FIN Ch. 13 pg. 210

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

10%; (0.06x0.02)+(0.4x0.22)=0.10

The weighted average of the standard deviations of the assets in Portfolio C is 12.95. Which of the following is a possible value for the standard deviation of the portfolio?

12. 9% or 10.9%

Which of the following are examples of a portfolio?

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

What is unsystematic risk?

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

Which type of risk is unaffected by adding securities to a portfolio?

Systematic risk

A firm faces many risks. Which of the following are examples of unsystematic risks faced by a firm?

The death of a CEO, A hostile takeover attempt by a competitor

What are the two components of the expected return on the market?

The risk premium; the risk-free rate

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

The unsystematic portion; the systematic portion

The risk of owning an asset comes from:

Unanticipated events; surprises

If the variance of a portfolio increases, then the portfolio standard deviation will ___.

increase

There is ___ correlation between the unsystematic risk of two companies from different industries.

no

Which of the following are examples of unsystematic risk?

Changes in management; Labor strikes

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?

13.6%

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; An increase in the corporate tax rate

Asset A has an expected return of 17% and standard deviation of 5%. Asset B has an expected return of 15% and standard deviation of 5%. Which asset would a rational investor choose?

Asset A

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

Idiosyncratic; Unique; Unsystematic

What is systematic risk?

It is a risk the pertains to a large number of assets

If securities expected return is equal to the risk-free rate of return, and the market-risk premium is greater than zero, what can you conclude about the value of the security's beta based on CAPM?

It is equal to 0

What is the definition of expected return?

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

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 decrease

Which of the following statements are true about variance?

Variance is a measure of the squared deviations of a security's return from its expected return; standard deviation is the square root of variance

If you wish to create a portfolio of stocks, what is the required minimum number of stocks?

You must invest in stocks of at least 2 corporations

The expected return on the market will increase if the risk-free rate ___ or if the market risk premium ___.

increases; increases

When an investor is diversified only ___ risk matters

systematic

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

that are borne unnecessarily


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