FNAN 300 Chapter 11 Connect Learnsmart

If security ABC has a beta of 1.5 and security XYZ has a beta of 1, what is the beta of a portfolio that is equally invested in both securities?

1.25

Unsystematic risk will affect

a specific firm an firms in a single industry

The computation of variance requires 4 steps. List the steps in order from first to last.

calculate the expected return calculate the deviation of each return from the expected return square each deviation calculate the average squared deviation

True or false: Since the CAPM equation can be used only for individual securities, it cannot be used with portfolios.

false

Which of the following are examples of a portfolio?

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

As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?

it is likely to decrease and it may eventually be almost totally eliminated

What is an uncertain or risky return?

it is the portion of return that depends on information that is currently unknown

What is the definition of expected return?

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

When an investor is diversified only _______________ risk matters.

systematic

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

systematic or market risk

Beta tells us the amount of _______________ risk of an asset or portfolio relative to _______________.

systematic; an average risky asset

According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero?

the risk-free rate of return

The standard deviation is _______________.

the square root of the variance

The true risk of any investment comes from:

unanticipated events and surprises

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

unsystematic, diversifiable, company-specific

What is the expected return of a portfolio consisting of stocks A and B if the expected return is 10 percent for A and 15 percent for B? Assume you are equally invested in both the stocks.

12.5%

ABC has a beta of 2.5 and XYZ has a beta of 1.5. The risk-free is 4 percent and the market and the market risk premium is 9 percent. What is the expected return on a portfolio that is equally invested in ABC and XYZ?

22%

Given the following probability distribution for the returns of a portfolio, what is the standard deviation of the portfolio? State; Probability; Portfolio Return Boom; 0.25; 20% Normal; 0.50; 4% Bust; 0.25; -6%

5.74%

John's portfolio consists of $1,200 worth of Chi Corporation common stock and $400 worth of Lambda Corporation common stock. Lambda's portfolio weight is 25%, and Chi's portfolio weight is:

75%

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

a portfolio's expected return

Which of the following are examples of unsystematic risk?

changes in management and labor strikes

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

cost of capital

What is the equation for the capital asset pricing model?

expected return on security=risk-free rate + beta x (return on market - risk-free rate)

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

less than

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

The Fed's decision on interest rates at their meeting next week and the outcome of an application currently pending with the FDA

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

market risk and unsystematic risk

If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be:

positive

The systematic risk principle argues that the market does not reward risks:

that are diversifiable and that are borne unnecessarily

A security gas a beta of 1, a market risk premium of 8%, and a risk-free rate of 3%. What will happen to the expected return if the beta doubles?

the expected return will increase to 19% from 11%

How are the unsystematic risks of two differenct companies in two different industries related?

there is no relationship