Finance 327 Chapter 13

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?

30

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

Which one of the following statements is correct concerning unsystematic risk?

Eliminating unsystematic risk is the responsibility of the individual investor

The expected return on a portfolio: I. can never exceed the expected return of the best performing security in the portfolio. II. must be equal to or greater than the expected return of the worst performing security in the portfolio. III. is independent of the performance of the overall economy. IV. is independent of the allocation of the portfolio amongst individual securities.

I and II only

Which of the following are examples of diversifiable risk? I. tornado strikes an industrial park in Kansas II. federal government imposes new workplace safety laws III. local government increases property tax rates IV. cost of worker's compensation insurance increases nationwide

I and III

Which one of the following statements is correct?

Over time, the average unexpected return will be zero

Which one of the following events would be included in the expected return on Delta stock?

This morning, Delta confirmed that its CEO is retiring at the end of the year as anticipated

Which one of the following is true concerning unexpected returns?

Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term

The systematic risk of the market is measured by:

a beta of 1.0

Which one of the following indicates a portfolio is being effectively diversified?

a decrease in the portfolio standard deviation

The expected return on a stock computed using economic probabilities is:

a mathematical expectation based on a weighted average and not an actual anticipated outcome

Which one of the following is an example of unsystematic risk?

an explosion occurs at a chemical plant

Systematic risk is measured by:

beta

The amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset, is called the:

beta coefficient

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 equation of the SML which defines the relationship between the expected return and beta is the:

capital asset pricing model

The return on a risky asset which is anticipated being earned in the future is called the _____ return.

expected

The systematic risk principle implies the _____ an asset depends on that asset's systematic risk.

expected return on

Which one of the following is an example of systematic risk?

inflation unexpectedly increases by 1.5 percent in the U.S.

Which one of the following is another name for systematic risk?

market risk

The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-free asset is referred to as the:

market risk premium

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

market risk premium

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

If a stock portfolio is well diversified, then the portfolio variance:

may be less than the variance of the least risky stock in the portfolio

A group of assets, such as stocks and bonds, held by an investor is called a(n):

portfolio

The percentage of a portfolio's total value invested in a particular asset is called that asset's:

portfolio weight

The expected risk premium on a stock is equal to the expected return on the stock minus the:

risk-free rate

The positively sloped linear function which illustrates the relationship between an asset's expected return and its beta coefficient is the:

security market line

The principle of diversification tells us that:

spreading an investment across many diverse assets will eliminate some of the total risk

Which one of the following should earn the most risk premium based on CAPM?

stock with a beta of 1.23

The market risk premium is computed by:

subtracting the risk-free rate of return from the market rate of return

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

systematic risk principle

Standard deviation measures _____ risk.

total

Risk that affects at most a small number of assets is called _____ risk.

unsystematic

Which one of the following risks is irrelevant to a well-diversified investor?

unsystematic risk

The expected return on a stock given various states of the economy is equal to the:

weighted average of the returns for each economic state

The minimum required return on a new risky investment is called the:

cost of capital

The reward-to-risk ratio for stock A exceeds the reward-to-risk ratio of stock B. Stock A has a beta of 1.4 and stock B has a beta of .90. This information implies that:

either stock A is underpriced or stock B is overpriced or both

The primary purpose of portfolio diversification is to:

eliminate asset-specific risk

The intercept point of the security market line is the rate of return which corresponds to:

the risk-free rate

Which one of the following statements is correct concerning a portfolio of multiple securities and multiple states of the economy when both the securities and the economic states have unequal weights?

Given both the unequal weights of the securities and the unequal weights of the economic states, a portfolio can be created that has an expected standard deviation of zero

The capital asset pricing model (CAPM) assumes: I. a risk-free asset has no systematic risk. II. beta is a reliable estimate of total risk. III. the risk-to-reward ratio is constant. IV. the market rate of return can be approximated.

I ,III, and IV

Which of the following statements are correct concerning diversifiable risks? I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities. II. The market rewards investors for diversifiable risk by paying a risk premium. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk.

I and III

Which of the following statements concerning risk are correct? I. Nondiversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for nondiversifiable risk. IV. Diversifiable risks are those risks you cannot avoid if you are invested in the financial markets.

I and III

The portfolio expected return considers which of the following factors? I. percentage of the portfolio invested in each individual security II. projected states of the economy III. the performance of each security given various economic states IV. probability of occurrence for each state of the economy

I, II, III, and IV

Which of the following are included in the computation of a portfolio's standard deviation? I. weight assigned to each security comprising the portfolio II. weighted average of the standard deviations of the individual securities held in the portfolio III. probability of occurrence for each economic state of the economy IV. rate of return for each individual security held in the portfolio for each economic state

I, III, and IV

Which of the following variables do you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? I. asset standard deviation II. asset beta III. risk-free rate of return IV. market risk premium

II and IV

Which of the following are examples of diversifiable risks? I. the inflation rate spikes suddenly II. terrorists strike the United States III. the price of corn increases due to a nationwide drought IV. taxes are increased on hotel room rentals

III and IV

Which one of the following is least apt to reduce the unsystematic risk of a portfolio?

adding additional shares of each stock in a portfolio to that portfolio

According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

market risk premium and the amount of systematic risk inherent in the security

If the market is efficient and securities are priced fairly then the _____ will be constant for all securities.

reward-to-risk ratio

The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.

risk premium

Total risk is measured by _____ and systematic risk is measured by _____.

standard deviation; beta

Risk that affects a large number of assets is called _____ risk.

systematic

The market rate of return is eleven percent and the risk-free rate of return is four percent. Treynak stock has three percent more risk than the market and has an actual return of eleven percent. This stock:

will plot below the security market line

A stock with an actual return that lies above the security market line has:

yielded a higher return than expected for the level of risk assumed