FRL 301 Chapter 13 LearnSmart

What is the expected return of a security with a beta of 1.2 if the risk free rate is 4 percent and the expected return on the market is 12 percent?

4% + 1.2(12% - 4%) = 13.6%

If the variance of a portfolio is .0025, what is the standard deviation?

5%

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%

If Boom and Recession have an equal probability of occurring, what is the expected return on a portfolio consisting of 80% Company X and 20% Company Y?

9.0%

It would be useful to understand how the _____ of the risk premium on a risky asset is determined. possibly return shape size

It would be useful to understand how the *size* of the risk premium on a risky asset is determined. This knowledge would be useful in calculating a return.

What is the slope of the security market line (SML)? The expected return on the market plus the risk-free rate of return The market-risk premium The expected return on market The risk-free rate of return

The market-risk premium

What are the two components of unexpected return (U) in the total return equation? The unsystematic portion The expected return portion The systematic portion The expected risk portion

The unsystematic portion The systematic portion

The calculation of a portfolio beta is similar to the calculation of: a portfolio's variance a portfolio's expected return a portfolio's standard deviation the value of a put option

a portfolio's expected return

When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market: doesn't pay attention to the news items already knew about most of the news item reversed its position based on the news

already knew about most of the news item

As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk? It may eventually be almost totally eliminated. It is likely to increase. It is likely to decrease. It will not change.

*(Unsystematic risk = diversifiable risk) => decreases with more diversification* It may eventually be almost totally eliminated. It is likely to decrease.

According to CAPM, which of the following events would affect the return on a risky asset? a fire in the company's plant Federal reserve actions that affect the economy a strengthening of the country's currency a change in the company's leadership a change in the yield of T-bills

(CAPM = a security's return is influenced by the pure time value of money, the reward for bearing systematic risk, and the amount of systematic risk present) Federal reserve actions that affect the economy a change in the company's leadership a change in the yield of T-bills

The weighted average of the standard deviations of the assets in Portfolio C is 12.9%. Which of the following is a possible value for the standard deviation of the portfolio? 12.9% 14.9% 10.9%

*The standard deviation of a portfolio is less than or equal to the weighted average of the standard deviations of the assets in the portfolio.* 12.9% 10.9%

How can a positive relationship between the expected return on a security and its beta be justified? Because the value of the beta is always positive Because the risk-free rate is equal to zero Because the difference between the return on the market and the risk-free rate is likely to be negative Because the difference between the return on the market and the risk-free rate is likely to be positive

Because the difference between the return on the market and the risk-free rate is likely to be positive

When an investor is diversified, only _____ risk matters unsystematic systematic diversifiable unnatural

systematic

The systematic risk principle argues that the market does not reward risks: that are borne unnecessarily that are dangerous that are systematic in any circumstances

that are borne unecessarily

Based on the capital asset pricing model (CAPM) there is generally _____ relationship between beta and the expected return on a security. no relationship a positive a negative

a positive

Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio: does not change increases declines fluctuates randomly

declines

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. 15% 12.5% 10% 25%

(.5 x 10%) + (.5 x1 5%) = 12.5%

Marks Company believes that there is a sixty percent chance of a recession and a forty percent chance of a boom. In the case of recession, the company expects to earn a 2% return. In the case of boom, the company expects to earn 22%. What is Marks Company's expected return? 14% 12% 10%

(.6 x .02) + (.4 x .22) 10%

Which of the following are examples of a portfolio? Investing $100k in a combination of US and Asian stocks Investing $100k in a combination of stocks and bonds Investing $100k in the stocks of 50 publicly traded corporations Investing $100k to buy 100 shares of the best performing stock on NYSE

(Portfolio = more than just a single stock, bond, or other asset) Investing $100k in a combination of US and Asian stocks Investing $100k in a combination of stocks and bonds Investing $100k in the stocks of 50 publicly traded corporations

The risk-free asset has a beta of:

0.00

By definition, what is the beta of the average asset equal to?

1

If a security's expected return is equal to the expected return on the market, its beta must be _____.

1

When 100 securities are included, the standard deviation of a portfolio of risky assets falls to about:

20%

ABC has a beta of 2.5 and XYZ has a beta of 1.5. The risk-free rate is 4 percent 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%

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

3% + (2 x 8%) = 19% The expected return will increase to 19% from 11%

Asset X, Expected Return 5.8%, Beta 0.8 Asset Y, Expected Return 14.2%, Beta 1.8 If the risk free rate is 1%, what is the reward-to-risk ratio for Asset X?

