FINA Exam 2 set 2

Of the options listed below, which is the best example of a diversifiable risk? Multiple Choice Core inflation increases Federal income taxes increase A firm's sales decrease Energy costs increase Interest rates increase

A firm's sales decrease

Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n):

Portfolio

When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the:

market value of the investment in each stock.

Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n):

portfolio weight.

If a poorly-diversified portfolio becomes well diversified, we would expect the portfolio's: Multiple Choice rate of return to increase. standard deviation to increase. standard deviation to decrease. beta to decrease. beta to increase.

standard deviation to decrease.

The expected return of a stock, based on the likelihood of various economic outcomes, equals the:

weighted average of the returns for each economic state.

Which of the following statements regarding unsystematic risk is accurate? Multiple Choice It is related to the overall economy. It is measured by beta. It can be effectively eliminated by portfolio diversification. It is compensated for by the risk premium. It is measured by standard deviation.

It can be effectively eliminated by portfolio diversification.

Which of the following statements best describes the principle of diversification? Multiple Choice Spreading an investment across many diverse assets will eliminate all of the systematic risk. Concentrating an investment in two or three stocks will eliminate all of the unsystematic risk. Spreading an investment across multiple diverse companies will not lower the total risk. Spreading an investment across many diverse assets will eliminate some of the total risk. Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.

Spreading an investment across many diverse assets will eliminate some of the total risk.

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the:

expected return.

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.

risk-free rate