BA3303 Test 7 Review

Diversifying among different kinds of assets is called asset allocation.

True

Unique security risk can be eliminated from an​ investor's portfolio through diversification.

True

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

True

Business risk leads to _______________ in a firm's operating income over time

Variation

The category of securities with the highest historical risk premium is

Small company stocks

The square root of the variance is also known as _____________________.

Standard Deviation

The Capital Asset Pricing Model (CAPM) states that the expected return on an asset depends on

its level of systematic risk.

In comparing the deviations of returns, which one of the following assets has historically had the largest standard deviation of annual returns?

large company stocks

What kind of portfolio contains all risky assets?

market portfolio

The market risk premium is measured​ by:

market return less​ risk-free rate

A positive correlation ___________________________.

occurs when two time series tend to move in conjunction with each other.

A _______________________ is a market in which all publicly available information, both current and past, is reflected in asset prices.

semi-strong form efficient market

The total risk of a portfolio can be measured by its ________________.

variance or the standard deviation of its returns

An all−stock portfolio is more risky than a portfolio consisting of all bonds.

True

Which one of the following assets has historically had the highest average annual return?

A. large company stocks

Which of the following statements is MOST correct concerning diversification and​ risk?

Diversification is mainly achieved by the asset allocation​ decision, not the selection of individual securities within each asset category.

The monthly (dollar) return equals the stock price at the end of the month minus the stock price at the beginning of the month plus

Dividends

A rational investor will always prefer an investment with a lower standard deviation of​ returns, because such investments are less risky.

False

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

False

Most non-diversifiable risk can be eliminated by creating a portfolio of around 30 stocks.

False

Proper diversification generally results in the elimination of risk.

False

Financial risk occurs because _____________________ do no change when operating income rises or falls.

Fixed interest expenses

1. You are considering buying some stock in Boeing. Which of the following are examples of non-diversifiable risks?

I. Risk resulting from a general decline in the stock market. II. Risk resulting from a possible increase in corporate income taxes.

Which of the following is NOT an example of market risk or systematic​ risk?

Management Risk

A boom economy, normal conditions, and recession all include the three scenarios that are found in the state of _______________.

Nature

Rather than using a limited number of states of nature with specific values for inflation and economic growth, _______________ allows many different combinations of the important variables that may determine stock returns.

Simulation

A market in which prices reflect all public and private knowledge including past and current information is called a _________________________.

Strong efficient market

explain what it says about risk tolerance.

The degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio.

Small company stocks have historically had higher average annual returns than large company​ stocks, and also a higher risk premium.

True

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

True

Which of the following is not a component of the required rate of return?

appropriate discount rate

Securities prices change over time. Therefore, any change in price must reflect a change in ________________.

expected cash flows, the discount rate, or both

Unsystematic risk is also known as:

firm-specific risk

Financial risk occurs because _____________________ do no change when operating income rises or falls.

fixed interest expenses

Much of the long standing regulations in U.S. markets resulted from the situation surrounding __________________________.

the stock market crash of 1929.