at the _____________ price, where the expected and required rates of return are equal, will the stock's price be stable.
equilibrium
A listing of all possible __________, with a probability assigned to each, is known as a probability ______________.
outcomes; distribution
Diversification of a portfolio is achieved by selecting securities that are not perfectly ____________ correlated with each other.
positively
An event's _____________ is defined as the chance that the event will occur.
probability
Investment risk is associated with the _____________ of low or negative returns; the greater the chance of loss, the riskier the investment.
probability
Weighting each possible outcome of a distribution by its _____________ of occurrence and summing the results give the expected ________ of the distribution.
probability; return
The risk free rate on a short term Treasury security is made up of two parts: the ______ ______-______ rate plus a(n) ___________ premium.
real risk-free; inflation
The minimum expected return that will induce investors to buy a particular security is the __________ rate of return.
required
The concept of __________ provides investors with a convenient way of expressing the financial performance of an investment.
return
Diversification of a portfolio can result in lower ______ for the same level of return.
risk
Investors who prefer outcomes with a high degree of certainty to those that are less certain are described as being ______ ________.
risk averse
The security used to measure the __________-______ rate is the return available on U. S. Treasury securities.
risk free
A stock's required rate of return is equal to the ______-______ rate plus the stock's ______ _________.
risk-free; risk premium
If the expected rate of return on a stock is less than its required rate of return, investors will desire to ______ the stock; there will also be a tendency for the stock's price to _________.
sell; decline
Changes in investors' risk aversion alter the _______ of the Security Market Line.
slope
One measure of the tightness of a probability distribution is the __________ ___________, a probability-weighted average deviation from the expected value.
standard deviation
The ______-form of the EMH states that all information contained in past price movements is fully reflected in current market prices.
weak
The beta coefficient of a portfolio is the __________ _________ of the betas of the individual stocks.
weighted average
