FIN Ch. 13 pg. 210
Marks Company believes that there is a sixty percent chance of a recession and a forth percent chance of a boom. In the case of recession, the company expects to earn a 2% return. In the case of a boom, the company expects to earn 22%. What is Marks Company's expected return?
10%; (0.06x0.02)+(0.4x0.22)=0.10
The weighted average of the standard deviations of the assets in Portfolio C is 12.95. Which of the following is a possible value for the standard deviation of the portfolio?
12. 9% or 10.9%
Which of the following are examples of a portfolio?
Investing $100,000 in the stocks of 50 publicly traded corporations; Investing $100,000 in a combination of stocks and bonds; Investing $100,000 in a combination of US and Asian stocks
What is unsystematic risk?
It is a risk that affects a single asset of a small group of assets
Which type of risk is unaffected by adding securities to a portfolio?
Systematic risk
A firm faces many risks. Which of the following are examples of unsystematic risks faced by a firm?
The death of a CEO, A hostile takeover attempt by a competitor
What are the two components of the expected return on the market?
The risk premium; the risk-free rate
What are the two components of unexpected return (U) in the total return equation?
The unsystematic portion; the systematic portion
The risk of owning an asset comes from:
Unanticipated events; surprises
If the variance of a portfolio increases, then the portfolio standard deviation will ___.
increase
There is ___ correlation between the unsystematic risk of two companies from different industries.
no
Which of the following are examples of unsystematic risk?
Changes in management; Labor strikes
What is the expected return of a security with a beta of 1.2 if the risk-free rate is 4 percent and the expected return on the market is 12 percent?
13.6%
What is the return on a portfolio that consists of: $50,000 in an index fund, $30,000 in a bond fund, and $20,000 in a foreign stock fund? The expected returns are 7 percent, -3 percent, and 18 percent, respectively.
6.2%
A firm is exposed to both systematic and unsystematic risks. Which of the following are examples of systematic risks?
An increase in the Federal funds rate; An increase in the corporate tax rate
Asset A has an expected return of 17% and standard deviation of 5%. Asset B has an expected return of 15% and standard deviation of 5%. Which asset would a rational investor choose?
Asset A
The computation of variance requires 4 steps. Place the steps in the correct order from the first step to the last step.
Calculate the expected return; Calculate the deviation of each return from the expected return; Square each deviation; Calculate the average squared deviation
___ risk is reduced as more securities are added to the portfolio
Idiosyncratic; Unique; Unsystematic
What is systematic risk?
It is a risk the pertains to a large number of assets
If securities 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?
It is equal to 0
What is the definition of expected return?
It is the return that an Investor expects to earn on a risky asset in the future.
As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?
It may eventually be almost totally eliminated; It is likely to decrease
Which of the following statements are true about variance?
Variance is a measure of the squared deviations of a security's return from its expected return; standard deviation is the square root of variance
If you wish to create a portfolio of stocks, what is the required minimum number of stocks?
You must invest in stocks of at least 2 corporations
The expected return on the market will increase if the risk-free rate ___ or if the market risk premium ___.
increases; increases
When an investor is diversified only ___ risk matters
systematic
The systematic risk principle argues that the market does not reward risks:
that are borne unnecessarily