Chapter 13. RETURN, RISK, AND THE SECURITY MARKET LINE Assignment

According to CAPM, which of the following events would affect the return on a risky asset?

- A change in the yield of T-bills - Federal reserve actions that affect the economy - A strengthening of the country's currency

Which of the following statements 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

A firm faces many risks. Which of the following are examples of unsystematic risk faced by a firm?

- The death of a CEO - A hostile takeover attempt by a competitor

What are the two components of the expected return on the market (Rm)?

- The risk-free rate (RF) - The risk premium

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

- that are borne unnecessarily

The risk of owning an asset comes from:

- unanticipated events - surprises

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

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

Which of the following are examples of systematic risk?

-future rates of inflation-regulatory changes in tax rates

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

1. Calculate the expected return 2. Determine the squared deviation from the expected return 3. Multiply each squared deviation by its probability 4. The result is the variance

The weighted average of the standard deviations of the assets in Portfolio C is 12.9%. Which of the following is a possible value for the standard deviation of the portfolio?

12.9% and 10.9%

ABC has a beta of 2.5 and XYZ has a beta of 1.5. The risk-free rate is 4% and the market premium risk is 9%. What is the expected return on a portfolio that is equally invested in both?

22%

if the variane of a portfolio is .0025, what is the standard deviation?

5%

A security has a beta of 1, a market risk premium of 8%, and a risk-free rate of 3%. What will happen to the expected return if the beta doubles?

Expected Return increases from 11% to 19%

What two factors determine a stock's total return?

Expected and unexpected return

what is the definition of expected return?

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

It would be useful to understand how the __________ of the premium on a risky asset is determined

Size

when an investor is diversified only ____ risk matters.

Systematic

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

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

The unsystematic portion The systematic portion

Based on the capital asset pricing model (CAPM) there is generally _____ relationship between beta and the expected return on a security.

a positive

An investment will have a negative NPV when its expected return is __________ ____________ what the financial markets offer for the same risk.

less than

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

positive

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.

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. Holding $100,000 in a combination of stocks and bonds.

What is the return on a portfolio that consists of $50,000 in an index fund, $30,000 in a bond fund, and $20,000 in a foreign stock fund? The expected returns are 7 percent, -3 percent, and 18 percent, respectively.

6.2%

Which type of risk is unaffected by adding securities to a portfolio?

Systematic risk

The minimum required return on a new project when its risk is similar to that of projects the firm currently owns is known as the:

cost of capital

the increase in the number of stocks in a portfolio results in ____ standard deviation of annual portfolio returns.

decline