Ch 6
Which of the following is NOT an example of market risk or systematic risk?
Management risk
Which of the following has a beta of zero?
A risk-free asset
You are considering buying some stock in Colony Transport. Which of the following is an example of systematic or market risk?
Risk resulting from a general decline in the stock market.
You are considering investing in Disney. Which of the following is an example of diversifiable risk?
Risk resulting from uncertainty regarding a possible strike against Disney.
Give specific examples of systematic and unsystematic risk. How many different securities must be owned to essentially diversify away unsystematic risk? Identify whether the following examples are systematic or unsystematic risks. How many different securities must be owned to essentially diversify away unsystematic risk?
The CEO of a firm retires. Unsystematic risk The Federal Reserve announces that it will lower the interest rate to boost the economy. Systematic risk Production costs of a firm increase due to rising oil prices. Systematic risk A manufacturer loses a product liability suit. Unsystematic risk The inflation rate increases unexpectedly. Systematic risk A firm announces a decrease in its earnings forecast. Unsystematic risk 20
The security market line (SML) relates risk to return, for a given set of market conditions. If you expect inflation to increase, which of the following would expect to occur all else being held constant?
The SML line would shift up but maintain the same slope.
What method is used to measure a firm's market risk? A firm's market risk can be estimated by
estimating the beta coefficient of the characteristic line using the regression method.
Which rate of return in the popup table, is the risk-free rate? Why? Treasury bills are risk-free assets because they have a short-term maturity date, their price is less volatile, and there is no chance of default on them.
3.7% true
The market risk premium is measured by:
market return less risk-free rate.
What is the name of additional compensation required for assuming greater risk?
risk premium.
The beta of a stock is the slope of:
the line of best fit for a plot of the company's returns against the returns of the market portfolio for the same period.