final exam conceptual
Standard deviation measures which type of risk?
Total
Systematic risk is measured by:
beta
The principle of diversification tells us that:
spreading an investment across many diverse assets will eliminate some of the total risk.
What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average?
16 percent
For the period 1926-2016, the average risk premium on large-company stocks was about:
8.6 percent.
Which one of the following statements is correct concerning market efficiency?
A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.
Which one of the following statements is correct concerning a portfolio beta?
A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.
Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?
Efficient capital market
You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?
Expected return
Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.
I and III only
Which one of the following is represented by the slope of the security market line?
Market risk premium
Which one of the following is an example of unsystematic risk?
National decrease in consumer spending on entertainment
Which one of the following is defined by its mean and its standard deviation?
Normal distribution
Suzie owns five different bonds and twelve different stocks. Which one of the following terms most applies to her investments?
Portfolio
Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?
Reward-to-risk ratio
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?
Security market line
Which one of the following earned the highest risk premium over the period 1926-2016?
Small-company stocks
Which one of the following should earn the highest risk premium based on CAPM?
Stock with highest beta
Which one of the following is a risk that applies to most securities?
Systematic
Which one of the following best defines the variance of an investment's annual returns over a number of years?
The average squared difference between the actual returns and the arithmetic average return
Stacy purchased a stock last year and sold it today for $4 a share more than her purchase price. She received a total of $1.15 per share in dividends. Which one of the following statements is correct in relation to this investment?
The capital gains yield is positive.
Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient.
The information was expected
Which one of the following statements related to risk is correct?
The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.
Which one of the following categories of securities had the lowest average risk premium for the period 1926-2016?
U.S. Treasury bills
Which one of the following risks is irrelevant to a well-diversified investor?
Unsystematic risk
Standard deviation is a measure of which one of the following?
Volatility
Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?
Weak
The systematic risk of the market is measured by a:
beta of 1.
Unsystematic risk:
can be effectively eliminated by portfolio diversification.
The standard deviation of a portfolio:
can be less than the standard deviation of the least risky security in the portfolio.
The average compound return earned per year over a multiyear period is called the ________ average return
geometric
To convince investors to accept greater volatility, you must:
increase the risk premium.
Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock:
is underpriced
The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:
market value of the investment in each stock.
The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:
risk premium.
You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best ________ form efficient.
semistrong
The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than ________ form efficient.
strong
The market risk premium is computed by:
subtracting the risk-free rate of return from the market rate of return.
The intercept point of the security market line is the rate of return which corresponds to:
the risk-free rate.