FIn 301 ch6 conceptual only--ME
35) A stock's beta is a measure of its A) unsystematic risk. B) systematic risk. C) company-unique risk. D) diversifiable risk.
Answer: B
32) Most stocks have betas between A) -1.00 and 1.00. B) 0.00 and 1.00. C) 0.60 and 1.60. D) 1.00 and 2.00.
Answer: C
13) A typical measure for the risk-free rate of return is the A) U.S. Treasury bill rate. B) prime lending rate. C) money-market rate. D) short-term AAA-rated bond rate.
Answer: A
16) Stock A has a beta of 1.2 and a standard deviation of returns of 18%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the market risk premium increases, then A) the required return on stock B will increase more than the required return on stock A. B) the required returns on stocks A and B will both increase by the same amount. C) the required returns on stocks A and B will remain the same. D) the required return on stock A will increase more than the required return on stock B.
Answer: A
25) Which of the following statements is MOST correct concerning diversification and risk? A) Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry. B) Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk. C) Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification. D) Proper diversification generally results in the elimination of risk.
Answer: A
30) You are considering buying some stock in Continental Grain. Which of the following are examples of non-diversifiable risks? I. Risk resulting from a general decline in the stock market. II. Risk resulting from a possible increase in income taxes. III. Risk resulting from an explosion in a grain elevator owned by Continental. IV. Risk resulting from a pending lawsuit against Continental. A) I and II B) III and IV C) I only D) II, III, and IV
Answer: A
30) You determine that LMN common stock has an expected return of 24%. LMN has a Beta of 1.5. The risk-free rate is 5%, and the market expected return is 15%. Which of the following is most likely to happen? A) You and other investors will buy up LMN stock and its price will rise. B) You and other investors will sell LMN stock and its return will fall. C) You and other investors will buy up LMN stock and its return will rise. D) You and other investors will sell LMN stock and its price will fall.
Answer: A
37) Which of the following is/are true? A) Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks. B) Two points on the Characteristic Line are the T-bill and the market portfolio. C) The greater the total risk of an asset, the greater the expected return. D) All securities have a beta between 0 and 1.
Answer: A
45) Which of the following types of risk is diversifiable? A) unsystematic, or company-unique risk B) betagenic, or ecocentric risk C) systematic risk D) market risk
Answer: A
If you are a risk-averse investor, which one is the better choice? A) Security A B) Security B C) Either security would be acceptable. D) Cannot be determined with information given
Answer: A
12) The capital asset pricing model A) provides a risk-return trade-off in which risk is measured in terms of the market volatility. B) provides a risk-return trade-off in which risk is measured in terms of beta. C) measures risk as the coefficient of variation between security and market rates of return. D) depicts the total risk of a security.
Answer: B
14) If the beta for stock A equals zero, then A) stock A's required return is equal to the required return on the market portfolio. B) stock A's required return is equal to the risk-free rate of return. C) stock A has a guaranteed return. D) stock A's required return is greater than the required return on the market portfolio.
Answer: B
17) Stock A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the risk-free rate of return increases and the market risk premium remains constant, then A) the required return on stock B will increase more than the required return on stock A. B) the required returns on stocks A and B will both increase by the same amount. C) the required returns on stocks A and B will not change. D) the required return on stock A will increase more than the required return on stock B.
Answer: B
26) Which of the following statements is MOST correct concerning diversification and risk? A) Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio. B) Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category. C) Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated. D) Asset allocation is important for pension funds but not for individual investors.
Answer: B
33) A well-diversified portfolio includes investments in 50 securities. The portfolio's systematic risk is likely to be about A) 50% of the total risk. B) 40% of the total risk. C) 25% of the total risk. D) zero because risk is eliminated with a portfolio of 50 securities or more.
Answer: B
39) What is the name given to the equation that financial managers use to measure an investor's required rate of return? A) the standard deviation B) the capital asset pricing model C) the coefficient of variation D) the MIRR
Answer: B
54) Changes in the general economy, like changes in interest rates or tax laws, represent what type of risk? A) company-unique risk B) market risk C) unsystematic risk D) diversifiable risk
Answer: B
7) The category of securities with the highest historical risk premium is A) large company stocks. B) small company stocks. C) government bonds. D) small company corporate bonds.
Answer: B
8) If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the least risky investment? A) common stock of large firms B) U.S. Treasury bills C) common stock of small firms D) long-term government bonds
Answer: B
11) Rogue Recreation, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 5%, while Lake Tours, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 15%. Which of the following is true? A) Lake Tours' investors are not being adequately compensated for relevant risk. B) Rogue Rec is likely to experience returns larger than those of Lake Tours. C) Lake Tours is more likely to have negative returns than Rogue Rec. D) Rational investors will prefer Lake Tours, Inc. over Rogue Recreation, Inc.
