fin 300 ch 13

Which one of the following is an example of unsystematic risk? Multiple Choice An across the board increase in income taxes Adoption of a national sales tax Decrease in the national level of inflation An increased feeling of global prosperity National decrease in consumer spending on entertainment

National decrease in consumer spending on entertainment

Which one of the following is a risk that applies to most securities? Multiple Choice Unsystematic Diversifiable Systematic Asset-specific Industry

Systematic

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. Multiple Choice real return actual return nominal return risk premium expected return

risk premium

he 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: Multiple Choice market risk premium. risk premium. systematic return. total return. real rate of return.

risk premium.

Which one of the following is the best example of a diversifiable risk? Multiple Choice Interest rates increase Energy costs increase Core inflation increases A firm's sales decrease Taxes decrease

A firm's sales decrease

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly? Multiple Choice Variance Standard deviation Reward-to-risk ratio Beta Risk premium

Reward-to-risk ratio

A stock with an actual return that lies above the security market line has: Multiple Choice more systematic risk than the overall market. more risk than that warranted by CAPM. a higher return than expected for the level of risk assumed. less systematic risk than the overall market. a return equivalent to the level of risk assumed.

a higher return than expected for the level of risk assumed.

Unsystematic risk: Multiple Choice can be effectively eliminated by portfolio diversification. is compensated for by the risk premium. is measured by beta. is measured by standard deviation. is related to the overall economy.

can be effectively eliminated by portfolio diversification.

The standard deviation of a portfolio: Multiple Choice is a weighted average of the standard deviations of the individual securities held in the portfolio. can never be less than the standard deviation of the most risky security in the portfolio. must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. can be less than the standard deviation of the least risky security in the portfolio.

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

The standard deviation of a portfolio: Multiple Choice is a measure of that portfolio's systematic risk. is a weighted average of the standard deviations of the individual securities held in that portfolio. measures the amount of diversifiable risk inherent in the portfolio. serves as the basis for computing the appropriate risk premium for that portfolio. can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

The reward-to-risk ratio for Stock A is less than the reward-to-risk ratio of Stock B. Stock A has a beta of .82 and Stock B has a beta of 1.29. This information implies that: Multiple Choice Stock A is riskier than Stock B and both stocks are fairly priced. Stock A is less risky than Stock B and both stocks are fairly priced. either Stock A is underpriced or Stock B is overpriced or both. either Stock A is overpriced or Stock B is underpriced or both. both Stock A and Stock B are correctly priced since Stock A is less risky than Stock B.

either Stock A is overpriced or Stock B is underpriced or both.

The intercept point of the security market line is the rate of return which corresponds to: Multiple Choice the risk-free rate. the market rate. a return of zero. a return of 1.0 percent. the market risk premium.

the risk-free rate.

Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid. Multiple Choice I and III only II and IV only I and II only III and IV only I, II, and III only

I and III only

Which one of the following is an example of systematic risk? Multiple Choice Investors panic causing security prices around the globe to fall precipitously A flood washes away a firm's warehouse A city imposes an additional one percent sales tax on all products A toymaker has to recall its top-selling toy Corn prices increase due to increased demand for alternative fuels

Investors panic causing security prices around the globe to fall precipitously

Which one of the following statements related to unexpected returns is correct? Multiple Choice All announcements by a firm affect that firm's unexpected returns. Unexpected returns over time have a negative effect on the total return of a firm. Unexpected returns are relatively predictable in the short-term. Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

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 risks is irrelevant to a well-diversified investor? Multiple Choice Systematic risk Unsystematic risk Market risk Non-diversifiable risk Systematic portion of a surprise

Unsystematic risk

Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the: Multiple Choice average arithmetic return. expected return. market rate of return. internal rate of return.

cost of capital.

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: Multiple Choice is underpriced. is correctly priced. will plot below the security market line. will plot on the security market line. will plot to the right of the overall market on a security market line graph.

is underpriced.