Ch 6

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Which of the following is NOT an example of market risk or systematic​ risk?

Management risk

Which of the following has a beta of​ zero?

A​ risk-free asset

You are considering buying some stock in Colony Transport. Which of the following is an example of systematic or market​ risk?

Risk resulting from a general decline in the stock market.

You are considering investing in Disney. Which of the following is an example of diversifiable​ risk?

Risk resulting from uncertainty regarding a possible strike against Disney.

Give specific examples of systematic and unsystematic risk. How many different securities must be owned to essentially diversify away unsystematic​ risk? Identify whether the following examples are systematic or unsystematic risks. How many different securities must be owned to essentially diversify away unsystematic​ risk?

The CEO of a firm retires. Unsystematic risk The Federal Reserve announces that it will lower the interest rate to boost the economy. Systematic risk Production costs of a firm increase due to rising oil prices. Systematic risk A manufacturer loses a product liability suit. Unsystematic risk The inflation rate increases unexpectedly. Systematic risk A firm announces a decrease in its earnings forecast. Unsystematic risk 20

The security market line​ (SML) relates risk to​ return, for a given set of market conditions. If you expect inflation to​ increase, which of the following would expect to occur all else being held​ constant?

The SML line would shift up but maintain the same slope.

What method is used to measure a​ firm's market​ risk? A​ firm's market risk can be estimated by

estimating the beta coefficient of the characteristic line using the regression method.

Which rate of return in the popup​ table, is the​ risk-free rate?​ Why? Treasury bills are​ risk-free assets because they have a​ short-term maturity​ date, their price is less​ volatile, and there is no chance of default on them.

​3.7% true

The market risk premium is measured​ by:

market return less​ risk-free rate.

What is the name of additional compensation required for assuming greater​ risk?

risk premium.

The beta of a stock is the slope​ of:

the line of best fit for a plot of the​ company's returns against the returns of the market portfolio for the same period.


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