Finance Chapter 13

I. can never exceed the expected return of the best performing security in the portfolio. II. must be equal to or greater than the expected return of the worst performing security in the portfolio. III. is independent of the unsystematic risks of the individual securities held in the portfolio.

I, II and III only

Which of the following statements are correct concerning diversifiable risks? I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry.

I, II, and III

The capital asset pricing model (CAPM) assumes which of the following? I. a risk-free asset has no systematic risk. II. beta is a reliable estimate of total risk. IV. the market rate of return can be approximated.

I, III, IV

At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-freeasset? II. asset's beta IV. market risk premium

II and IV only

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

a. investors panic causing security prices around the globe to fall precipitously

The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock:

a. is underpriced

Which one of the following is least apt to reduce the unsystematic risk of a portfolio?

a. reducing the number of stocks held in the portfolio

Which one of the following statements is correct concerning a portfolio beta?

b. A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.

Systematic risk is measured by:

b. beta

According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

b. market risk premium and the amount of systematic risk inherent inthe security.

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments?

b. portfolio

The expected risk premium on a stock is equal to the expected return on the stock minus the:

b. risk-free rate

Which one of the following risks is irrelevant to a well-diversified investor?

b. unsystematic risk

Which one of the following statements related to risk is correct?

c. The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.

Which one of the following events would be included in the expected return on Sussex stock?

c. This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated.

A stock with an actual return that lies above the security market line has:

c. a higher return than expected for the level of risk assumed.

The primary purpose of portfolio diversification is to:

c. eliminate asset-specific risk.

Which one of the following is most directly affected by the level of systematic risk in a security?

c. expected rate of return

The expected return on a stock computed using economic probabilities is:

d. a mathematical expectation based on a weighted average and not anactual anticipated outcome

Which one of the following statements is correct?

e. Over time, the average unexpected return will be zero.

Which one of the following statements related to unexpected returns is correct?

e. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

Which one of the following indicates a portfolio is being effectively diversified?

e. a decrease in the portfolio standard deviation

The standard deviation of a portfolio:

e. can be less than the standard deviation of the least risky security in the portfolio.

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

e. consumer spending on entertainment decreased nationally

Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:

e. cost of capital

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?

25

The systematic risk of the market is measured by:

a. a beta of 1.0

Which one of the following is the best example of a diversifiable risk?

d. a firm's sales decrease

The standard deviation of a portfolio:

e. can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

The expected return on a portfolio considers which of the following factors? I. percentage of the portfolio invested in each individual security II. projected states of the economy III. the performance of each security given various economic states IV. probability of occurrence for each state of the economy

ALL

Which of the following statements concerning risk are correct? I. Nondiversifiable risk is measured by beta. III. Systematic risk is another name for nondiversifiable risk.

I and III

Which of the following are examples of diversifiable risk? I. earthquake damages an entire town IV. toymakers are required to improve their safety standards

I and IV only