Finance Test

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

True

Diversifying among different kinds of assets is called asset allocation.

True

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

True

The market risk premium is measured​ by:

market return less​ risk-free rate.

The category of securities with the highest historical risk premium is

small company stocks.

1. You are considering buying some stock in Boeing. Which of the following are examples of non-diversifiable risks? I. Risk resulting from a general decline in the stock market. II. Risk resulting from a possible increase in corporate income taxes. III. Risk resulting from a plane crash due to software problems IV. Risk resulting from a pending lawsuit against Boeing.

A. I and II

1. Which one of the following assets has historically had the highest average annual return?

A. large company stocks

1. Which of the following is not a component of the required rate of return?

Appropriate discount rate

Which of the following is NOT an example of market risk or systematic​ risk? A. Interest rate risk B. Inflation C. Management risk Your answer is correct. D. Recession

C. Management risk

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

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

1. Most non-diversifiable risk can be eliminated by creating a portfolio of around 30 stocks.

False

A rational investor will always prefer an investment with a lower standard deviation of​ returns, because such investments are less risky.

False

1. Financial risk occurs because _____________________ do no change when operating income rises or falls.

Fixed interest expense

Proper diversification generally results in the elimination of risk.

False

The market rewards the patient​ investor, for the period between 1926 and​ 2016, there has never been a time when an investor lost money if she held an all−large−stock portfolio for ten years.

False

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

False

1. Unsystematic risk is also known as:

Firm-specific risk

1. In comparing the deviations of returns, which one of the following assets has historically had the largest standard deviation of annual returns?

Large company stocks

1. According to the definitions given in the text, if Stock A has a standard deviation of 4% and expected returns of 9%, and Stock B has a standard deviation of 3% and returns of 1%, which stock has a better risk/reward profile?

Stock A

An all−stock portfolio is more risky than a portfolio consisting of all bonds.

True

Small company stocks have historically had higher average annual returns than large company​ stocks, and also a higher risk premium.

True

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

True

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

common stock of small firms