FINC 311 Final Chapter 11

Standard deviation measures _____ risk while beta measures _____ risk. systematic; unsystematic unsystematic; systematic total; unsystematic total; systematic asset-specific; market

total; systematic

What is the beta of the following portfolio? .98 .76 1.18 1.21 1.13

.76

What do you think is the beta of a U.S. Treasury bill? 1.0 -1.0 0 0.5 Beta doesn't apply to T-bills

0

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 -Real return -Market rate -Systematic return -Risk premium

Expected return

If a stock has a 50% probability of having an expected return of 10% and a 50% probability of having an expected return of 20%, what is the overall expected return for this stock? -10% -20% -15% -30% -Impossible to calculate

15% why: 15% = (.5*10% + .5*20%)

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock? -An increase in the rate of return in a recessionary economy -An increase in the probability of an economic boom -A decrease in the probability of a recession occurring -A decrease in the probability of an economic boom -An increase in the rate of return for a normal economy

A decrease in the probability of an economic boom

Which one of the following is the best example of unsystematic risk? -Inflation exceeding market expectations -A warehouse fire -Decrease in corporate tax rates -Decrease in the value of the dollar -Increase in consumer spending

A warehouse fire

Explanation Stock 1. Value: $32,960 Beta: 0.76 Stock 2. Value: $15,780 Beta: 1.31 Stock 3. Value: $8,645 Beta: 1.49 Stock 4. Value: $19,920 Beta: .00

Portfolio value = $32,960 + 15,780 + 8,645 + 19,920 = $77,305 βP = ($32,960 /$77,305)(.76) + ($15,780/$77,305)(1.31) + ($8,645/$77,305)(1.49) + ($19,920 /$77,305)(0) = .76

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent? -Portfolio variance -Portfolio standard deviation -Portfolio weight -Portfolio expected return -Portfolio beta

Portfolio weight

Consider the following information: Standard Deviation Beta Security C 20% 1.25 Security K 30% 0.95 Which security has more systemic risk? A. Security C B. Security K

Security C has more systemic risk since the beta is higher - beta is the measure of systemic risk

Consider the following information: Standard Deviation Beta Security C 20% 1.25 Security K 30% 0.95 Which security should have the higher expected return? A. Security C B. Security K

Security C should have a higher expected return since the beta is higher

Consider the following information: Standard Deviation Beta Security C 20% 1.25 Security K 30% 0.95 Which security has more total risk? A. Security C B. Security K

Security K Higher SD is more risk

According to the capital asset pricing model, the expected return on a security will be affected by all of the following except the: -Market risk premium -Risk-free rate -Market rate of return -Security's standard deviation -Security's beta

Security's standard deviation

Portfolio diversification eliminates: -All investment risk -The portfolio risk premium -Market risk -Unsystematic risk -The reward for bearing risk

Unsystematic risk