Finance Chp 11 HW/Quiz

Fiddler's Music Stores' stock has a risk premium of 8.3 percent while the inflation rate is 3.1 percent and the risk-free rate is 3.8 percent. What is the expected return on this stock?

12.1 percent (Expected return = .038 + .083 = .121, or 12.1 percent )

PL Lumber stock is expected to return 22 percent in a booming economy, 15 percent in a normal economy, and lose 2 percent in a recession. The probabilities of an economic boom, normal state, or recession are 5 percent, 92 percent, and 3 percent, respectively. What is the expected rate of return on this stock?

14.84 percent

Which one of the following portfolios will have a beta of zero?

A portfolio comprised solely of U. S. Treasury bills

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

A warehouse fire

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

Cost of capital

Which one of these is the best example of systematic risk?

Decrease in gross domestic product

Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?

Expected return

A portfolio is:

Group of assets held by an investor

Which one of the following statements is correct?

If a risky security is correctly priced, its expected risk premium will be positive.

Which one of these represents systematic risk?

Increase in consumption created by a reduction in personal tax rates

Which statement is true?

The weights of the securities held in any portfolio must equal 1.0.

Systematic risk is defined as:

any risk that affects a large number of assets.

Unsystematic risk can be defined by all of the following except:

market risk

Standard deviation measures _____ risk while beta measures _____ risk.

total; systematic