corporate finance ch 5

Diversifiable risk includes _____. a. reinvestment rate risk b. economic risk c. business risk d. political risk e. interest rate risk

c

The difference between the expected rate of return on a given risky asset and the expected rate of return on a less risky asset is known as the _____. a. standard deviation of returns b. variance of returns c. actual rate of return d. risk premium e. risk-adjusted return

d

The greater the variability of the possible returns on an investment, _____. a. the lesser the expected return b. the lower the standard deviation of the investment c. the higher the actual return on the investment d. the riskier the investment e. the lower the beta of the investment

d

For Investment A, the probability of the return being 20 percent is 0.5, 10 percent is 0.4, and -10 percent is 0.1. Compute the standard deviation for the investment with the given information. a. 85.0% b. 15.0% c. 34.0% d. 17.0% e. 9.0%

e

Other things held constant, if investors become less risk averse, the new security market line (SML) would _____. a. not be affected b. shift down c. shift up d. have a steeper slope e. have a less steep slope

e

The expected returns for Stocks A, B, C, D, and E are 7 percent, 10 percent, 12 percent, 25 percent, and 18 percent, respectively. The corresponding standard deviations for these stocks are 12 percent, 18 percent, 15 percent, 23 percent, and 15 percent, respectively. Which one of the securities should a risk-averse investor purchase if the investment will be held in isolation (by itself)? a. A b. B c. C d. D e. E

e

The market for a stock is said to be in equilibrium when the _____. a. expected return on the stock is equal to its required return b. expected return on the stock is equal to the risk-free rate of return c. expected return on the stock is equal to the market risk premium d. expected return on the stock is equal to the market return e. expected return on the stock is equal to its historical return

a

The risk that is limited to a particular firm is also known as _____. a. unsystematic risk b. non-diversifiable risk c. market risk d. relevant risk e. combined risk

a

Which of the following is a measure of the extent to which the returns on a given stock move with the stock market? a. Beta coefficient b. Standard deviation c. Coefficient of variation d. Correlation coefficient e. Probability distribution of expected returns Clear my choice

a

Which of the following portfolios would have no diversification benefits? a. A portfolio consisting of two perfectly positively correlated stocks b. A portfolio consisting of two perfectly negatively correlated stocks c. A portfolio consisting of two uncorrelated stocks d. A portfolio consisting of two stocks with the same standard deviation of returns e. A portfolio consisting of two stocks with the same beta coefficient

a

Which of the following statements about the risk-return relationship observed in investing is correct? a. An increase in the expected inflation rate would lead to an increase in the required return on all the risky assets by the same amount, assuming all other things were held constant. b. A graph of the SML shows required rates of return on the vertical axis and standard deviations of returns on the horizontal axis. c. If investors' risk attitudes change, the required rates of return on low-beta stocks will be impacted more than the required rates of return on high-beta stocks. d. If investors became more averse to risk, then the slope of the SML would become less steep. e. The market risk premium is lower for high-beta stocks than it is for low-beta stocks.

a

Diversification refers to the _____. a. reduction of the stand-alone risk of an individual investment, which is measured by its beta coefficient, by combining it with other investments in a portfolio b. reduction of the stand-alone risk of an individual investment, which is measured by the standard deviation of its returns, by combining it with other investments in a portfolio c. reduction of the systematic risk of an individual investment, which is measured by its beta coefficient, by combining it with other investments in a portfolio d. reduction of the systematic risk of an individual investment, which is measured by the standard deviation of its returns, by combining it with other investments in a portfolio e. reduction of the unsystematic risk of an individual investment, which is measured by its beta coefficient, by combining it with other investments in a portfolio

b

The _____ of an investment is a measure of the tightness, or variability, of its set of returns. a. correlation coefficient b. standard deviation of the returns c. beta coefficient d. coefficient of variation e. expected return

b

The beta coefficient of Zed Corporation is equal to 0.7 and the required rate of return on the stock equals 12 percent. If the expected return on the market is 12.5 percent, what is the risk-free rate of return? a. 11.56% b. 10.83% c. 9.52% d. 12.25% e. 8.89%

