FRL3000 Ch 13 Connect Study set

By definition what is the beta on average asset equal to?

1

If a securities expected return is equal to the expected return on the market its beta must be

1

According to the CAPM, which of the following events would affect the return on a risky asset?

a strengthening of the country's currency Federal reserve actions that affect the economy a change in yield on T-bills.

Which type of risk is unaffected by adding securities to a portfolio?

systematic risk

The systematic risk principle argues that the market does not reward risks

that are borne unnecessarily

What are the two components of the expected return on the market (Rm)?

the risk free rate risk premium

According to the capital asset pricing model, what is the expected return on a security with a beta of zero?

the risk free rate of return

What is the intercept of the security market line SML?

the risk-free rate

The standard deviation is

the square root of variance

What are the two components of unexpected return (U) in the total return equation?

the unsystematic portion the systematic portion

The risk from owning an asset comes from?

unanticipated events surprises

Place the steps in the computation of variance in the correct order from the first step to the last step

1. Calculating the expected return. 2. Determine the square deviation from the expected return .3. Multiply each Square deviation by its probability .4. The result in variance

Marks company believes that there is a sixty percent chance of a recession and a 40% chance of a boom. In the case of recession the company expects to earn a 2 % return. In the case of boom the company expects to earn 22%. What is Marks company expected return?

10%

The weighted average of the standard deviations of the assets in Portfolio C is 12.9%. Which of the following are possible values for the standard deviation of the portfolio?

10.9% 12.9%

ABC has a beta of 2.5 and XYZ has a beta of 1.5. The Risk-free rate is 4 percent and the market risk premium is 9 percent. What is the expected return on a portfolio that is equally invested in ABC and XYZ?

22%

If the variance of a portfolio is .0025, what is the standard deviation?

5%

What is expected to return for a security if the risk-free rate is 5%, the expected return on the market is 9% and the firms beta is 1.5 %.

5+1.5(9-5)=11%

What is the return on a portfolio that consists of: $50,000 in index fund, $30,000 in a bond fun, and $20,000 in a foreign stock fund? The expected returns are 7%, -3% and 18%, respectively.

6.2%

If the risk free rate is 1% what is the reward to risk ratio for asset Y?

7.3%

John's portfolio consists of $1,200 worth of Chi Corporation common stock and $400 worth of Lambda Corporation common stock. Lambda's portfolio weight is 25%, and Chi's portfolio weight is:

75%

If the boom and recession have an equal probability of occurring what is the expected return on a portfolio consisting of 80% company X and 20% of company Y?

9.0%

A firm is exposed to both systematic and unsystematic risks. Which of the following are examples of systematic risks?

An increase in the Federal funds rate An increase in the corporate tax rate

Assets A and B each have an expected return of 10 percent. Asset A has a standard deviation of 12 percent while Asset B has a standard deviation of 12 percent. Which asset would a rational investor choose?

Asset A

If the risk-free rate is 1%, what will happen to prices of assets X and Y in an efficient market?

Assets Y price will rise and assets X price will fall.

What is the equation for the capital asset pricing model?

Expected return on security=Risk free rate + Beta X (Return on market-Risk free rate)

T/F: Since the CAPM equation can be used only for individual securities, it cannot be used with portfolios.

False

What is an 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 the definition of expected return?

It is the return that an investor expects to earn on a risky asset in the future

As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?

It may eventually be almost totally eliminated It is likely to decrease.

What does variance measure?

It measures the riskiness of a security's returns. It measures the dispersion of the sample returns.

Which of the following are examples of information that may impact the risky return of a stock?

The Fed's decision on interest rates at their meeting next week The outcome of an application currently pending with food and Drug administration

What is the expected return on a security with beta of 1?

The expected return on the market

If you wish to create a portfolio of stocks, what is the required minimum number of stocks?

You must invest in stock of more than one corporation

The calculation for a portfolio beta is similar to the calculation of:

a portfolios expected return

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 items

How can a positive relationship between the expected return on a security and its beta be justified?

because the difference between the return on the market and the risk-free rate is likely to be positive.

Which of the following are unsystematic risks?

changes in management labor strikes

The minimum required return on a new project when its risk is similar to that of projects the firm currently owns is known as the:

cost of capital

Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio:

declines

The increase in the number of stocks in a portfolio results in an ___________ in average standard deviation of annual portfolio returns.

decrease

___________ risk is reduced as more securities are added to the portfolio.

diversifiable unsystematic unique

What two factors determine a stock's total return?

expected return unexpected return

T/F: A well-diversified portfolio will eliminate all risks

false

T/F: Systematic risk can be eliminated by diversification

false

An investment will have a negative NPV when its expected return is __________ _________what the financial markets offer for the same risk.

less than

There is ______ correlation between the unsystematic risk of two companies from different industries.

no

The security market line (sml) shows that the relationship between a securities expected return and its beta is_________.

positive

It would be useful to understand how the _________ of the risk premium on a risky asset is determined

size

When the investor is diversified only ________ risk matters.

systematic