FIN 300 Ch 13 Learn Smart- TRAGER
The systematic portion The unsystematic portion
Select all that apply What are the two components of unexpected return (U) in the total return equation? The expected return portion The expected risk portion The systematic portion The unsystematic portion
Expected
The ____ return is the return that an investor will probably earn on a risky asset in the adventure.
systematic
The _____ risk principle argues that the market does not reward unnecessary risk that is taken on by the investor
decline
The increase in the number of stocks in a portfolio results in a(n) ____ in the avg SD of annial portfolio returns
The expected return on the market.
What is the expected return on a security with beta of 1? 0% The risk-free rate of return. 1%. The expected return on the market.
isn't
The variance of a portfolio ____ (is/isnt) generally a simple combination of the variances of hte assets in the portfolio.
The expected return on the market.
What is the expected return on a security with beta of 1? The expected return on the market. The risk-free rate of return. 0% 1%.
already knew about most of the news item
When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market _____. doesn't pay attention to news items reversed its position based on the news already knew about most of the news item
decrease
When new securities are added to a portfolio, the total unsystematic risk portion of that portfolio is most likely to _____. decrease remain constant increase
systematic or market risk
Which type of risk does not change as we add more securities to a portfolio?
Systematic risk
Which type of risk is unaffected by adding securities to a portfolio? Systematic risk Neither systematic nor unsystematic risk Both systematic and unsystematic risk Unsystematic risk
surprises unanticipated events
Select all that apply The risk of owning an asset comes from: surprises expectations unanticipated events forecasts
risk-free rate
What is the intercept of the security market line (SML)? The market-risk premium Beta The market rate of return The risk-free rate
False
rue or false: Systematic risk can be eliminated by diversification
false
True or false: A well-diversified portfolio will eliminate all risks.
Holding $100,000 investment in a combination of stocks and bonds Investing $100,000 in the stocks of 50 publicly traded corporations Investing $100,000 in a combination of U.S. and Asian stocks
Select all that apply Which of the following are examples of a portfolio? Holding $100,000 investment in a combination of stocks and bonds Investing $100,000 in the stocks of 50 publicly traded corporations Investing $100,000 in a combination of U.S. and Asian stocks Holding $100,000 in cash to buy after five years 100 shares of the best performing stock on the NYSE
1. Calc expected return 2. Determine the squared deviation from the expected return 3. Multiply each squared deviation by its probability 4. Result is its variance
Steps to variance
You must invest in stocks of more than one corporation.
If you wish to create a portfolio of stocks, what is the required minimum number of stocks? You must invest in the stocks of at least 30 corporations. You must invest in stocks of more than one corporation. You must invest in stocks of at least 10 corporations. You must invest in at least 2 stocks of 1 corporation.
Expected return on security = Risk-free rate + Beta × (Return on market - Risk-free rate)
What is the equation for the capital asset pricing model? Expected return on security = Beta ×(Return on market - Risk-free rate) Expected return on security = Risk-free rate + Return on market Expected return on security = Risk-free rate + Beta × Return on market Expected return on security = Risk-free rate + Beta × (Return on market - Risk-free rate)
Because the difference between the return on the market and the risk-free rate is likely to be positive
How can a positive relationship between the expected return on a security and its beta be justified? Because the difference between the return on the market and the risk-free rate is likely to be positive Because the difference between the return on the market and the risk-free rate is likely to be negative Because the value of beta is always positive Because the risk-free rate is equal to zero
Future rates of inflation Regulatory changes in tax rates
Select all that apply Which of the following are examples of systematic risk? Future rates of inflation Labour strikes Regulatory changes in tax rates An increase in competition in the industry
False
True or false: Systematic risk can be eliminated by diversification
10.9% 12.9%
Select all that apply The weighted average of the standard deviations of the assets in Portfolio C is 12.9%. Which of the following are possible values for the standard deviation of the portfolio? 10.9% 12.9% 14.9%
Labor strikes Changes in management
Select all that apply Which of the following are examples of unsystematic risk? Labor strikes Changes in management The expected rate of inflation next year Changes in the federal tax code
Unique Unsystematic Diversifiable
Select all that apply ______ risk is reduced as more securities are added to the portfolio Unique Market Unsystematic Diversifiable Systematic
squared
The first step to calculate the variances of the returns on two stocks is to determine the ____ deviations from the expected return
expected return on the market
What is the expected return on a security with beta of 1? The risk-free rate of return. 1%. 0% The expected return on the market.
The risk-free rate
What is the intercept of the security market line (SML) Beta The risk-free rate The market rate of return The market-risk premium
The risk-free rate of return
According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero? The market risk premium Zero The return on market The risk-free rate of return
Asset A
Assets A and B each have an expected return of 10 percent. Asset A has a standard deviation of 12 percent while Asset B has a standard deviation of 13 percent. Which asset would a rational investor choose? Asset B Neither Asset A nor B since they are both risky Asset A Either Asset A or B since they both offer the same expected return.
