FIN 300
Another name for an asset's expected rate of return is holding−period return.
False
A typical measure for the risk−free rate of return is the
U.S. Treasury bill rate.
If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the least risky investment?
U.S. Treasury bills
The slope of the characteristic line of a security is that security's beta.
True
Total risk equals systematic risk plus unsystematic risk.
True
Unique security risk can be eliminated from an investor's portfolio through diversification.
True
Which of the following types of risk is diversifiable?
unsystematic, or company−unique risk
A stock's beta is a measure of its
systematic risk.
The category of securities with the highest historical risk premium is
small company stocks.
Most stocks have betas between
0.60 and 1.60.
The T−bill return is used in the CAPM model as the risk−free rate.
True
As the required rate of return of an investment decreases, the market price of the investment decreases.
False
Beta is a statistical measure of
the relationship between an investment's returns and the market return.
If we are able to fully diversify, what is the appropriate measure of risk to use?
Beta
The appropriate measure for risk according to the capital asset pricing model is
Beta
Which of the following statements is MOST correct concerning diversification and risk?
Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category.
Which of the following statements is MOST correct regarding beta?
Even professionals may not agree on the measurement of beta.
A rational investor will always prefer an investment with a lower standard deviation of returns, because such investments are less risky.
False
According to the CAPM, for each unit of beta, an asset's required rate of return increases by the market's return.
False
Accounting profits is the most relevant variable the financial manager uses to measure returns.
False
Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.
False
Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds.
False
An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%.
False
Asset allocation is not recommended by financial planners because mixing different types of assets, such as stocks with bonds, makes it more difficult to track performance and adjust portfolios to changing market conditions.
False
Because risk is measured by variability of returns, how long we hold our investments does not matter very much when it comes to reducing risk.
False
Cash flows is the most relevant variable to measure the returns on debt instruments, while GAAP net income is the most relevant variable to measure the returns on common stock.
False
Due to strict stock market controls, the most a stock's value can drop in one trading day is 5%.
False
For a well−diversified investor, an investment with an expected return of 10% with a standard deviation of 3% dominates an investment with an expected return of 10% with a standard deviation of 5%.
False
Investment A and Investment B both have the same expected return, but Investment A is more risky than Investment B. In the technical jargon of modern portfolio theory, Investment A is said to "dominate" Investment B.
False
Negative historical returns are not possible during periods of high volatility (high standard deviations of returns) due to the risk−return trade−off.
False
Portfolio performance is determined mainly by stock selection and market timing, with less emphasis on asset allocation.
False
Proper diversification generally results in the elimination of risk.
False
The risk−return trade−off that investors face on a day−to−day basis is based on realized rates of return because expected returns involve too much uncertainty.
False
The beta of a T−bill is one.
False
The characteristic line for any well−diversified portfolio is horizontal.
False
The market rewards the patient investor, for the period between 1926 and 2016, there has never been a time when an investor lost money if she held an all−large−stock portfolio for ten years.
False
The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.
False
The S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate.
False
Historically, investments with the highest returns have the lowest standard deviations because investors do not like risk.
False
Investment A has an expected return of 15% per year, while Investment B has an expected return of 12% per year. A rational investor will choose
Investment A if A and B are of equal risk.
Rogue Recreation, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 5%, while Lake Tours, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 15%. Which of the following is true?
Lake Tours is more likely to have negative returns than Rogue Rec.
Which of the following is/are true?
Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.
How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?
Purchase a variety of securities; i.e., diversify.
Which of the following statements is MOST correct concerning diversification and risk?
Risk−averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.
A well−diversified portfolio typically has systematic risk equal to about 40% of the portfolio's total risk.
True
A security with a beta of one has a required rate of return equal to the overall market rate of return.
True
A stock with a beta of 1 has systematic or market risk equal to the "typical" stock in the marketplace.
True
A stock with a beta of 1.4 has 40% more variability in returns than the average stock.
True
According to the CAPM, for each unit of beta, an asset's required rate of return increases by the market's risk premium.
True
An all−stock portfolio is more risky than a portfolio consisting of all bonds.
True
Beta is a measurement of the relationship between a security's returns and the general market's returns.
True
Beta represents the average movement of a company's stock returns in response to a movement in the market's returns.
True
Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.
True
Diversifying among different kinds of assets is called asset allocation.
True
In an efficient market, a stock with a standard deviation of returns of 12% could have a higher expected return than a stock with a standard deviation of 10% because the beta for the higher standard deviation stock could be lower than the beta for the lower standard deviation stock.
True
In general, the required rate of return is a function of (1) the time value of money, (2) the risk of an asset, and (3) the investor's attitude toward risk.
True
Small company stocks have historically had higher average annual returns than large company stocks, and also a higher risk premium.
True
Stocks that plot above the security market line are underpriced because their expected returns exceed their risk−adjusted required returns.
True
The CAPM designates the risk−return trade−off existing in the market, where risk is defined in terms of beta.
True
The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.
True
The beta of a T−bill is zero.
True
The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.
True
The realized rate of return, or holding period return, is equal to the holding period dollar gain divided by the price at the beginning of the period.
True
The relevant risk to an investor is that portion of the variability of returns that cannot be diversified away.
True
The required rate of return for an asset is equal to the risk−free rate plus a risk premium.
True
Variation in the rate of return of an investment is a measure of the riskiness of that investment.
True
Which of the following is the slope of the security market line?
the market risk premium
What is diversifying among different kinds of assets known as?
asset allocation
Of the following, which differs in meaning from the other three?
asset−unique risk
Which of the following measures the average relationship between a stock's returns and the market's returns?
beta coefficient
The relevant variable a financial manager uses to measure returns is
cash flows.
If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the highest risk investment?
common stock of small firms
Of the following different types of securities, which is typically considered most risky?
common stocks of small companies
Based on the security market line, Robo−Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%. Robo−Tech has a standard deviation of returns of 18%. Therefore,
for a well−diversified investor, Friendly is less risky than Robo−Tech.
Changes in the general economy, like changes in interest rates or tax laws, represent what type of risk?
market risk
The capital asset pricing model
provides a risk−return trade−off in which risk is measured in terms of beta.
If the beta for stock A equals zero, then
stock A's required return is equal to the risk−free rate of return.
What is the name given to the equation that financial managers use to measure an investor's required rate of return?
the capital asset pricing model
The beta of ABC Co. stock is the slope of
the characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period.
Beginning with an investment in one company's securities, as we add securities of other companies to our portfolio, which type of risk declines?
unsystematic risk
Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________.
beta; standard deviation
The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the
investor's required rate of return.
