Chp 13
The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock:
Is underpriced.
The intercept point of the security market line is the rate of return which corresponds to
The risk-free rate
Which one of the following statements related to risk is correct?
The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.
Can be effectively eliminated by portfolio diversification
Unsystematic risk
The systematic risk of the market is measured by
a beta of 1.0
Which one of the following indicates a portfolio is being effectively diversified?
a decrease in the portfolio standard deviation
Which one of the following is the best example of a diversifiable risk?
a firm's sales decrease
The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the particular asset's:
betacoefficient
Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?
reward-to-risk ratio
The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:
risk premium.
The expected risk premium on a stock is equal to the expected return on the stock minus the
risk-free rate.
The expected risk premium on a stock is equal to the expected return on the stock minus the:
risk-free rate.
The market risk premium is computed by
subtracting the risk-free rate of return from the market rate of return.
Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk
systematic
The expected return on a stock given various states of the economy is equal to the:
weighted average of the returns for each economic state.
The capital asset pricing model (CAPM) assumes
-A risk-free asset has no systematic risk. -The reward-to-risk ratio is constant. -The market rate of return can be approximated.
What is the standard deviation of the returns on a $30,000 portfolio that consists of stocks S and T? Stock S is valued at $21,000.
2.61%
How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?
25
A stock with an actual return that lies above the security market line has
A higher return than expected for the level of risk assumed
The standard deviation of a portfolio:
Can be less than the standard deviation of the least risky security in the portfolio.
Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights
Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.
The expected return on a portfolio considers which of the following factors? I Percentage of the portfolio invested in each individual security. II Projected states of the economy. III The performance of each security given various economic states. IV Probability of occurrence for each state of the economy.
I,II,III,IV
Which of the following statements concerning risk are correct?
Non diversifiable risk is measured by beta, Systematic risk is another name for non diversifiable risk
Which one of the following statements is correct?
Over time, the average unexpected return will be zero.
If we had many assets in a portfolio, we would multiply each assets beta by its portfolio weight and then add the results to get the portfolios beta. -putting half of money in google and half in pepsi calculating Beta would be B=.5(B-google) + .5(B-pepsi)
Portfolio Betas
The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.
Risk premium
Which one of the following events would be included in the expected return on Sussex stock?
This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated
can be either positive or negative in the short term but tend to be zero over the long-term.
Unexpected returns
Which one of the following statements related to unexpected returns is correct?
Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.
Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?
beta
The standard deviation of a portfolio:
can be less than the weighted average of the standard deviations of the individual securities held in that portfolio
Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?
capital asset pricing model
Which one of the following is an example of unsystematic risk?
consumer spending on entertainment decreased nationally
Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the
cost of capital
The primary purpose of portfolio diversification is to
eliminate asset-specific risk.
Investors panic causing security prices around the globe to fall precipitously.
example of systematic risk
You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?
expected return
Which one of the following is an example of systematic risk?
investors panic causing security prices around the globe to fall precipitously
Which one of the following is represented by the slope of the security market line
market risk premium
According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:
market risk premium and the amount of systematic risk inherent in the security.
If a stock portfolio is well diversified, then the portfolio variance
may be less than the variance of the least risky stock in the portfolio.
Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments?
portfolio
Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?
portfolio weight
The percentage of a portfolio's total value invested in a particular asset is called that asset's
portfolio weight
Which one of the following is least apt to reduce the unsystematic risk of a portfolio?
reducing the number of stocks held in the portfolio
A particular risky asset's risk premium, measured relative to its beta coefficient, is its
reward-to-risk ratio
The linear relation between an asset's expected return and its beta coefficient is the
security market line
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?
security market line
The principle of diversification tells us that:
spreading an investment across many diverse assets will eliminate some of the risk
The principle of diversification tells us that:
spreading an investment across many diverse assets will eliminate some of the total risk.
Total risk is measured by _____ and systematic risk is measured by ____
standard deviation; beta
Which one of the following should earn the most risk premium based on CAPM?
stock with a beta of 1.38
Which one of the following is a risk that applies to most securities?
systematic
Standard deviation measures which type of risk?
total
A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent. What type of risk does this news flash represent?
unsystematic
Risk that affects at most a small number of assets is called _____ risk
unsystematic
