CHAPTER 13

beta of the market is equal to___

1

1. Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification.

1. An investor wants to reduce the unsystematic risk in her portfolio. Which of the following actions is least likely to do so?

Reducing the number of stocks held in her stock portfolio

is the return on a risky asset expected in the future. It is equal to the sum of the possible returns multiplied by their probabilities

expected return

The difference between the expected return on a risky investment and the certain return on a risk-investment

expected, risk-premium

1. Which one of the following statements is accurate?

A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.

1. A ________ is the market's measure of systematic risk.

Beta of 1

Is the equation of the SML showing the relationship between expected return and beta

Capital asset pricing model (CAPM)

1. The most important reason to diversify a portfolio is to:

Eliminate asset-specific risk

1. Given a well-diversified stock portfolio, the variance of the portfolio:

May be less than the variance of the least risky stock in the portfolio.

1. Which of the following statements best describes the principle of diversification?

Spreading an investment across many diverse assets will eliminate some of the total risk.

1. ________ measures total risk, and ________ measures systematic risk.

Standard deviation ; beta

1. The Capital Asset Pricing Model (CAPM) shows that the expected return for a particular asset depends on all of the following, except:

The return on a risk-less asset

1. Risk-free assets have a beta of 0 and the market portfolio has a beta of 1.

True

is the slope of the SML, the term E (Rm)-Rf

market risk premium

1. Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n:

portfolio

is a group of assets such as stocks and bonds held by an investor

portfolio

implies some of the riskiness with individual assets can be eliminated by forming portfolios

principle of diversification

SML means

security market line

influences many assets. Also, know as non-diversifable risk or market risk

systematic risk

states that the expected return on a risky asset depends only on that asset's systematic risk

systematic risk principle

is a simple weighted combination of the expected returns of the assets in the portfolio

the return of a portfolio

is a risk that affects at most a small number of assets. Also, know as diversifiable risk, unique risk, or asset-specific risk

unsystematic risk

1. Of the options listed below, which is the best measure of systematic risk?

Beta

1. The security market line is a positively sloped straight line that displays the relationship between expected return and ____________.

Beta

The sensitivity of the asset (stock) return to the changes in the market portfolio returns.

Beta

1. While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the:

Expected return

1. While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the:Top of Form

Expected return

1. Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n):

Portfolio

1. The security market line intercepts the vertical axis at the:

Risk-free rate

1. The security market line intercepts the vertical axis at the:

Risk-free rate.

Expected return is the return on a _______ asset expected in the future

Risky

1. The ________ is a positively sloped linear function that plots securities' expected returns against their betas

Security market line

is a positively sloped. straight line displaying the relationship between expected return and beta

Security market line (SML)

1. _______ measures total risk, and ________ measures systematic risk.

Standard deviation; beta

1. Most financial securities have some level of ________ risk.

Systematic

1. An investor who owns a well-diversified portfolio would consider ________ to be irrelevant.

Unsystematic risk

1. Portfolio Beta is the ______________ average of the Betas of the investments included in the portfolio.

Weighted

level of systematic risk is measured using the

beta coefficient B

is NOT a simple weighted combination of the variances of the assets in the portfolio

variance of a portfolio

1. The expected return of a stock, based on the likelihood of various economic outcomes, equals the:

weighted average of the returns for each economic state.