b

The part of a security's risk associated with random outcomes generated by events or behaviors specific to the firm is known as _____. a. nondiversifiable risk b. unsystematic risk c. market risk d. systematic risk e. relevant risk

b

The standard deviation of the returns of Stock A is 45.9 percent, and the standard deviation of the returns of Stock B is 52.7 percent. Which of the following statements about the stocks is correct? a. Stock A has a wider (more dispersed) probability distribution than Stock B, and hence lower total risk. b. Stock A has a tighter probability distribution than Stock B, and hence lower total risk. c. Stock B has a wider (more dispersed) probability distribution than Stock A, and hence lower total risk. d. Stock B has a tighter probability distribution than Stock A, and hence lower total risk. e. Stock B has a lower risk than Stock A, but nothing can be said about their probability distributions.

b

The variance of the returns of Stock X is 62.5 percent, and the expected return from the stock is 18 percent. Calculate the coefficient of variation of the stock. a. 3.47 b. 0.44 c. 40.98 d. 0.29 e. 1.86

b

Which of the following pairs of terms are names for the same risk? a. Market risk and unsystematic risk b. Market risk and relevant risk c. Firm-specific risk and nondiversifiable risk d. Firm-specific risk and systematic risk e. Firm-specific risk and market risk

b

Which of the following statements about beta is correct? a. Firms with greater systematic risk volatilities than the market have betas that are less than 1.0, and firms with smaller systematic risk volatilities than the market have betas that are greater than 1.0. b. Firms with greater systematic risk volatilities than the market have betas that are greater than 1.0, and firms with smaller systematic risk volatilities than the market have betas that are less than 1.0. c. Firms with greater systematic risk volatilities than the market have betas that are less than zero, and firms with smaller systematic risk volatilities than the market have betas that are greater than zero. d. Firms with greater unsystematic risk volatilities than the market have betas that are less than 1.0, and firms with smaller unsystematic risk volatilities than the market have betas that are greater than 1.0. e. Firms with greater unsystematic risk volatilities than the market have betas that are greater than 1.0, and firms with smaller unsystematic risk volatilities than the market have betas that are less than 1.0.

b

Combining two stocks to form a portfolio offers maximum diversification benefits when _____. a. the stocks have a correlation coefficient equal to 0 b. the stocks have a correlation coefficient equal to +1 c. the stocks have a correlation coefficient equal to -1 d. the both stocks have a coefficients of variation of 0 e. both stocks have a coefficients of variation of -1

c

Dividing the standard deviation of the returns of a stock by the stock's expected return gives us the stock's _____. a. variance b. risk premium c. coefficient of variation d. beta e. correlation coefficient

c

Isabel invested in four-stock portfolio; she invested 20 percent of her money in Stock A, 30 percent of her money in Stock B, 25 percent of her money in Stock C, and 25 percent of her money in Stock D. The betas for Stock A, B, C, and D are 0.4, 1.2, 2.5, and 1.75, respectively, and their expected returns are 12 percent, 24 percent, 30 percent, and 28 percent, respectively. What is the beta of Isabel's portfolio? a. 1.82 b. 1.96 c. 1.50 d. 1.43 e. 1.38

c

The expected rate of return of an investment _____. a. equals one of the possible rates of return for that investment b. equals the required rate of return for the investment c. is the mean value of the probability distribution of possible outcomes d. is the median value of the probability distribution of possible outcomes e. is the mode value of the probability distribution of possible outcomes

c

Which of the following is the only risk that is relevant to a rational, diversified investor, because it cannot be eliminated or reduced through diversification? a. Diversifiable risk b. Stand-alone risk c. Market risk d. Unsystematic risk e. Firm-specific risk

c

Which of the following statements about the various types of risks is true? a. A firm's default risk is a nondiversifiable risk. b. Interest rate risk is an unsystematic risk. c. Inflation risk is a systematic risk. d. Economic risk is a firm-specific risk. e. Political risk is a diversifiable risk.

