Finance 3312 Exam 2

Which of the following are needed to describe the distribution of stock returns?

-Standard deviation of returns -Mean return

Which of the following statements is (are) true about variance?

-Variance is a measure of the squared deviations of a security's return from its expected return. -Standard deviation is the square root of variance.

By definition, what is the beta of the average asset equal to?

1

If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?

An efficient market reaction

The capital asset pricing model is the equation of the security market line showing the relationship between expected return and

Beta

The amount of systematic risk presents in a particular risky asset relative to that in an average risky asset is measured by the

Beta coefficient

the difference between the rate of return on a risky asset and the risk-free rate of return.

Excess Return

Labor strikes are an example of systematic risk.

False

Portfolio weights can be defined as the dollars invested in each asset.

False

The average return of a given period is typically not a good estimate of the returns over that same period.

False

An efficient market is one in which any change in available information will be reflected in the company's stock price

Immediately

If the dispersion of returns on a particular security is very spread out from the security's mean return, the security

Is highly risk

What does the security market line depict?

It is a graphical depiction of the capital asset pricing model.

What is unsystematic risk?

It is a risk that affects a single asset or a small group of assets

what is systematic risk?

It is a risk that pertains to a large number of assets.

What is a risk premium?

It is additional compensation for taking risk, over and above the risk-free rate.

What is an uncertain or risky return?

It is the portion of return that depends on information that is currently unknown.

What is the definition of expected return?

It is the return that an investor expects to earn on a risky asset in the future

Which type of stock price adjustment time path occurs when there is a bubble (price run up) in the path followed by a decline after the market receives information about the stock?

Overreaction and correction

can be interpreted as the reward for bearing risk.

Risk premium

The standard deviation is the ______ of the variance.

Square root

the most commonly used measures of volatility.

Standard deviation

____________ risk is the only risk important to the well diversified investor.

Systematic

What is the slope of the security market line (SML)?

The market-risk premium

What is the intercept of the security market line (SML)?

The risk-free rate

According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero?

The risk-free rate of return

What is the equation for total return?

Total Return = Expected Return + Unexpected Return

According to the capital asset pricing model (CAPM), the risk-free rate of return is the expected return on a security with a beta of zero.

True

Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio declines.

True

Market risk and unsystematic risk are the two components of risky return in the total return equation.

True

The expected return is the return that an investor expects to earn on a risky asset in the future.

True

The larger the variance of standard deviation is, the more spread out the returns will be.

True

The risk premium can be interpreted as a reward for bearing risk

True

If you wish to create a portfolio of stocks, what is the required minimum number of stocks?

You must invest in stocks of more than one corporation.

What is the Reward-to-Risk Ratio?

[E(RA) - Rf]/βA

In an efficient market ______ investments have a _____ NPV.

all; zero

When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market:

already knew about most of the news item

The average return on the stock market can be used to

compare stock returns with the returns on other securities

The average return on the stock market can be used to ___.

compare stock returns with the returns on other securities

What two factors determine a stock's total return?

expected return and unexpected return

In an efficient market, firms should expect to receive ______ value for securities they sell.

fair

An efficient market is one that fully reflects all available ______.

information

Stock prices fluctuate from day to day because of:

information flow

Systematic risk is also called ______________ risk.

market

If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be:

positive

The security market line (SML) shows that the relationship between a security's expected return and its beta is ______.

positive

If an asset has a reward-to-risk ratio of 6.0%, that means it has a __________ of 6.0% per unit of _______.

risk premium; systematic risk

The true risk of any investment comes from _______________ .

surprises

A portfolio can be described by its portfolio weights which are defined as _____________________.

the percentage of dollars invested in each asset

The square of the standard deviation is equal to the ____.

variance

The efficient markets hypothesis contends that _____________ capital markets such as the NYSE are efficient.

well-organized

What is the beta of the risk-free asset?

zero

To get the average return, the yearly returns are summed and then divided by the number of returns.

True

The square of the standard deviation is equal to the

Variance