Finance Final Ch 13

Which one of the following is the best example of a diversifiable risk?

A firm's sales decrease

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 an example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously

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

National decrease in consumer spending on entertainment

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 risk that applies to most securities?

Systematic

Which one of the following statements related to unexpected returns is correct?

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

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

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

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.

Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:

cost of capital

The reward-to-risk ratio for Stock A is less than the reward-to-risk ratio of Stock B. Stock A has a beta of .82 and Stock B has a beta of 1.29. This information implies that:

either Stock A is overpriced or Stock B is underpriced or both.

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 _____ 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

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

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

the risk-free rate