c

Stock A has a beta coefficient (β) equal to 2.1, and Stock B has a beta coefficient (β) equal to 0.7. According to the capital asset pricing model (CAPM), which of the following statements is correct? a. The required rate of return for Stock A, rA, should be 2.1 times the required rate of return for Stock B, rB. b. The risk premium associated with Stock A, RPA, should be 2.1 times the risk premium associated with Stock B, RPB. c. The required rate of return for Stock A, rA, should be three times the required rate of return for Stock B, rB. d. The risk premium associated with Stock A, RPA, should be three times the risk premium associated with Stock B, RPB. e. The required rate of return for Stock A, rA, should be three times the risk premium associated with Stock A, RPA.

d

The part of a security's risk associated with economic factors that affect all firms to some extent is known as the _____. a. diversifiable risk b. unsystematic risk c. stand-alone risk d. market risk e. business risk

d

The risk-free rate of return is 4 percent, and the market return is 10 percent. The betas of Stocks A, B, C, D, and E are 0.85, 0.95, 1.20, 1.35, and 0.5, respectively. The expected rates of return for Stocks A, B, C, D, and E are 8 percent, 9 percent, 10 percent, 14 percent, and 6 percent, respectively. Which stock should a rational investor purchase? a. A b. B c. C d. D e. E

d

The risk-free rate of return is 5 percent, and the market return is 10 percent. The betas of Stocks A, B, C, D, and E are 0.85, 0.95, 1.20, 1.35, and 0.5, respectively. The expected rates of return for Stocks A, B, C, D, and E are 8 percent, 9 percent, 10 percent, 14 percent, and 6 percent, respectively. Which stock should a rational investor purchase? a. A b. B c. C d. D e. E

d

Which of the following statements about correlation is correct? a. If the returns from two stocks are perfectly positively correlated and the two stocks have equal variance, an equally weighted portfolio of the two stocks will have a variance that is less than that of the individual stocks. b. If a stock has a negative correlation with market, its systematic risk is more than the market risk. c. Stocks that have correlation coefficients equal to zero will have minimum diversification benefits. d. The weaker the positive correlation two stocks exhibit, the more risk can be reduced when they are combined in a portfolio. e. Risk is reduced when positively-related stocks are combined to form portfolios, especially when the correlation coefficients are equal to +1.

d

According to the capital asset pricing model (CAPM), _____. a. investors should expect to be rewarded for the total risk associated with an individual investment, which is measured by the standard deviation of returns on the investment b. investors should expect to be rewarded for only the unsystematic risk associated with an individual investment, which is measured by the standard deviation of returns c. investors should expect to be rewarded only for the systematic risk associated with an individual investment, which is measured by the standard deviation of returns d. investors should expect to be rewarded for only the unsystematic risk associated with an individual investment, which is measured by the beta coefficient e. investors should expect to be rewarded for only the systematic risk associated with an individual investment, which is measured by the beta coefficient

e

If the standard deviation of returns from an investment is zero, then: a. the risk associated with the investment is more than that of the investments that provide risk-free return. b. the expected return from the investment is higher than that of those investments whose standard deviation is greater than zero. c. the scatter of the possible outcome from the investment is high and its investors demand higher return. d. the scatter of the possible outcome from the investment is low and its investors demand higher return. e. there is no risk associated with the investment; that is, the investment is risk free, because there is only one possible payoff.

e

The Security Market Line (SML) relates the risks of individual securities to their required rate of return. If investors conclude that the inflation rate is going to increase, which of the following change would occur? a. The market risk premium will increase. b. The beta of a stock will increase. c. The slope of the SML will become steeper. d. The standard deviation of a stock will increase. e. The required returns on all stocks will increase.

e

The risk-free rate of return is 5 percent, and the market return is 8 percent. The betas of Stocks A, B, C, D, and E are 0.75, 0.50, 0.25, 1.50, and 1.25, respectively. The expected rates of return for Stocks A, B, C, D, and E are 8 percent, 6.5 percent, 7 percent, 11 percent, and 7 percent, respectively. Suppose an investor holds all of these stocks in a single portfolio. Based on the information given here, if the investor wants to sell one of the stocks so that only four stocks remain in the portfolio, which stock should be sold? a. Stock A b. Stock B c. Stock C d. Stock D e. Stock E

e