Finance 3312 Exam 2
Which of the following are needed to describe the distribution of stock returns?
-Standard deviation of returns -Mean return
Which of the following statements is (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.
By definition, what is the beta of the average asset equal to?
1
If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?
An efficient market reaction
The capital asset pricing model is the equation of the security market line showing the relationship between expected return and
Beta
The amount of systematic risk presents in a particular risky asset relative to that in an average risky asset is measured by the
Beta coefficient
the difference between the rate of return on a risky asset and the risk-free rate of return.
Excess Return
Labor strikes are an example of systematic risk.
False
Portfolio weights can be defined as the dollars invested in each asset.
False
The average return of a given period is typically not a good estimate of the returns over that same period.
False
An efficient market is one in which any change in available information will be reflected in the company's stock price
Immediately
If the dispersion of returns on a particular security is very spread out from the security's mean return, the security
Is highly risk
What does the security market line depict?
It is a graphical depiction of the capital asset pricing model.
What is unsystematic risk?
It is a risk that affects a single asset or a small group of assets
what is systematic risk?
It is a risk that pertains to a large number of assets.
What is a risk premium?
It is additional compensation for taking risk, over and above the risk-free rate.
What is an uncertain or risky return?
It is the portion of return that depends on information that is currently unknown.
What is the definition of expected return?
It is the return that an investor expects to earn on a risky asset in the future
Which type of stock price adjustment time path occurs when there is a bubble (price run up) in the path followed by a decline after the market receives information about the stock?
Overreaction and correction
can be interpreted as the reward for bearing risk.
Risk premium
The standard deviation is the ______ of the variance.
Square root
the most commonly used measures of volatility.
Standard deviation
____________ risk is the only risk important to the well diversified investor.
Systematic
What is the slope of the security market line (SML)?
The market-risk premium
What is the intercept of the security market line (SML)?
The risk-free rate
According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero?
The risk-free rate of return
What is the equation for total return?
Total Return = Expected Return + Unexpected Return
According to the capital asset pricing model (CAPM), the risk-free rate of return is the expected return on a security with a beta of zero.
True
Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio declines.
True
Market risk and unsystematic risk are the two components of risky return in the total return equation.
True
The expected return is the return that an investor expects to earn on a risky asset in the future.
True
The larger the variance of standard deviation is, the more spread out the returns will be.
True
The risk premium can be interpreted as a reward for bearing risk
True
If you wish to create a portfolio of stocks, what is the required minimum number of stocks?
You must invest in stocks of more than one corporation.
What is the Reward-to-Risk Ratio?
[E(RA) - Rf]/βA
In an efficient market ______ investments have a _____ NPV.
all; zero
When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market:
already knew about most of the news item
The average return on the stock market can be used to
compare stock returns with the returns on other securities
The average return on the stock market can be used to ___.
compare stock returns with the returns on other securities
What two factors determine a stock's total return?
expected return and unexpected return
In an efficient market, firms should expect to receive ______ value for securities they sell.
fair
An efficient market is one that fully reflects all available ______.
information
Stock prices fluctuate from day to day because of:
information flow
Systematic risk is also called ______________ risk.
market
If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be:
positive
The security market line (SML) shows that the relationship between a security's expected return and its beta is ______.
positive
If an asset has a reward-to-risk ratio of 6.0%, that means it has a __________ of 6.0% per unit of _______.
risk premium; systematic risk
The true risk of any investment comes from _______________ .
surprises
A portfolio can be described by its portfolio weights which are defined as _____________________.
the percentage of dollars invested in each asset
The square of the standard deviation is equal to the ____.
variance
The efficient markets hypothesis contends that _____________ capital markets such as the NYSE are efficient.
well-organized
What is the beta of the risk-free asset?
zero
To get the average return, the yearly returns are summed and then divided by the number of returns.
True
The square of the standard deviation is equal to the
Variance
