FIN QUIZ 2

. Which one of the following is the slope of the security market line?

market risk premium

Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else constant?

A decrease in the risk-free rate given a security beta of 1.06

Which one of the following statements is correct?

An underpriced security will plot above the security market line

Which one of the following statements is correct? A. A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0, B. Any portfolio that is correctly valued will have a beta of 1.0. C. A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a security market line graph. D. A risk-free security plots at the origin on a security market line graph. E. An underpriced security will plot above the security market line.

An underpriced security will plot above the security market line

Which one of the following statements related to the security market line is correct? A. An underpriced security will plot below the security market line. B. A security with a beta of 1.54 will plot on the security market line if it is correctly priced. C. A portfolio with a beta of 0.93 will plot to the right of the overall market. D. A security with a beta of 0.99 will plot above the security market line if it is correctly priced. E. A risk-free security will plot at the origin.

B. A security with a beta of 1.54 will plot on the security market line if it is correctly priced.

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?

Beta coefficient

The capital asset pricing model:

Considers the time value of money

Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

Diversification

Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?

Expected return

The security market line is a linear function that is graphed by plotting data points based on the relationship between which two of the following variables?

Expected return and beta

The security market line is defined as a positively sloped straight line that displays the relationship between the:

Expected return and beta of either a security or a portfolio

Which one of the following best describes a portfolio?

Group of assets held by an investor

The expected return on a security depends on which of the following? I. Risk-free rate of return II. Amount of the security's unique risk III. Market rate of return IV. Standard deviation of returns

I. and III.

Which one of the following statements is correct? A. The risk premium on a risk-free security is generally considered to be 1 percent. B. The expected rate of return on any security, given multiple states of the economy, must be positive. C. There is an inverse relationship between the level of risk and the risk premium given a risky security. D. If a risky security is correctly priced, its expected risk premium will be positive. E. If a risky security is priced correctly, it will have an expected return equal to the risk-free rate.

If a risky security is correctly priced, its expected risk premium will be positive.

The addition of a risky security to a fully diversified portfolio:

May or may not affect the portfolio beta

Systematic risk is:

Measured by beta

Which one of the following describes systemic risk?

Risk that affect a large number of assets

Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?

Statement by a firm that it has just discovered a manufacturing defect and is recalling its product

The risk premium for an individual security is based on which one of the following types of risk?

Systematic

You are assigned the task of computing the expected return on a portfolio containing several individual stocks. Which one of the following statements is correct concerning this task?

The summation of the return deviation from the portfolio expected return for each economic state must equal zero.

Which statement is true?

The weight of the securities held in any portfolio must equal 1.0

Portfolio diversification eliminates which one of the following?

Unsystematic Risk

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

Warehouse fire

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

cost of capital

Standard deviation measures --- risk while beta measures --- risk.

total; systematic

Portfolio diversification eliminates:

unsystematic risk

Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security?

zero

Bama Entertainment has common stock with a beta of 1.46. The market risk premium is 9.3% and the risk free rate is 4.6%. What is the expected return on this stock?

18.03

Which one of the following is an example of systematic risk?

Increase in consumption created by a reduction in personal tax rates

The systematic risk principle states that the expected return on a risky asset depends only on which one of the following?

Market risk

Which one of the following portfolios will have a beta of zero?

a portfolio comprised solely of US Treasury bills