Finance Chapter 11
Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio:
of each security must equal the slope of the security market line.
You currently own a portfolio valued at $56,000
.75
What do you think is the beta of a U.S. Treasury bill?
0
BJB Inc...
1.32
Stock J has a beta of 1.17 and an expected...
12.04
Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else constant?
A decrease in the risk-free rate given a security beta of 1.06
A stock has a beta of 1.47 and an expected return of 16.6 percent. The risk free rate is 4.8%
8.03%
A stock has a beta of 1.24
8.50
A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?
A decrease in the probability of an economic boom
Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?
Cost of capital
The security market line is a linear function that is graphed by plotting data points based on the relationship between the:
expected return and beta
Which one of these is the best example of systematic risk?
Decrease in gross domestic product
Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?
Diversification
Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?
Expected return
The expected return of a security...
II & III
Which one of the following statements is correct?
If a risky security is correctly priced, its expected risk premium will be positive.
Which one of these represents systematic risk?
Increase in consumption created by a reduction in personal tax rates
Julie wants to create a $5000 portfolio
Invest $2500 in a risk free asset and $2500 in a stock with a beta of 2.0
Which one of the following is the vertical intercept of the security market line?
Risk-free rate
If a security plots to the right and below the security market line, then the security has ____ systematic risk than the market and is ____.
more; overpriced
The risk premium for an individual security is based on which one of the following types of risk?
Systematic
Which one of the following best exemplifies unsystematic risk?
Unexpected increase in the variable costs for a firm
Systematic risk is defined as:
any risk that affects a large number of assets.
Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?
beta coefficient
The capital asset pricing model:
considers the relationship between the fluctuations in a security's returns versus the market's returns.
The security market line is defined as a positively sloped straight line that displays the relationship between the:
expected return and beta of either a security or a portfolio.
The systematic risk principle states that the expected return on a risky asset depends only on the asset's ___ risk.
market
Unsystematic risk can be defined by all of the following except:
market risk
The slope of the security market line represents the:
market risk premium
The addition of a risky security to a fully diversified portfolio:
may or may not affect the portfolio beta.
Systematic risk is
measured by beta
Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?
portfolio weight
Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following?
reduce the portfolios unique risks
According to the capital asset pricing model, the expected return on a security will be affected by all of the following except the:
security standard deviation
A stock has a beta of 1.56
stock weight=.68; risk-free weight=.72
The beta of a risky portfolio cannot be less than _____ nor greater than ____.
the lowest individual beta in the portfolio; the highest
Consider a portfolio comprised of four risky securities. Assume the economy has three states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero?
the portfolio expected rate of return must be the same for each economic state
Standard deviation measures _____ risk while beta measures _____ risk.
total; systematic
Portfolio diversification eliminates which one of the following?
unsystematic risk
Portfolio diversification eliminates:
unsystematic risk
Which one of the following is the best example of unsystematic risk?
warehouse fire