Asset A
Assets A and B each have an expected return of 10 percent. Asset A has a standard deviation of 12 percent while Asset B has a standard deviation of 13 percent. Which asset would a rational investor choose? Either Asset A or B since they both offer the same expected return. Asset A Neither Asset A nor B since they are both risky Asset B
Positive
Based on the capital asset pricing model (CAPM) there is generally ___ relationship between beta and the expected return on a security. a positive a negative no relationship
1
By definition, what is the beta of the average asset equal to? 2 0 1 between 0 and 1
declines
Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio _____. increases declines fluctuates randomly does not change
There is no relationship.
How are the unsystematic risks of two different companies in two different industries related? There is a positive relationship. There is a negative relationship. The relationship can be either positive or negative. There is no relationship.
The Fed's decision on interest rates at their meeting next week The outcome of an application currently pending with the Food and Drug Administration.
Select all that apply Which of the following are examples of information that may impact the risky return of a stock? The Fed's decision on interest rates at their meeting next week The trend in sales growth over the last 10 years. The outcome of an application currently pending with the Food and Drug Administration. Last year's net income as a percentage of sales and gross fixed assets.
Unsystematic Diversifiable Unique
Select all that apply ______ risk is reduced as more securities are added to the portfolio Systematic Unsystematic Diversifiable Unique Market
not change
Systematic risk will ____ when securities are added to a portfolio. Multiple choice question. decrease increase not change be eliminated
Variation
The ____ is the squared standard deviation
weight
The percentage of a portfolio's total value that is invested in a particular asset is the portfolio _____
the percentage of the total value that is invested in an asset
The portfolio weight is _____. always equal to 10 the percentage of the total value that is invested in an asset the amount of return versus the overall market the square root of the standard deviation
some
The principle of diversification tells us that spreading an investment across a number of assets will _____ of the risk. some all an insignificant portion almost none
unanticipated
The true risk of any investment is the _____ portion. unanticipated risk-free anticipated compounding
false
True or false: Systematic risk will impact all securities in every portfolio equally.
false
True or false: The process to calculate a portfolio's beta is opposite of the process to calculate a portfolio's expected return.
discount
When we ____ an annoucement or a news item, we say that is has less of an impact on price becuase the market already factored it in
discount
When we ____ an announcement or a news item, we say that is has less of an impact on price because market already factored in
Systematic, or market risk
Which one of the following types of risk is not reduced by diversification? Unsystematic risk Unique risk Neither systematic nor unsystematic risk is reduced Systematic, or market risk
decline
he increase in the number of stocks in a portfolio results in a(n) _____ in the avg SD of annual portfolio returns
variation
the ____ is the squared standard deviations
beta
the _____ coefficient is the amount of systematic risk present in a particular risky asset relative to that in an average asset.
Asset A
Asset A has an expected return of 17 percent and standard deviation of 5 percent. Asset B has an expected return of 15 percent and standard deviation of 5 percent. Which asset would a rational investor choose? Neither A or B since they are both risky Asset B Asset A or B since they both are equally risky Asset A
Because the difference between the return on the market and the risk-free rate is likely to be positive
How can a positive relationship between the expected return on a security and its beta be justified? Multiple choice question. Because the risk-free rate is equal to zero Because the value of beta is always positive Because the difference between the return on the market and the risk-free rate is likely to be positive Because the difference between the return on the market and the risk-free rate is likely to be negative
1
If a security's expected return is equal to the expected return on the market, its beta must be ____ 0 2 -2 -1 1
1
If a security's expected return is equal to the expected return on the market, its beta must be ____. Multiple choice question. 2 1 0 -1
0
If a security's expected return is equal to the risk-free rate of return, and the market-risk premium is greater than zero, what can you conclude about the value of the security's beta based on CAPM? 1 beta 0 -1
Positive
If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be _____. negative zero positive unimaginably large
The death of the CEO A hostile takeover attempt by a competitor
Select all that apply A firm faces many risks. Which of the following are examples of unsystematic risks faced by a firm? An increase in the dividend tax rate The death of the CEO A hostile takeover attempt by a competitor A change in the Federal Reserve's monetary policy
An increase in the corporate tax rate An increase in the Federal funds rate
Select all that apply A firm is exposed to both systematic and unsystematic risks. Which of the following are examples of systematic risks? A fire in a manufacturing plant An increase in the corporate tax rate An increase in the Federal funds rate Management turnover
A change in the yield on T-bills Federal reserve actions that affect the economy A strengthening of the country's currency
Select all that apply According to the CAPM, which of the following events would affect the return on a risky asset? A change in the yield on T-bills Federal reserve actions that affect the economy A strengthening of the country's currency A change in the company's leadership A fire in the company's plant
A hostile takeover attempt by a competitor The death of the CEO
Select all that apply A firm faces many risks. Which of the following are examples of unsystematic risks faced by a firm? An increase in the dividend tax rate A hostile takeover attempt by a competitor The death of the CEO A change in the Federal Reserve's monetary policy
A change in the yield on T-bills Federal reserve actions that affect the economy A strengthening of the country's currency
Select all that apply According to the CAPM, which of the following events would affect the return on a risky asset? A change in the yield on T-bills Federal reserve actions that affect the economy A change in the company's leadership A strengthening of the country's currency A fire in the company's plant
The expected return on the market The risk-free rate
Select all that apply What are the two components of the market risk premium? The expected return on the market The default spread Beta The risk-free rate
The unsystematic portion The systematic portion
Select all that apply What are the two components of unexpected return (U) in the total return equation? The unsystematic portion The expected return portion The expected risk portion The systematic portion
a portfolio's expected return
The calculation of a portfolio beta is similar to the calculation of _____. a portfolio's standard deviation a portfolio's expected return the value of a put option a portfolio's variance
Increases, increases The expected return on the market will increase if the risk-free rate increases or if the market risk premium increases. It is an increasing function of both.
