FINC Module 4 HW
Unique security risk can be eliminated from an investor's portfolio through diversification.
True
Variation in the rate of return of an investment is a measure of the riskiness of that investment.
True
Of the following different types of securities, which is typically considered most risky?
common stocks of small companies
Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.
True
The required rate of return for an asset is equal to the Risk-Free Rate plus a risk premium
True
Most stocks have betas between
0.60 and 1.60.
If we are able to fully diversify, what is the appropriate measure of risk to use?
Beta
The relevant variable a financial manager uses to measure returns is
Cash Flows
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.
Which of the following statements is MOST correct regarding beta?
Even professionals may not agree on the measurement of beta.
According to the CAPM, for each unit of beta, an asset's required rate of return increases by the market's return.
False
Accounting profits is the most relevant variable the financial manager uses to measure returns.
False
Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds.
False
Another name for an asset's expected rate of return is holding-period return
False
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.
False
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%.
False
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.
False
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.
False
Negative historical returns are not possible during periods of high volatility (high standard deviations of returns) due to the risk-return trade-off
False
The beta of a T-Bill is one
False
The characteristic line for any well −diversified portfolio is horizontal.
False
The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.
False
The risk-return trade-off that investors face on a day-to-−day basis is based on realized rates of return because expected returns involve too much uncertainty.
False
Historically, investments with the highest returns have the lowest standard deviations because investors do not like risk.
False
You are considering buying some stock in Continental Grain. 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 income taxes. III. Risk resulting from an explosion in a grain elevator owned by Continental. IV. Risk resulting from a pending lawsuit against Continental.
I and II
Changes in the general economy, like changes in interest rates or tax laws, represent what type of risk?
Market Risk
How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?
Purchase a variety of securities; i.e., diversify.
A stock with a beta of 1 has systematic or market risk equal to the "typical" stock in the marketplace.
True
A well diversified portfolio typically has systematic risk equal to about 40% of the portfolio's total risk.
True
Beta is a measurement of the relationship between a security's returns and the general market's returns.
True
Beta represents the average movement of a company's stock returns in response to a movement in the market's returns.
True
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.
True
Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns
True
The CAPM designates the risk-return trade-off existing in the market,, where risk is defined in terms of beta
True
The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.
True
The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.
True
A typical measure for the risk-free rate of return is the
U.S Treasury Bill Rate
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?
U.S. Treasury bills
What is the name given to the equation that financial managers use to measure an investor's required rate of return?
the capital asset pricing model
The beta of ABC Co. stock is the slope of
the characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period.
Beta is a statistical measure of
the relationship between an investment's returns and the market return.
The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the
investor's required rate of return.
