Business Finance Chapter 13 Quiz

Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification

A ________ is the market's measure of systematic risk

beta of 1

The most important reason to diversify a portfolio is to:

eliminate asset-specific risk

The market risk premium equals the:

market rate of return minus the risk-free rate of return

The majority of the diversifiable risk in a portfolio can be eliminated by owning as few as _________ stocks

10

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn a 7.2 percent next year. The 7.2 percent figure is called the:

Expected Return

Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium?

Stock with a beta of 1.24

When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the:

market value of the investment in each stock

Given a well-diversified stock portfolio, the variance of the portfolio:

may be less than the variance of the least risky stock in the portfolio

________ risk is measured using the standard deviation

Total

Of the options listed below, which is the best example of unsystematic risk?

A national decrease in consumer spending on entertainment

Of the options listed below, which is the best measure of systematic risk?

Beta

Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n):

Portfolio

An investor wants to reduce the unsystematic risk in her portfolio. Which of the following actions is least likely to do so?

Reducing the number of stocks held in her stock portfolio

With respect to unexpected returns, which one of the following statements is accurate?

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

The _________ explains the relationship between the expected return on a security and the level of that security's systematic risk

capital asset pricing model (CAPM)

To calculate the expected risk premium on a stock, one must subtract the _________ from the stock's expected return

risk-free rate