BF LS Chapter 11: Risk and Return

12. True or false: The calculation of the portfolio beta is similar to the calculation of the portfolio weights.

12. False

What is unsystematic risk?

It is a risk that affects a single asset or a small group of assets

What is the slope of the security market line (SML)?

The market-risk premium

The CAPM can also be used for a portfolio by first determining the portfolio's_________

beta

The security market line (SML) shows that the relationship between a security's expected return and its beta is ______.

positive

What is the beta of the risk-free asset?

zero

Unsystematic risk will affect

- firms in a single industry - a specific firm

1. True or false: Portfolio weights can be defined as the dollars invested in each asset.

1. False

What is the expected return for a security if the risk-free rate is 5%, the expected return on the market is 9%, and the security's beta is 1.5?

Expected return for a security= 5 + 1.5 x (9 - 5) = 11%

Which of the following are examples of systematic risk?

Future rates of inflation Regulatory changes in tax rates

What is the definition of expected return?

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

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

a portfolio's expected return

The capital asset pricing model is the equation of the security market line showing the relationship between expected return and ____________

beta

The __________return on a portfolio is a combination of the expected returns on the assets in the portfolio.

expected

10. True or false: It is possible for the unsystematic risk of a portfolio to be reduced almost to zero.

10. True

11. True or false: A well-diversified portfolio will eliminate all risks.

11. False

13. True or false: According to the capital asset pricing model (CAPM), the risk-free rate of return is the expected return on a security with a beta of zero.

13. True

14. True or false: Since the CAPM equation can be used only for individual securities, it cannot be used with portfolios.

14 False

2. True or false: The expected return of a portfolio is a combination of the weights of each asset in a portfolio.

2. False

3. True or false: The expected return is the return that an investor expects to earn on a risky asset in the future.

3. True

What is the expected return of a security with a beta of 1.2 if the risk-free rate is 4 percent and the expected return on the market is 12 percent?

4% + 1.2(12% - 4%) = 13.6%

Which of the following are examples of a portfolio?

Investing $100,000 in a combination of US and Asian stocks Investing $100,000 in a combination of stocks and bonds Investing $100,000 in the stocks of 50 publicly traded corporations

What does the security market line depict?

It is a graphical depiction of the capital asset pricing model.

what is systematic risk?

It is a risk that pertains to a large number of assets.

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

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

What is an uncertain or risky return?

It is the portion of return that depends on information that is currently unknown.

Which of the following statements is (are) true about variance?

Standard deviation is the square root of variance. Variance is a measure of the squared deviations of a security's return from its expected return.

____________ risk is the only risk important to the well diversified investor.

Systematic

Which of the following types of risk is not reduced by diversification?

Systematic, or market risk

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 the Food and Drug Administration.

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

The outcome of an application currently pending with the Food and Drug Administration. The Fed's decision on interest rates at their meeting next week

What is the intercept of the security market line (SML)?

The risk-free rate

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

The risk-free rate of return

______ risk is reduced as more securities are added to the portfolio

Unsystematic Diversifiable Company-specific

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

Unsystematic risk Market risk

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

You must invest in stocks of more than one corporation.

What is the Reward-to-Risk Ratio?

[E(RA) - Rf]/βA

Systematic risk is also called ______________ risk.

market

If an asset has a reward-to-risk ratio of 6.0%, that means it has a __________ of 6.0% per unit of _______.

risk premium; systematic risk

The _____ is the news that influences the unanticipated return on the stock.

surprise

The true risk of any investment comes from _______________ .

surprises

The true risk of any investment comes from ____________.

surprises unanticipated events

The return expected on an investment depends only on the asset's _____ risk.

systematic

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

that are borne unnecessarily that are diversifiable

A portfolio can be described by its portfolio weights which are defined as _____________________.

the percentage of dollars invested in each asset

If the standard deviation of a portfolio is __________?

the square root of the variance

The standard deviation is ___.

the square root of the variance

4. True or false: The standard deviation is the variance squared.

4 .False

5. True or false: Portfolio weights can be defined as the dollars invested in each asset.

5. False

6. True or false: The surprise part of any announcement is the information the market uses to form the expectation of the return on the stock.

6. False

7. True or false: Portfolio weights can be defined as the dollars invested in each asset.

7. False

8. True or false: Labor strikes are an example of systematic risk.

8. False

9. True or false: Expected return and inflation are the two components of risky return in the total return equation.

9. False

The CAPM shows that the expected return for an asset depends on which three things?

The amount of systematic risk The reward for bearing systematic risk The pure time value of money

Even if the portfolio is well diversified, the investor is still exposed to _____ risk.

systematic

Beta tells us the amount of ________ risk of an asset or portfolio relative to ______.

systematic; an average risky asset