Finance 300: Chapter 13 Quiz
For well-diversified portfolios, unsystematic risk is relatively large.
False
Beta is a measure of relative risk.
True
Beta is the choice variable in the security market line.
True
Consider a portfolio with a beta of 0.8 and WSB Inc. with a beta of 1.1. If you add WSB to the portfolio the the total risk of the portfolio will decrease.
True
Consider the following information: Standard Deviation Beta Bob Inc. 32% 0.90 Jane Ltd. 23% 1.33 Bob has less market risk.
True
WSB Inc. has a stock beta of 0.8. If T bills yield 2.1% per year and the annual expected return on the S&P 500 is 13.4%, according to the CAPM what is the expected return on WSB stock?
11.14
WSB Inc.'s stock beta is 81% of the market's. In secondary markets you see that a a $100 face value T bill is currently trading for $94.43 and you expect the risk premium on the S&P 500 to be 1.6 times the yield on the T bill. Given the information above, what is the expected return on WSB's stock for the upcoming year?
13.54
WSB Inc. has a stock beta of 1.15 and an annual expected return of 13.2%. If you expect the S&P 500 to earn 12% next year, what is the intercept of the security market line?
4
WSB Inc.'s stock beta is 40% of the market's. In secondary markets you see that a a $100 face value T bill is currently trading for $97.11 and you expect the risk premium on the S&P 500 to be 2.9 times the yield on the T bill. Given the information above, what is the expected return on WSB's stock for the upcoming year?
6.43
WSB Inc. has a stock beta of 1.18 and an annual expected return of 12.9%. If you expect the S&P 500 to earn 12% next year, what is the intercept of the security market line?
7
WSB Inc. has a stock beta of 0.8. If T bills yield 2.5% per year and the annual expected return on the S&P 500 is 12.1%, according to the CAPM what is the appropriate risk premium WSB stockholders should receive?
7.68
An asset's beta is the intercept for the security market line.
False
An expected change in GDP is a systematic risk.
False
An unanticipated labor strike at John Deere is a market risk,
False
As you increase the number of randomly chosen stocks in your portfolio from one to a thousand you approach an asymptote at close to zero.
False
As you increase the number of randomly chosen stocks in your portfolio from one to a thousand you approach an asymptote which represents the amount of idiosyncratic risk left in your portfolio.
False
Assets below the security market line have a reward-to-risk ratio that is higher than the next best investment of similar risk.
False
Assets on the security market line are underpriced.
False
Beta is expressed in percentages.
False
Beta is expressed in squared percentages.
False
Comparing undiversified portfolios to the market portfolio, the proportion of their total risks that are systematic risks are about the same.
False
Consider a portfolio with a beta of 1.5 and WSB Inc. with a beta of 1.3. If you add WSB to the portfolio the the market risk of the portfolio will increase.
False
Consider the following information: Standard Deviation Beta Bob Inc. 32% 0.90 Jane Ltd. 23% 1.33 Bob has less total risk.
False
Consider the following information: Standard Deviation Beta Bob Inc. 32% 0.90 Jane Ltd. 23% 1.33 Jane should have the lower expected return.
False
Consider the following situation, (E[rK] - rf) ÷ betaK < (E[rm] - rf) ÷ betam There will be net selling pressure on Asset K, driving down its expected return and reward-to-risk ratio.
False
Diversification can substantially reduce the variability of returns with an equivalent reduction in expected returns.
False
For a single asset, the standard deviation of returns is a measure of systematic total risk in percent.
False
If you hold the Dow Jones Industrials you are not well-diversified because you are holding leading firms in a few very similar industries.
False
If you hold the S&P 500 you are not very close to the asymptotic level of nondiversifiable risk.
False
If you own fifty stocks that span twenty different industries you are undiversified.
False
In a world with uncertainty, there must be a finite number of states.
False
In equilibrium, (E[ri] + rf) ÷ betai = (E[rm] + rf) ÷ betam
False
In equilibrium, assets can have many different reward-to-risk ratios.
