Finance 303 CH11

______ risk is reduced as more securities are added to the portfolio

- Unsystematic - Company-specific - Diversifiable

True or false: A well-diversified portfolio will eliminate all risks.

False

What is an uncertain or risky return?

It is the portion of return that depends on information that is currently unknown.

Which of the following are examples of a portfolio?

- Investing $100,000 in a combination of stocks and bonds - Investing $100,000 in a combination of US and Asian stocks - Investing $100,000 in the stocks of 50 publicly traded corporations

True or false: Expected return and inflation are the two components of risky return in the total return equation.

False

True or false: Portfolio weights can be defined as the dollars invested in each asset.

False

Which of the following statements is (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 more than one corporation.

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.

What are the two components of risky return (U) in the total return equation?

- Market risk - Unsystematic risk

Which of the following are examples of information that may impact the risky return of a stock?

- The outcome of an application currently pending with the Food and Drug Administration. - The Fed's decision on interest rates at their meeting next week

The true risk of any investment comes from:

-surprises -unanticipated events

By definition, what is the beta of the average asset equal to?

1

True or false: The calculation of the portfolio beta is similar to the calculation of the portfolio weights.

False

True or false: The expected return of a portfolio is a combination of the weights of each asset in a portfolio.

False

True or false: The standard deviation is the variance squared.

False

True or false: The surprise part of any announcement is the information the market uses to form the expectation of the return on the stock.

False

What does the security market line depict?

It is a graphical depiction of the capital asset pricing model.

What is systematic risk?

It is a risk that pertains to a large number of assets.

What is the definition of expected return?

It is the return that an investor expects to earn on a risky asset in the future.

____________ risk is the only risk important to the well diversified investor.

Systematic

Which of the following types of risk is not reduced by diversification?

Systematic, or market risk

True or false: It is possible for the unsystematic risk of a portfolio to be reduced almost to zero.

True

True or false: The expected return is the return that an investor expects to earn on a risky asset in the future.

True

What is the Reward-to-Risk Ratio?

[E(RA) - Rf]/βA

The calculation of a portfolio beta is similar to the calculation of:

a portfolio's expected return

The appropriate discount rate to use to evaluate a new project is the _____.

cost of capital

The minimum required return on a new project is known as the:

cost of capital

The __________ return on a portfolio is a combination of the expected returns on the assets in the portfolio. Listen to the complete question

expected

An investment will have a negative NPV when its expected return is _______ ________ what the financial markets offer for the same risk.

less than

Systematic risk is also called ______________ risk.

market

The security market line (SML) shows that the relationship between a security's expected return and its beta is ______.

positive

If an asset has a reward-to-risk ratio of 6.0%, that means it has a __________ of 6.0% per unit of _______.

risk premium; systematic risk

The _____ is the news that influences the unanticipated return on the stock.

surprise

The true risk of any investment comes from _______________ .

surprises

Even if the portfolio is well diversified, the investor is still exposed to _____ risk.

systematic

The return expected on an investment depends only on the asset's _____ risk.

systematic

To determine the appropriate required return for an investment, we can use _____________________.

the Security Market Line

A portfolio can be described by its portfolio weights which are defined as _____________________.

the percentage of dollars invested in each asset

If the standard deviation of a portfolio is __________?

the square root of the variance

The standard deviation is ___.

the square root of the variance

What is the beta of the risk-free asset?

zero