Chapter 11 Questions

Systematic risk will ____ when securities are added to a portfolio.

not change

If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be:

positive

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

systematic

____________ 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

What is the beta of the risk-free asset?

zero

Which of the following are examples of unsystematic risk?

- labor strikes - changes in management

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

1. that are borne unnecessarily 2. that are diversifiable

T/F: It is possible for the unsystematic risk of a portfolio to be reduced almost to zero.

true

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

false

T/F: Discounting a news item is the same as taking the present value of that item.

false

T/F: Labor strikes are an example of systematic risk.

false

T/F: Portfolio weights can be defined as the dollars invested in each asset.

false

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

1. company-specific 2. Unsystematic 3. Diversifiable

What is the equation for total return?

Total return = Expected return + Unexpected return

The standard deviation is ___.

the square root of the variance

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

- unsystematic risk - market risk

By definition, what is the beta of the average asset equal to?

1

The computation of variance requires 4 steps. Place the steps in the correct order from the first step to the last step.

1. Calculating the expected return 2. Calculate the deviation of each return from the expected return 3. Square each deviation 4. Calculate the average squared deviation

Which of the following are examples of a portfolio?

1. Investing $100,000 in a combination of US and Asian Stocks. 2. Investing $100,000 in stocks of 50 publicly traded corporations. 3. Investing $100,000 in a combination of stocks and bonds.

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

expected

T/F: Calculating the expected return is the last step in the computation of variance.

false

What is an uncertain or risky return?

it is the portion of return that depends on information that is currently unknown

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

surprise

The true risk of any investment comes from _______________ .

surprises

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

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

How are the unsystematic risks of two different companies in two different industries related?

there is no relationship

T/F: Adding securities will reduce unsystematic risk only. Systematic risk is unaffected by diversification.

true

T/F: The expected return is the return that an investor expects to earn on a risky asset in the future.

true

T/F: Unsystematic risk is specific only to a single company or industry.

true

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

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

1. Standard deviation is the square root of variance 2. Variance is a measure of the squared deviations of a security's return from its expected return

What two factors determine a stock's total return?

1. expected return 2. unexpected return

Unsystematic risk will affect

1. firms in a single industry 2. a specific firm

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 item

T/F: Expected return and inflation are the two components of risky return in the total return equation.

false

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

false

T/F: The calculation of the portfolio beta is similar to the calculation of the portfolio weights.

false

T/F: The expected return of a portfolio is a combination of the weights of each asset in a portfolio.

false

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

1. it may eventually be almost eliminated 2. it is likely to decrease

Which of the following are examples of systematic risk?

1. regulatory changes in tax rates 2. future rates of inflation

The true risk of any investment comes from:

1. surprises 2. unanticipated events

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

1. the Fed's decision on interest rates at their meeting next week 2. the outcome of an application currently pending with the Food and Drug Administration.

T/F: The standard deviation is the variance squared.

false

What is a risk premium?

it is additional compensation for taking risk, over and above the risk-free rate

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

a portfolio's expected return

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

declines

T/F: The surprise part of any announcement is the information the market uses to form the expectation of the return on the stock.

false

What is 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

Systematic risk is also called ______________ risk.

market

T/F: Labor strikes are an example of unsystematic risk.

true