False
In financial markets, there is a reward for bearing risk unnecessarily.
False
In terms of risk reduction, there are no limits to the benefits of diversification.
False
In the CAPM, the average risk premium is betai × (E[rM] - rf)
False
Increasing the number of randomly chosen stocks from one to two makes a relatively large reduction in systematic risk.
False
Manitowoc has a beta of 2.0, which means it is about half as sensitive to systematic surprises as the S&P 500.
False
Random good luck is a market risk.
False
Systematic risks are surprises that result in the uncorrelated price changes of a large number of assets.
False
The "expected" in expected return means the mostly likely realized return if the process is repeated many times.
False
The beta coefficient measures the sensitivity of an asset's returns to surprises surprises that affect a small number of assets in an uncorrelated way.
False
The beta coefficient measures the sensitivity of an asset's returns to surprises that affect a small number of assets in a correlated way.
False
The beta of the S&P 500 is zero.
False
The expected component of news changes an investment's expected future cash flows, and thereby its price.
False
The expected return on a portfolio can be expressed as, E[rp] = p1E[r1] + p2E[r2] + ... + pmE[rm]
False
The expected return on a portfolio, E[rp] = w1E[r1] + w2E[r2] + ... + wmE[rm], uses portfolio weights but not probabilities.
False
The expected return on an asset is based on the probabilities of the m possible state-contingent outcomes.
False
The market portfolio is a theoretical portfolio that holds a little bit of all private but not public risky assets in the economy.
False
The market risk premium is the choice variable in the security market line.
False
The total risk for a diversified portfolio is much greater than the systematic risk.
False
There are expected and unexpected components to expected returns.
False
There are positive and increasing marginal diversification benefits when increasing the number of randomly chosen stocks in your portfolio.
False
There is not a reward for bearing systematic risk.
False
This is the CAPM, E[ri] = rf + betai × (E[rM] + rf)
False
When calculating the forward looking variance, you divide the sum of the squared deviations from the expected value by T-1.
False
You can hold a true market portfolio because it includes risky publicly traded assets.
False
You like assets that are below the security market line.
False
betai = sensitivity of asset i to unsystematic risk ÷ sensitivity of average asset to systematic risk.
False
betai = sensitivity of average asset to systematic risk ÷ sensitivity of asset i to systematic risk
False
expected return = realized return + anticipated return
False
unexpected return = asset-specific portion + unsystematic portion
False
A stock with a beta with a beta of 0.50 has about half the sensitivity to systematic surprises as the market portfolio.
True
All else equal, if Pixar has unexpected blockbuster movie, the market portfolio will not move.
True
All else equal, if beta decreases, the slope of the SML will remain the same.
True
All else equal, if the riskless rate increases, the slope of the SML will flatten.
True
An asset with a beta of zero has no systematic risk.
True
Announcements and news contain both an expected component and a surprise component.
True
As you increase the number of randomly chosen stocks in your portfolio from one to a thousand you eliminate a substantial part of the risk, but not all of it.
True
As you increase the number of randomly chosen stocks in your portfolio from one to a thousand you eliminate a substantial part of the total risk, but not all of it.
True
As you increase the number of randomly chosen stocks in your portfolio from one to a thousand, the percent of your total risk that is idiosyncratic risk decreases.
True
Assets above the security market line are positive NPV winners.
True
Assets below the security market line have a reward-to-risk ratio that is lower than the next best investment of similar risk.
True
Assets on the security market line are zero NPV investments.
True
At any point in time, the unexpected return can be either positive or negative.
True
Because it is difficult and expensive to diversify away systematic risk, the expected return on a risky asset depends only on its market risk.
True
Consider a portfolio with a beta of 1.3 and WSB Inc. with a beta of 1.5. If you add WSB to the portfolio the the market risk of the portfolio will increase.
True
Consider the following information: Standard Deviation Beta WSB Inc. 22% 1.30 Badger Ltd. 29% 1.10 WSB should have the higher expected return.
