FIN 300

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Another name for an​ asset's expected rate of return is holding−period return.

False

A typical measure for the risk−free rate of return is the

U.S. Treasury bill rate.

If you were to use the standard deviation as a measure of investment​ risk, which of the following has historically been the least risky​ investment?

U.S. Treasury bills

The slope of the characteristic line of a security is that​ security's beta.

True

Total risk equals systematic risk plus unsystematic risk.

True

Unique security risk can be eliminated from an​ investor's portfolio through diversification.

True

Which of the following types of risk is​ diversifiable?

​unsystematic, or company−unique risk

A​ stock's beta is a measure of its

systematic risk.

The category of securities with the highest historical risk premium is

small company stocks.

Most stocks have betas between

0.60 and 1.60.

The T−bill return is used in the CAPM model as the risk−free rate.

True

As the required rate of return of an investment​ decreases, the market price of the investment decreases.

False

Beta is a statistical measure of

the relationship between an​ investment's returns and the market return.

If we are able to fully​ diversify, what is the appropriate measure of risk to​ use?

Beta

The appropriate measure for risk according to the capital asset pricing model is

Beta

Which of the following statements is MOST correct concerning diversification and​ risk?

Diversification is mainly achieved by the asset allocation​ decision, not the selection of individual securities within each asset category.

Which of the following statements is MOST correct regarding​ beta?

Even professionals may not agree on the measurement of beta.

A rational investor will always prefer an investment with a lower standard deviation of​ returns, because such investments are less risky.

False

According to the​ CAPM, for each unit of​ beta, an​ asset's required rate of return increases by the​ market's return.

False

Accounting profits is the most relevant variable the financial manager uses to measure returns.

False

Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

False

Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds.

False

An investor with a required return of​ 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to​ 8%.

False

Asset allocation is not recommended by financial planners because mixing different types of​ assets, such as stocks with​ bonds, makes it more difficult to track performance and adjust portfolios to changing market conditions.

False

Because risk is measured by variability of​ returns, how long we hold our investments does not matter very much when it comes to reducing risk.

False

Cash flows is the most relevant variable to measure the returns on debt​ instruments, while GAAP net income is the most relevant variable to measure the returns on common stock.

False

Due to strict stock market​ controls, the most a​ stock's value can drop in one trading day is​ 5%.

False

For a well−diversified ​investor, an investment with an expected return of​ 10% with a standard deviation of​ 3% dominates an investment with an expected return of​ 10% with a standard deviation of​ 5%.

False

Investment A and Investment B both have the same expected​ return, but Investment A is more risky than Investment B. In the technical jargon of modern portfolio​ theory, Investment A is said to​ "dominate" Investment B.

False

Negative historical returns are not possible during periods of high volatility​ (high standard deviations of​ returns) due to the risk−return trade−off.

False

Portfolio performance is determined mainly by stock selection and market​ timing, with less emphasis on asset allocation.

False

Proper diversification generally results in the elimination of risk.

False

The risk−return trade−off that investors face on a day−to−day basis is based on realized rates of return because expected returns involve too much uncertainty.

False

The beta of a T−bill is one.

False

The characteristic line for any well−diversified portfolio is horizontal.

False

The market rewards the patient​ investor, for the period between 1926 and​ 2016, there has never been a time when an investor lost money if she held an all−large−stock portfolio for ten years.

False

The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.

False

The​ S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate.

False

​Historically, investments with the highest returns have the lowest standard deviations because investors do not like risk.

False

Investment A has an expected return of​ 15% per​ year, while Investment B has an expected return of​ 12% per year. A rational investor will choose

Investment A if A and B are of equal risk.

Rogue​ Recreation, Inc. has normally distributed returns with an expected return of​ 15% and a standard deviation of​ 5%, while Lake​ Tours, Inc. has normally distributed returns with an expected return of​ 15% and a standard deviation of​ 15%. Which of the following is​ true?

Lake Tours is more likely to have negative returns than Rogue Rec.

Which of the following​ is/are true?

Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected​ return?

Purchase a variety of​ securities; i.e., diversify.

Which of the following statements is MOST correct concerning diversification and​ risk?

Risk−averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.

A well−diversified portfolio typically has systematic risk equal to about​ 40% of the​ portfolio's total risk.

True

A security with a beta of one has a required rate of return equal to the overall market rate of return.

True

A stock with a beta of 1 has systematic or market risk equal to the​ "typical" stock in the marketplace.

True

A stock with a beta of 1.4 has​ 40% more variability in returns than the average stock.

True

According to the​ CAPM, for each unit of​ beta, an​ asset's required rate of return increases by the​ market's risk premium.

True

An all−stock portfolio is more risky than a portfolio consisting of all bonds.

True

Beta is a measurement of the relationship between a​ security's returns and the general​ market's returns.

True

Beta represents the average movement of a​ company's stock returns in response to a movement in the​ market's returns.

True

Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.

True

Diversifying among different kinds of assets is called asset allocation.

True

In an efficient​ market, a stock with a standard deviation of returns of​ 12% could have a higher expected return than a stock with a standard deviation of​ 10% because the beta for the higher standard deviation stock could be lower than the beta for the lower standard deviation stock.

True

In​ general, the required rate of return is a function of​ (1) the time value of​ money, (2) the risk of an​ asset, and​ (3) the​ investor's attitude toward risk.

True

Small company stocks have historically had higher average annual returns than large company​ stocks, and also a higher risk premium.

True

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk−adjusted required returns.

True

The CAPM designates the risk−return trade−off existing in the​ market, where risk is defined in terms of beta.

True

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

True

The beta of a T−bill is zero.

True

The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.

True

The realized rate of​ return, or holding period​ return, is equal to the holding period dollar gain divided by the price at the beginning of the period.

True

The relevant risk to an investor is that portion of the variability of returns that cannot be diversified away.

True

The required rate of return for an asset is equal to the risk−free rate plus a risk premium.

True

Variation in the rate of return of an investment is a measure of the riskiness of that investment.

True

Which of the following is the slope of the security market​ line?

the market risk premium

What is diversifying among different kinds of assets known​ as?

asset allocation

Of the​ following, which differs in meaning from the other​ three?

asset−unique risk

Which of the following measures the average relationship between a​ stock's returns and the​ market's returns?

beta coefficient

The relevant variable a financial manager uses to measure returns is

cash flows.

If you were to use the standard deviation as a measure of investment​ risk, which of the following has historically been the highest risk​ investment?

common stock of small firms

Of the following different types of​ securities, which is typically considered most​ risky?

common stocks of small companies

Based on the security market​ line, Robo−Tech stock has a required return of​ 14% and Friendly Insurance Company has a required return of​ 10%. Robo−Tech has a standard deviation of returns of​ 18%. Therefore,

for a well−diversified ​investor, Friendly is less risky than Robo−Tech.

Changes in the general​ economy, like changes in interest rates or tax​ laws, represent what type of​ risk?

market risk

The capital asset pricing model

provides a risk−return trade−off in which risk is measured in terms of beta.

If the beta for stock A equals​ zero, then

stock​ A's required return is equal to the risk−free rate of return.

What is the name given to the equation that financial managers use to measure an​ investor's required rate of​ return?

the capital asset pricing model

The beta of ABC Co. stock is the slope of

the characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period.

Beginning with an investment in one​ company's securities, as we add securities of other companies to our​ portfolio, which type of risk​ declines?

unsystematic risk

Portfolio risk is typically measured by​ ________ while the risk of a single investment is measured by​ ________.

​beta; standard deviation

The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the

​investor's required rate of return.


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