BF LS Chapter 11: Risk and Return
12. True or false: The calculation of the portfolio beta is similar to the calculation of the portfolio weights.
12. False
What is unsystematic risk?
It is a risk that affects a single asset or a small group of assets
What is the slope of the security market line (SML)?
The market-risk premium
The CAPM can also be used for a portfolio by first determining the portfolio's_________
beta
The security market line (SML) shows that the relationship between a security's expected return and its beta is ______.
positive
What is the beta of the risk-free asset?
zero
Unsystematic risk will affect
- firms in a single industry - a specific firm
1. True or false: Portfolio weights can be defined as the dollars invested in each asset.
1. False
What is the expected return for a security if the risk-free rate is 5%, the expected return on the market is 9%, and the security's beta is 1.5?
Expected return for a security= 5 + 1.5 x (9 - 5) = 11%
Which of the following are examples of systematic risk?
Future rates of inflation Regulatory changes in tax rates
What is the definition of expected return?
It is the return that an investor expects to earn on a risky asset in the future
The calculation of a portfolio beta is similar to the calculation of:
a portfolio's expected return
The capital asset pricing model is the equation of the security market line showing the relationship between expected return and ____________
beta
The __________return on a portfolio is a combination of the expected returns on the assets in the portfolio.
expected
10. True or false: It is possible for the unsystematic risk of a portfolio to be reduced almost to zero.
10. True
11. True or false: A well-diversified portfolio will eliminate all risks.
11. False
13. True or false: According to the capital asset pricing model (CAPM), the risk-free rate of return is the expected return on a security with a beta of zero.
13. True
14. True or false: Since the CAPM equation can be used only for individual securities, it cannot be used with portfolios.
14 False
2. True or false: The expected return of a portfolio is a combination of the weights of each asset in a portfolio.
2. False
3. True or false: The expected return is the return that an investor expects to earn on a risky asset in the future.
3. True
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%
Which of the following are examples of a portfolio?
Investing $100,000 in a combination of US and Asian stocks Investing $100,000 in a combination of stocks and bonds Investing $100,000 in the stocks of 50 publicly traded corporations
What does the security market line depict?
It is a graphical depiction of the capital asset pricing model.
what is systematic risk?
It is a risk that pertains to a large number of assets.
As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?
It is likely to decrease. 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.
Which of the following statements is (are) true about variance?
Standard deviation is the square root of variance. Variance is a measure of the squared deviations of a security's return from its expected return.
____________ risk is the only risk important to the well diversified investor.
Systematic
Which of the following types of risk is not reduced by diversification?
Systematic, or market risk
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 The outcome of an application currently pending with the Food and Drug Administration.
Which of the following are examples of information that may impact the risky return of a stock?
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 is the intercept of the security market line (SML)?
The risk-free rate
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
______ risk is reduced as more securities are added to the portfolio
Unsystematic Diversifiable Company-specific
What are the two components of risky return (U) in the total return equation?
Unsystematic risk Market risk
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.
What is the Reward-to-Risk Ratio?
[E(RA) - Rf]/βA
Systematic risk is also called ______________ risk.
market
If an asset has a reward-to-risk ratio of 6.0%, that means it has a __________ of 6.0% per unit of _______.
risk premium; systematic risk
The _____ is the news that influences the unanticipated return on the stock.
surprise
The true risk of any investment comes from _______________ .
surprises
The true risk of any investment comes from ____________.
surprises unanticipated events
The return expected on an investment depends only on the asset's _____ risk.
systematic
The systematic risk principle argues that the market does not reward risks:
that are borne unnecessarily that are diversifiable
A portfolio can be described by its portfolio weights which are defined as _____________________.
the percentage of dollars invested in each asset
If the standard deviation of a portfolio is __________?
the square root of the variance
The standard deviation is ___.
the square root of the variance
4. True or false: The standard deviation is the variance squared.
4 .False
5. True or false: Portfolio weights can be defined as the dollars invested in each asset.
5. False
6. True or false: The surprise part of any announcement is the information the market uses to form the expectation of the return on the stock.
6. False
7. True or false: Portfolio weights can be defined as the dollars invested in each asset.
7. False
8. True or false: Labor strikes are an example of systematic risk.
8. False
9. True or false: Expected return and inflation are the two components of risky return in the total return equation.
9. False
The CAPM shows that the expected return for an asset depends on which three things?
The amount of systematic risk The reward for bearing systematic risk The pure time value of money
Even if the portfolio is well diversified, the investor is still exposed to _____ risk.
systematic
Beta tells us the amount of ________ risk of an asset or portfolio relative to ______.
systematic; an average risky asset