Finance Chapter 8: Risk and Rates of Return

Which of the following statements best describes what would be expected to happen as you randomly add stocks to your portfolio? A ) Adding more stocks to your portfolio reduces the portfolios company-specific risk. B ) Adding more stocks to your portfolio reduces the beta of your portfolio. C ) Adding more stocks to your portfolio increases the portfolios expected return. D ) All of the statements above are correct.

A ) Adding more stocks to your portfolio reduces the portfolios company-specific risk.

What is a measure of market risk which is the extent to which the returns on a stock move with the market? A ) Beta B ) Standard deviation C ) Coefficient of variation D ) Expected return

A ) Beta

Expressing investment results as rates of return addresses: A ) scale of investment problems. B ) timing of return problems. C ) both a and b D ) neither a nor b

C ) both a and b

Risk can be analyzed: A ) only on a stand-alone basis B ) only on a portfolio basis. C ) both on a stand-alone and portfolio basis. D ) neither of the above is correct. Correct. Risk can be analyzed on a stand-alone or portfolio basis. Stand-alone risk considers the asset in isolation

C ) both on a stand-alone and portfolio basis.

If investment return is stated in dollars, to make a decision regarding return adequacy you also need to know: A ) only the scale of investment. B ) only the timing of the return C ) both the scale of investment and the timing of the return D ) neither of the above

C ) both the scale of investment and the timing of the return

Which of the following statements is correct? A ) It is possible to have a situation in which the market risk of a single stock is less than the market risk of a portfolio of stocks. B ) The market risk premium will increase if, on average, market participants become more risk averse. C ) If you selected a group of stocks whose returns are perfectly positively correlated, then you could end up with a portfolio for which none of the unsystematic risk is diversified away. D ) All of the statements above are correct.

D ) All of the statements above are correct.

Which of the following statements are correct? A ) diversifiable risk can be eliminated by proper diversification B ) market risk cannot be eliminated by proper diversification C ) the market portfolio has no risk D ) a and b are correct

D ) a and b are correct

The coefficient of variation: A ) is a stand-alone risk measure B ) provides an idea of how far above or below the expected value the actual value is likely to be C ) shows the risk per unit of return D ) a and c are correct

D ) a and c are correct

Risk averse individuals will: A ) always choose the lowest risk alternative. B ) always choose the highest return alternative C ) always ignore risk when making choices D ) neither of the above statements is correct

D ) neither of the above statements is correct

The CAPM says that the relevant risk of an individual asset is its: A ) stand-alone risk. B ) expected return C ) realized return D ) portfolio or market risk

D ) portfolio or market risk

The CAPM says that the relevant risk of an individual asset is its:

portfolio or market risk

Empirical studies show that the CAPM is completely valid. A ) True B ) False

B ) False

For virtually all portfolios, the riskiness of the portfolio is a weighted average of the riskiness of the individual assets in the portfolio with the weights equal to the fraction of the total portfolio funds invested in each asset. A ) True B ) False

B ) False

Investment risk refers to the chance that some unfavorable event will occur. A ) True B ) False

B ) False

The expected return on an asset is: A ) is generally not a weighted average of the possible returns with the weights equal to the probability that each possible return will occur. B ) a weighted average of the possible returns with the weights equal to the probability that each possible return will occur. C ) an average of the possible returns without regard to the probability that each possible return will occur. D ) neither of the above statements is correct

B ) a weighted average of the possible returns with the weights equal to the probability that each possible return will occur.

What is a measure of market risk which is the extent to which the returns on a stock move with the market?

Beta

True or False: Empirical studies show that the CAPM is completely valid.

False

True or False: For virtually all portfolios, the riskiness of the portfolio is a weighted average of the riskiness of the individual assets in the portfolio with the weights equal to the fraction of the total portfolio funds invested in each asset.

False

True or False: Investment risk refers only to the chance that some unfavorable event will occur.

False

If investment return is stated in dollars, to make a decision regarding return adequacy you also need to know:

both the scale of investment and the timing of the return

The coefficient of variation:

is a stand-alone risk measure; measures risk per unit of return

For a portfolio, the weighted average of the expected returns for the individual assets in the portfolio with the weights equal to the fraction of the total portfolio funds invested in each asset is called the:

the portfolio expected return