True
Consider the following portfolio: JCI MAN ROK HOG Portfolio Weight 20% 35% 25% 20% Beta 1.2 1.5 1.4 1.3 You expect this portfolio to be more sensitive to asset-specific surprises than the S&P 500.
True
Consider the following situation, (E[rN] - rf) ÷ betaN = (E[rm] - rf) ÷ betam Asset N is correctly priced.
True
Consider this portfolio: T bill S&P 500 Portfolio Weight 50% 50% The beta of the portfolio is one half.
True
Diversifiable risk can be eliminated by combining assets that are not perfectly correlated together into a portfolio.
True
In the CAPM, the slope reflects the average compensation for bearing systematic risk in the market.
True
Market risk cannot be eliminated by combining assets that are not perfectly correlated together into a portfolio.
True
Systematic risks are surprises that result in the correlated price changes of a large number of assets.
True
The "expected" in expected return means the average if the process is repeated many times.
True
The CAPM accounts for the pure time value of money through the riskless rate.
True
The expected return on a portfolio can be expressed as, E[rp] = w1E[r1] + w2E[r2] + ... + wmE[rm]
True
The forward looking variance uses the probabilities to weight the squared deviations from the expected value.
True
The market portfolio is a theoretical portfolio that holds a little bit of every risk asset in the economy.
True
The proportion of a portfolio's total risk that is market risk decreases as diversification decreases.
True
The riskless rate is the intercept for the security market line.
True
The security market line provides the internal rates of return for assets that plot on it.
True
There is a minimum level of risk that cannot be diversified away and that is the market portion.
True
There is a minimum level of total risk that cannot be diversified away.
True
Unsystematic risk and idiosyncratic risk are the same thing.
True
Unsystematic risk and unique risk are the same thing.
True
When applied to asset returns, the forward looking standard deviation is in percent.
True
You cannot hold a true market portfolio.
True
You want to avoid assets that are below the security market line.
True
betai = sensitivity of asset i to systematic risk ÷ sensitivity of average asset to systematic risk.
True
betai = sensitivity of asset i to systematic risk ÷ sensitivity of the market portfolio to systematic risk.
True
realized return = expected return + unexpected return
True
You can hold a true market portfolio.
False
A stock with a beta with a beta of 0.50 has about twice the sensitivity to systematic surprises as the market portfolio.
False
As you increase the number of randomly chosen stocks in your portfolio from one to a thousand you eliminate a substantial part of the systematic risk, but not all of it.
False
As you increase the number of randomly chosen stocks in your portfolio from one to a thousand, the proportion of your diversifiable risk that is asset-specific decreases.
False
As you increase the number of randomly chosen stocks in your portfolio from one to a thousand, the proportion of your nondiversifiable risk that is market risk increases.
False
Asset-specific risk cannot be eliminated by combining assets that are not perfectly correlated together into a portfolio.
False
Assets above the security market line are negative NPV losers.
False
Assets above the security market line are overpriced.
False
Assets on the security market line are positive NPV investments.
False
The beta coefficient measures an asset's diversifiable risk.
False
The beta coefficient measures an asset's idiosyncratic risk.
False
The beta coefficient measures an asset's total risk.
False
The beta of the S&P 500 is more than the market's.
False
A beta more than one implies the asset has more systematic risk than the overall market.
True
A parts shortage at Ford is a unique risk.
True
Generally, realized returns are not equal to expected returns.
True
If we hold only assets in one industry then we are exposing ourselves to risks that we could partially diversify away.
True
If we know a physical asset's systematic risk, we can use the CAPM to determine its expected return.
True
In the CAPM, the intercept reflects compensation for waiting and inflation.
True
The capital asset pricing model assumes all reward-to-risk ratios are equal.
True
The capital asset pricing model is the equation for a line.
True
unexpected return = market portion + idiosyncratic portion
True
unexpected return = systematic portion + unsystematic portion
True