Chapter 13 (Finance)

market risk premium and the amount of systematic risk inherent in the security.

According to the capital asset pricing model (CAPM), the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

standard deviation to decrease.

If a poorly-diversified portfolio becomes well diversified, we would expect the portfolio's:

Systematic

Most financial securities have some level of ________ risk.

A firm's sales decrease

Of the options listed below, which is the best example of a diversifiable risk?

Beta

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

portfolio weight.

Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n):

capital asset pricing model

The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk.

weighted average of the returns for each economic state.

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

risk-free rate

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.

market value of the investment in each stock.

When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the:

a mathematical expectation based on a weighted average and not a guaranteed outcome.

When using economic probabilities to compute the expected return on a stock, the result is:

Reducing the number of stocks held in her stock portfolio

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

is underpriced.

Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock:

The actual expected stock return indicates the stock is currently overpriced.

The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. Which one of the following statements is true given this information?

I, III, and IV only

Which of the following are assumptions of the capital asset pricing model (CAPM)? I.A risk-free asset has no systematic risk. II. Beta is a reliable estimate of total risk. III. The reward-to-risk ratio is constant. IV. The market rate of return can be approximated.

I and III only

Which of the following statements are accurate? I. Nondiversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for nondiversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.

It can be less than the standard deviation of the least risky security in the portfolio.

Which of the following statements is true of a portfolio's standard deviation?