The expected return on the market will increase if the risk-free rate _________ or if the market risk premium _____. dec, inc inc, inc dec, dec inc, dec
squared
The first step to calculate the variances of the returns on two stocks is to determine the _____ deviations from the expected return
Systematic
The principle of diversification tells us that, to a diversified investor, the only type of risk that matters is _____ (systematic/unsystematic) risk
unsystematic
The risk that affects a single asset or a small group of assets is ______ risk. inflation systematic unsystematic Treasury
0.00
The risk-free asset has a beta of _____. 0.75 0.00 1.00 3.00
pos
The security market line (SML) shows that the relationship between a security's expected return and its beta is ______. neg overrated pos insignificant
the square root of the variance
The standard deviation is ___. the square of the variance equal to the sum of deviations divided by the number of observations the square root of the variance equal to the sum of the deviations of actual returns from the average return
that are borne unnecessarily
The systematic risk principle argues that the market does not reward risks _____. that are borne unnecessarily that are dangerous that are systematic in any circumstances
isn't
The variance of a portfolio _____ (is/isn't generally a simple combo of the variances of the assets in the portfolio.
It is a graphical depiction of the capital asset pricing model. It shows the relationship between expected return and beta.
What does the security market line depict? Multiple choice question. It depicts the relationship between expected return and the standard deviation of returns. It depicts the relationship between the return on the S&P 500 and an individual security's return. It is a graphical depiction of the capital asset pricing model. It shows the relationship between expected return and beta. It depicts the relationship between systematic risk and unsystematic risk.
It is additional compensation for taking risk, over and above the risk-free rate.
What is a risk premium? It is additional compensation for taking risk, over and above the risk-free rate. It is a numerical estimate of beta. It is a fee charged to investors by the SEC that allows them to invest in risky securities. It is the return on risk-free securities.
It is the portion of return that depends on information that is currently unknown.
What is an uncertain or risky return? It is the portion of return that depends on information that is currently unknown. It is the portion of return that is unaffected by present or future information. It is the return that is classified as risky by bond rating agencies. It is the portion of return that depends on information that is currently known.
It is a risk that pertains to a large number of assets.
What is systematic risk? It is a risk that affects only one or a few assets. It is a risk that increases in a systematic, gradual fashion. It is a risk that pertains to a large number of assets. It is a risk that is caused by failure of the internal control system of a corporation.
It is the return that an investor expects to earn on a risky asset in the future.
What is the definition of expected return It is the variation in return during the last period. It is the return that an investor expects to earn on a risky asset in the future. It is the expected variation in return on a risky asset. It is the return that was earned in the past on a risky asset.
Expected return on security = Risk-free rate + Beta × (Return on market - Risk-free rate)
What is the equation for the capital asset pricing model? Multiple choice question. Expected return on security = Risk-free rate + Return on market Expected return on security = Risk-free rate + Beta × Return on market Expected return on security = Risk-free rate + Beta × (Return on market - Risk-free rate) Expected return on security = Beta ×(Return on market - Risk-free rate)
The market-risk premium
What is the slope of the security market line (SML)? The expected return on market The market-risk premium The risk-free rate of return The expected return on the market plus the risk-free rate of return
It is a risk that affects a single asset or a small group of assets.
What is unsystematic risk? It is a risk that is always caused by external factors. It is a risk that is unavoidable. It is a risk that affects all the assets in a diversified portfolio. It is a risk that affects a single asset or a small group of assets.
Systematic
When an investor is diversified only ________ risk matters. systematic unsystematic diversifiable unnatural
Systematic, or market, risk
Which type of risk does not change as we add more securities to a portfolio? Idiosyncratic risk Company-specific risk Unsystematic, or diversifiable, risk Systematic, or market, risk
Systematic risk
Which type of risk is unaffected by adding securities to a portfolio? Both systematic and unsystematic risk Systematic risk Unsystematic risk Neither systematic nor unsystematic risk