Answer: C
11) The relevant variable a financial manager uses to measure returns is A) net income determined using generally accepted accounting principles. B) earnings per share minus dividends per share. C) cash flows. D) dividends.
Answer: C
20) Based on the security market line, Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%. Robo-Tech has a standard deviation of returns of 18%. Therefore, A) Friendly must have a standard deviation of returns of less than 18% because Friendly is less risky than Robo-Tech. B) all rational investors will prefer Friendly over Robo-Tech. C) for a well-diversified investor, Friendly is less risky than Robo-Tech. D) the beta for Friendly must be greater than the beta for Robo-Tech because Friendly is the better buy for a risk-averse investor.
Answer: C
38) If we are able to fully diversify, what is the appropriate measure of risk to use? A) expected return B) standard deviation C) beta D) risk-free rate of return
Answer: C
41) The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the A) stock's beta. B) investor's risk premium. C) investor's required rate of return. D) risk-free rate.
Answer: C
42) Assume that you expect to hold a $40,000 investment for one year. It is forecasted to have a year end value of $42,000 with a 30% probability; a year end value of $48,000 with a 45% probability; and a year end value of $60,000 with a 25% probability. What is the expected holding period return for this investment? A) 50% B) 25% C) 23% D) 18%
Answer: C
43) Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________. A) standard deviation; beta B) security market line; standard deviation C) beta; standard deviation D) beta; slope of the characteristic line
Answer: C
44) How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return? A) Wait until the stock market rises. B) Increase the amount of money invested in the portfolio. C) Purchase a variety of securities; i.e., diversify. D) Purchase stocks that have exceptionally high standard deviations.
Answer: C
5) Investment A has an expected return of 15% per year, while Investment B has an expected return of 12% per year. A rational investor will choose A) Investment A because of the higher expected return. B) Investment B because a lower return means lower risk. C) Investment A if A and B are of equal risk. D) Investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B.
Answer: C
51) What is diversifying among different kinds of assets known as? A) portfolio funding B) capital asset classification C) asset allocation D) multi-diversification
Answer: C
9) If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the highest risk investment? A) common stock of large firms B) U.S. Treasury bills C) common stock of small firms D) long-term government bonds
Answer: C
26) The appropriate measure for risk according to the capital asset pricing model is A) the standard deviation of a firm's cash flows. B) alpha. C) the standard deviation of a firm's stock returns. D) beta.
Answer: D
29) You are considering investing in Ford Motor Company. Which of the following are examples of diversifiable risk? I. Risk resulting from possibility of a stock market crash. II. Risk resulting from uncertainty regarding a possible strike against Ford. III. Risk resulting from an expensive recall of a Ford product. IV. Risk resulting from interest rates decreasing. A) I only B) I and IV C) I, II, III, IV D) II, III
Answer: D
31) Of the following, which differs in meaning from the other three? A) systematic risk B) market risk C) undiversifiable risk D) asset-unique risk
Answer: D
34) Beta is a statistical measure of A) unsystematic risk. B) total risk. C) the standard deviation. D) the relationship between an investment's returns and the market return.
Answer: D
35) The beta of ABC Co. stock is the slope of A) the security market line. B) the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills. C) the arbitrage pricing line. D) the characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period.
Answer: D
38) Which of the following is the slope of the security market line? A) beta B) one C) It varies, and it is steeper for riskier securities. D) the market risk premium
Answer: D
41) Beginning with an investment in one company's securities, as we add securities of other companies to our portfolio, which type of risk declines? A) systematic risk B) market risk C) non-diversifiable risk D) unsystematic risk
Answer: D
47) Which of the following measures the average relationship between a stock's returns and the market's returns? A) coefficient of validation B) standard deviation C) geometric regression D) beta coefficient
Answer: D
50) Which of the following statements is MOST correct regarding beta? A) Beta must be calculated using at least 5 years of monthly returns data to be accurate. B) Beta can only be measured properly using daily returns. C) Beta for a particular company remains constant over time. D) Even professionals may not agree on the measurement of beta.
Answer: D
52) Investment A has an expected return of 14% with a standard deviation of 4%, while investment B has an expected return of 20% with a standard deviation of 9%. Therefore, A) a risk averse investor will definitely select investment A because the standard deviation is lower. B) a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A ($14% - 4%). C) it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A's, but the return is not twice as big. D) rational investors could pick either A or B, depending on their level of risk aversion.
Answer: D
6) Of the following different types of securities, which is typically considered most risky? A) long-term corporate bonds B) long-term government bonds C) common stocks of large companies D) common stocks of small companies
Answer: D
