Finance Midterm chapter 5

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The CAPM designates the risk-return trade- off existing in the market, where risk defined in terms of beta

true

Unique security risk can be eliminated from an​ investor's portfolio through diversification.

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Variation in the rate of return of an investment is a measure of the riskiness of that investment.

the capital asset pricing model

What is the name given to the equation that financial managers use to measure an​ investor's required rate of​ return?

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​Historically, investments with the highest returns have the lowest standard deviations because investors do not like risk.

US treasury bill rate

A typical measure for the risk-free rate of return is the

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A stock with a beta of 1 has systematic or market risk equal to the​ "typical" stock in the marketplace.

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According to the​ CAPM, for each unit of​ beta, an​ asset's required rate of return increases by the​ market's return.

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Accounting profits is the most relevant variable the financial manager uses to measure returns.

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Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds.

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Another name for an​ asset's expected rate of return is holding- period return

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Asset allocation is not recommended by financial planners because mixing different types of​ assets, such as stocks with​ bonds, makes it more difficult to track performance and adjust portfolios to changing market conditions.

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Beta is a measurement of the relationship between a​ security's returns and the general​ market's returns.

the relationship between an​ investment's returns and the market return.

Beta is a statistical measure of

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Beta represents the average movement of a​ company's stock returns in response to a movement in the​ market's returns.

market risk

Changes in the general​ economy, like changes in interest rates or tax​ laws, represent what type of​ risk?

true

Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.

Purchase a variety of​ securities; i.e., diversify.

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected​ return?

beta

If we are able to fully​ diversify, what is the appropriate measure of risk to​ use?

US treasury bills

If you were to use the standard deviation as a measure of investment​ risk, which of the following has historically been the least risky​ investment?

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In an efficient​ market, a stock with a standard deviation of returns of​ 12% could have a higher expected return than a stock with a standard deviation of​ 10% because the beta for the higher standard deviation stock could be lower than the beta for the lower standard deviation stock.

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Investment A and Investment B both have the same expected​ return, but Investment A is more risky than Investment B. In the technical jargon of modern portfolio​ theory, Investment A is said to​ "dominate" Investment B.

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In​ general, the required rate of return is a function of​ (1) the time value of​ money, (2) the risk of an​ asset, and​ (3) the​ investor's attitude toward risk.

0.60 and 1.60.

Most stocks have betas between

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Negative historical returns are not possible during periods of high volatility​ (high standard deviations of​ returns) due to the risk- return trade- off

common stocks of small companies

Of the following different types of​ securities, which is typically considered most​ risky?

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Stocks that plot above the security market line are underpriced because their expected returns exceed their risk- adjusted required returns

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The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

the characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period.

The beta of ABC Co. stock is the slope of

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The beta of T-bill is one

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The characteristic line for any well-diversified portfolio is horizontal

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The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.

​investor's required rate of return.

The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the

false

The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.

cash flows

The relevant variable a financial manager uses to measure returns is

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The required rate of return for an asset is equal to the risk- free rate plus a risk premium

Diversification is mainly achieved by the asset allocation​ decision, not the selection of individual securities within each asset category.

Which of the following statements is MOST correct concerning diversification and​ risk?

Even professionals may not agree on the measurement of beta.

Which of the following statements is MOST correct regarding​ beta?

Risk resulting from a general decline in the stock market Risk resulting from a possible increase in income taxes

You are considering buying some stock in Continental Grain. Which of the following are examples of non−diversifiable ​risks?

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a well- diversified portfolio typically has systematic risk equal to about​ 40% of the​ portfolio's total risk.

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for a well-diversified ​investor, an investment with an expected return of​ 10% with a standard deviation of​ 3% dominates an investment with an expected return of​ 10% with a standard deviation of​ 5%.

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the risk-return trade-off that investors face on a day to day baisis is based on realized rates of return because expected returns involve too much uncertainty.