Finance 300 Chapter 5 Quiz
The relevant risk to an investor is that portion of the variability of returns that cannot be diversified away
True
Total risk equals systematic risk plus unsystematic risk
True
As the required rate of return of an investment decreases, the market price of the investment decreases
False
A security with a beta of one has a required rate of return equal to the overall market rate of return
True
A stock with a beta of 1.4 has 40% more variability in returns than the average stock
True
According to the CAPM, for each unit of beta, an asset's required rate of return increases by the market's risk premium
True
An all-stock portfolio is more risky than a portfolio consisting of all bonds
True
The realized rate of return, or holding period return, is equal to the holding period dollar gain divided by the price at the beginning of the period
True
The slope of the characteristic line of a security is that security's beta
True
The beta of a T−bill is zero
True
An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%
False
A rational investor will always prefer an investment with a lower standard deviation of returns, because such investments are less risky
False
Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value
False
Because risk is measured by variability of returns, how long we hold our investments does not matter very much when it comes to reducing risk
False
Cash flows is the most relevant variable to measure the returns on debt instruments, while GAAP net income is the most relevant variable to measure the returns on common stock
False
Due to strict stock market controls, the most a stock's value can drop in one trading day is 5%
False
Portfolio performance is determined mainly by stock selection and market timing, with less emphasis on asset allocation
False
Proper diversification generally results in the elimination of risk
False
The market rewards the patient investor, for the period between 1926 and 2016, there has never been a time when an investor lost money if she held an all−large−stock portfolio for ten years
False
The S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate
False
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.
II and III
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
Investment A if A and B are of equal risk
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?
Lake Tours is more likely to have negative returns than Rogue Rec
Which of the following is/are true? A. Two points on the Characteristic Line are the T−bill and the market portfolio. B. The greater the total risk of an asset, the greater the expected return. C. All securities have a beta between 0 and 1. D. Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.
Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks
Which of the following statements is MOST correct concerning diversification and risk?
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
Diversifying among different kinds of assets is called asset allocation
True
Small company stocks have historically had higher average annual returns than large company stocks, and also a higher risk premium
True
The T−bill return is used in the CAPM model as the risk−free rate
True
What is diversifying among different kinds of assets known as?
asset allocation
Of the following, which differs in meaning from the other three?
asset-unique risk
The appropriate measure for risk according to the capital asset pricing model is
beta
Which of the following measures the average relationship between a stock's returns and the market's returns?
beta coefficient
Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________.
beta; standard deviation
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?
common stock of small firms
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,
for a well−diversified investor, Friendly is less risky than Robo−Tech
The capital asset pricing model
provides a risk−return trade−off in which risk is measured in terms of beta
The category of securities with the highest historical risk premium is
small company stocks
If the beta for stock A equals zero, then
stock A's required return is equal to the risk−free rate of return
A stock's beta is a measure of its
systematic risk
Which of the following is the slope of the security market line?
the market risk premium
Beginning with an investment in one company's securities, as we add securities of other companies to our portfolio, which type of risk declines?
unsystematic risk
Which of the following types of risk is diversifiable?
unsystematic, or company−unique risk