6.0%

What is the return on a portfolio that consists of: $50,000 in an index fund, $30,000 in a bond fund, and $20,000 in a foreign stock fund? The expected returns are 7 percent, -3 percent, and 18 percent, respectively.

6.2%

A firm is exposed to both systematic and unsystematic risks. Which of the following are examples of systematic risks? An increase in the Federal funds rate Management turnover An increase in the corporate tax rate A fire in a manufacturing plant

An increase in the Federal funds rate An increase in the corporate tax rate

Assets A and B each have an expected return of 10 percent. Asset A has a standard deviation of 12 percent while Asset B has a standard deviation of 12 percent. Which asset would a rational investor choose? Either Asset A or B since they both offer the same expected return. Asset B Neither Asset A nor B since they are both risky Asset A

Asset A

How can a positive relationship between the expected return on a security and its beta be justified? Because the difference between the return on the market and the risk-free rate is likely to be negative Because the risk-free rate is equal to zero Because the value of beta is always positive Because the difference between the return on the market and the risk-free rate is likely to be positive

Because the difference between the return on the market and the risk-free rate is likely to be positive

What is unsystematic risk? It is a risk that affects all the assets in a diversified portfolio. It is a risk that is always caused by external factors. It is a risk that affects a single asset or a small group of assets. It is a risk that is unavoidable.

It is a risk that affects a single asset or a small group of assets.

What is systematic risk? It is a risk that pertains to a large number of assets. It is a risk that increases in systematic, gradual fashion. It is a risk that affects only one or a few assets. It is a risk that is caused by failure of the internal control system of a corporation.

It is a risk that pertains to a large number of assets.

What is a risk premium? It is the return on risk-free securities. It is a fee charged to investors by the SEC that allows them to invest in risky securities. It is additional compensation for taking a risk, over and above the risk-free rate. It is a numerical estimate of beta.

It is additional compensation for taking a risk, over and above the risk-free rate.

What is an uncertain or risky return? It is the portion of return that is unaffected by present or future information. It is the portion of return that depends on information that is currently known. It is the return that is classified as risky by bond rating agencies. It is the portion of return that depends on information that is currently unknown.

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 It is the variation in return during the last period It is the return that was earned in the past on a risky asset It is the expected variation in return on a risky asset

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

What does variance measure? It measures the riskiness of a security's returns. It measures the dispersion of the sample returns. It measures the square root of the standard deviation. It measures the average of the sample of returns.

It measures the riskiness of a security's returns. It measures the dispersion of the sample returns.

Which type of risk is unaffected by adding securities to a portfolio? Systematic risk Neither systematic nor unsystematic risk Both systematic and unsystematic risk Unsystematic risk

Systematic risk

A firm faces many risks. Which of the following are examples of unsystematic risks faced by a firm? An increase in the dividend tax rate A change in the Federal Reserve's monetary policy The death of the CEO A hosile takeover attempt by a competitor

The death of the CEO A hosile takeover attempt by a competitor

Which of the following are examples of information that may impact the risky return of a stock? Last year's net income as a percentage of sales and gross fixed assets. The outcome of an application currently pending with the Food and Drug Administration. The Fed's decision on interest rates at their meeting next week. The trend in sales growth over the last 10 years.

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

What are the two components of the expected return on the market (Rm)? The default spread The risk-free rate (RF) The risk premium Beta

The risk-free rate (RF) The risk premium

What two factors determine a stock's total return? Unexpected return Abnormal return Expected return Bond rates

Unexpected return Expected return

If you wish to create a portfolio of stocks, what is the required minimum number of stocks? You must invest in stocks of more than one corporation. You must invest in at least 2 stocks of 1 corporation. You must invest in the stocks of at least 30 corporations. You must invest in stocks of at least 10 corporations.

You must invest in stocks of more than one corporation.

The computation of variance requires 4 steps. Place the steps in the correct order from the first step to the last step.

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

_____ risk is reduced as more securities are added to the portfolio diversifiable market unique unsystematic systematic

diversifiable unique unsystematic

There is _____ correlation between the unsystematic risk of two companies from different industries. significant negative significant positive no

no

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

positive

The security market line (SML) shows that the relationship between a security's expected return and its beta is _____. negative overrated positive insiginifcant

positive

The systematic risk principle argues that the market does not reward risks: that are dangerous in any circumstances that are borne unnecessarily that are systematic

that are borne unnecessarily

The standard deviation is _____.

the square root of the variance.

The risk of owning an asset comes from: forecasts unanticipated events expectations surprises

unanticipated events surprises