Finance Chapter 6 Test

company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities

true

variation in the rate of return of an investment is a measure of the riskiness of that investment

true

as the required rate of return of an investment decreases, the market price of the investment decreases

true

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's 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. risk resulting from uncertainty regarding a possible strike against Ford III. risk resulting from an expensive recall of a Ford product

define systematic and unsystematic risk. what method is used to measure a firm's market risk?

Systematic risk are changes in the general economy that effect everybody. Systematic risk cannot be eliminated by diversification. Unsystematic risk effects a company/firm. Unsystematic risk can generally be eliminated by diversification. Standard deviation is used to measure a firm's market risk.

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

U.S. Treasury bills

a typical measure for the risk-free rate of return is the

U.S. treasury bill rate

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

fase

what is diversifying among different kinds of assets known as?

asset allocation

If we are able to fully diversify, what is the appropriate measure of risk to use?

beta

the appropriate measure for risk accouting to the capital asset pricing model is

beta

portfolio risk is typically measured by __________, while the risk of a single investment is measured by __________.

beta; standard deviation

the relevant variable a financial manager uses to measure return is

cash flows

of the following different types of securities, which is typically considered most risky?

common stocks of small companies

accounting profits is the most relevant variable the financial manager uses to measure returns

false

asset allocation is not recommended by financial planners because mixing different types of assets, such as stocks with bonds, makes it more difficult to track performance and adjust portfolios to changing with market conditions

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

historically, investments with the highest returns have the lowest standard deviations because investors do not like risk

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 characteristic line for any well-diversified portfolio is horizontal

false

the market reward the patient investor, for the period between 1926 and 2016, there has never been a time when an investor lost money if she had an all-large-stock portfolio for ten years

false

the risk-return trade-off that investors face on a day-to-day basis is based on realized rates of return because expected returns involve too much uncertainty

false

an all-stock portfolio is more risky than a portfolio consisting of all bonds

true

changes in the general economy, like changes in interest rates or tax laws, represent what type of risk?

market risk

the capital asset pricing model

provides a risk-return trade-off in which risk is measured in terms of beta

how can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?

purchase a variety of securities; i.e., diversify

how is risk defined?

risk is the variability of a return from an investment

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

the category of securities with the highest historical risk premium is

small company stocks

what is the name given to the equation that financial managers use to measure an investor's required rate of return?

the capital asset pricing model

a security with a beta of one has a required rate of return equal to the overall market rate of return

true