Finance 300 Chapter 5 Quiz

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The relevant risk to an investor is that portion of the variability of returns that cannot be diversified away

True

Total risk equals systematic risk plus unsystematic risk

True

As the required rate of return of an investment​ decreases, the market price of the investment decreases

False

A security with a beta of one has a required rate of return equal to the overall market rate of return

True

A stock with a beta of 1.4 has​ 40% more variability in returns than the average stock

True

According to the​ CAPM, for each unit of​ beta, an​ asset's required rate of return increases by the​ market's risk premium

True

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

True

The realized rate of​ return, or holding period​ return, is equal to the holding period dollar gain divided by the price at the beginning of the period

True

The slope of the characteristic line of a security is that​ security's beta

True

The beta of a T−bill is zero

True

An investor with a required return of​ 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to​ 8%

False

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

False

Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value

False

Because risk is measured by variability of​ returns, how long we hold our investments does not matter very much when it comes to reducing risk

False

Cash flows is the most relevant variable to measure the returns on debt​ instruments, while GAAP net income is the most relevant variable to measure the returns on common stock

False

Due to strict stock market​ controls, the most a​ stock's value can drop in one trading day is​ 5%

False

Portfolio performance is determined mainly by stock selection and market​ timing, with less emphasis on asset allocation

False

Proper diversification generally results in the elimination of risk

False

The market rewards the patient​ investor, for the period between 1926 and​ 2016, there has never been a time when an investor lost money if she held an all−large−stock portfolio for ten years

False

The​ S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate

False

You are considering investing in Ford Motor Company. Which of the following are examples of diversifiable​ risk? I. Risk resulting from possibility of a stock market crash. II. Risk resulting from uncertainty regarding a possible strike against Ford. III. Risk resulting from an expensive recall of a Ford product. IV. Risk resulting from interest rates decreasing.

II and III

Investment A has an expected return of​ 15% per​ year, while Investment B has an expected return of​ 12% per year. A rational investor will choose

Investment A if A and B are of equal risk

Rogue​ Recreation, Inc. has normally distributed returns with an expected return of​ 15% and a standard deviation of​ 5%, while Lake​ Tours, Inc. has normally distributed returns with an expected return of​ 15% and a standard deviation of​ 15%. Which of the following is​ true?

Lake Tours is more likely to have negative returns than Rogue Rec

Which of the following​ is/are true? A. Two points on the Characteristic Line are the T−bill and the market portfolio. B. The greater the total risk of an​ asset, the greater the expected return. C. All securities have a beta between 0 and 1. D. Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.

Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks

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

Risk−averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry

Diversifying among different kinds of assets is called asset allocation

True

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

True

The T−bill return is used in the CAPM model as the risk−free rate

True

What is diversifying among different kinds of assets known​ as?

asset allocation

Of the​ following, which differs in meaning from the other​ three?

asset-unique risk

The appropriate measure for risk according to the capital asset pricing model is

beta

Which of the following measures the average relationship between a​ stock's returns and the​ market's returns?

beta coefficient

Portfolio risk is typically measured by​ ________ while the risk of a single investment is measured by​ ________.

beta; standard deviation

If you were to use the standard deviation as a measure of investment​ risk, which of the following has historically been the highest risk​ investment?

common stock of small firms

Based on the security market​ line, Robo−Tech stock has a required return of​ 14% and Friendly Insurance Company has a required return of​ 10%. Robo−Tech has a standard deviation of returns of​ 18%. Therefore,

for a well−diversified investor, Friendly is less risky than Robo−Tech

The capital asset pricing model

provides a risk−return trade−off in which risk is measured in terms of beta

The category of securities with the highest historical risk premium is

small company stocks

If the beta for stock A equals​ zero, then

stock​ A's required return is equal to the risk−free rate of return

A​ stock's beta is a measure of its

systematic risk

Which of the following is the slope of the security market​ line?

the market risk premium

Beginning with an investment in one​ company's securities, as we add securities of other companies to our​ portfolio, which type of risk​ declines?

unsystematic risk

Which of the following types of risk is​ diversifiable?

​unsystematic, or company−unique risk


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