Finance Final Exam

security market line

The ________ is a positively sloped linear function that plots securities' expected returns against their betas.

10

The majority of the diversifiable risk in a portfolio can be eliminated by owning as few as ________ stocks.

market risk premium.

The slope of the security market line is the:

It can be effectively eliminated by portfolio diversification

Which of the following statements regarding unsystematic risk is accurate?

Standard deviation, beta

________ measures total risk, and ________ measures systematic risk.

beta of 1

A ________ is the market's measure of systematic risk.

Reducing the number of stocks held in her stock portfolio

An investor wants to reduce the unsystematic risk in her portfolio. Which of the following actions is least likely to do so?

unsystematic risk

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant.

systematic

Most financial securities have some level of ________ risk.

Beta

Of the options listed below, which is the best measure of systematic risk?

Capital Asset Pricing Model (CAPM)

The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk.

weighted average of the returns for each economic state.

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

Cost of debt

interest rate the firm must pay on new borrowing

risk free rate

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

total risk

measured by the variance or standard deviation of its return