Finance EXAM 4 Chapter 9

This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification. A. firm specific risk B. market risk C. modern portfolio risk D. total risk

A

Which statement is true? A. The larger the standard deviation, the lower the total risk. B. The larger the standard deviation, the higher the total risk. C. The larger the standard deviation, the more portfolio risk. D. The standard deviation is not an indication of total risk.

B

This is defined as the volatility of an investment, which includes firm specific risk as well as market risk. A. diversifiable risk B. market risk C. standard deviation D. total risk

D

Which of the following statements is correct with regards to diversification? A. Diversifying reduces the return of the portfolio. B. Diversifying reduces the market risk of the portfolio. C. Diversifying reduces the dollar return of the portfolio. D. None of these statements are correct.

D

Modern portfolio theory is ________________. A. a concept and procedure for combining securities into a portfolio to minimize risk B. a concept and procedure for combining securities into a portfolio to maximize return C. a concept and procedure for combining securities into a portfolio to maximize volatility D. a concept and procedure for combining securities into a portfolio to maximize dollar return

A

Which of the following statements is correct? A. A dominant portfolio has the best risk-return relationship as compared to other portfolios. B. It is not necessarily true that when an investment achieves a high return that it is risky. C. A low standard deviation means that the investment is less likely to achieve high returns; which means that is more risky. D. None of these statements are correct.

A

Interest rates, inflation and economic growth are economic factors that are examples of ______________________. A. Firm-specific risks that can be diversified away B. Market risk C. External factors that are neither firm specific risk nor market risk D. None of these statements are correct

B

Which of the following is the correct ranking from least risky to most risky? A. Long-term Treasury bonds, Stocks, Treasury Bills B. Treasury Bills, Long-term Treasury Bonds, Stocks C. Stocks, Long-term Treasury Bond, Treasury Bills D. Stocks, Treasury Bills, Long-term Treasury Bonds

B

Which of the following statements is correct? A. Uncorrelated assets have a correlation of -1.0. B. Most common stocks are positively correlated with each other because they are impacted by the economic factors. C. We can typically add many stocks together to fully eliminate the market risk in a portfolio. D. None of these statements are correct.

B

The optimal portfolio for you will be ______________________. A. the one that offers the lowest correlation B. the one that offers the highest returns C. the one that reflects the amount of risk that you are willing to take D. the one that offers the most diversification

C

This index tracks 500 companies which allows for a great deal of diversification. A. Nasdaq B. Fortune 500 C. S&P 500 D. Wall Street Journal

C

19. We commonly measure the risk-return relationship using which of the following? A. coefficient of variation B. correlation coefficient C. standard deviation D. expected returns

A

Jane Adams invests all her money in the stock of one firm. Which of the following must be true? A. Her return will have more volatility than the return in the overall stock market. B. Her return will have less volatility than the return in the overall stock market. C. Her return will have the same volatility as the return in the overall stock market. D. There is no relationship between her return and the return in the overall stock market.

A

This is a measure of risk to reward earned by an investment over a specific period of time. A. coefficient of variation B. market deviation C. standard deviation D. total variation

A

This is a measure summarizing the overall past performance of an investment. A. average return B. dollar return C. market return D. percentage return

A

This is the term for portfolios with the highest return possible for each risk level. A. efficient portfolios B. modern portfolios C. optimal portfolios D. total portfolios

A

Which of the following is correct regarding the total risk of a company? A. A company can change its risk level over time. B. Some firms are riskier because they offer many different products and/or services. C. Companies can change their risk by reducing the amount of money they have borrowed. D. None of these statements are correct

A

Which of the following is incorrect? A. It is possible to combine assets that all move in the exact same fashion over time and gain the benefits of diversification. B. Adding long-term Treasury bonds to a stock portfolio will reduce the risk of the portfolio. C. The optimal portfolio is the one with the lowest amount of risk. D. All of these statements are correct.

A

Which of the following makes this a true statement: The shape of the efficient frontier implies that A. diminishing returns apply to risk-taking in the investment world. B. increasing returns apply to risk-taking in the investment world. C. returns are not impacted by risk-taking in the investment world. D. None of these complete the sentence to make it true.

A

Which of the following statements is correct? A. A single stock has a lot of diversifiable risk. B. A single stock has more market risk than a diversified portfolio of stocks. C. Bonds and stocks have a high correlation because they are both financial assets. D. None of these statements are correct.

A

This is the concept and procedure for combining securities into a portfolio to minimize risk. A. firm specific theory B. modern portfolio theory C. optimal portfolio theory D. total portfolio theory

B

The efficient frontier portfolios are __________________________. A. portfolios that risk adverse investors will select B. portfolios where all the market risk is diversified away C. portfolios where the correlation among assets is 0.0 D. portfolios that dominate all others

D

Sally wants to invest in only two stocks. Which pair of stocks should Sally select? A. Stocks A and B move downward at the same time. B. Stocks C and D move in opposite directions at the same time. C. Stocks E and F move upward at the same time. D. Stocks G and H move randomly at the same time.

B

The total risk of the S&P500 Index is equal to ____________________. A. diversifiable risk B. nondiversifiable risk C. modern portfolio risk D. efficient frontier risk

B

To find the percentage return of an investment, A. multiply the dollar return by the investment's value at the beginning of the period. B. divide the dollar return by the investment's value at the beginning of the period. C. multiply the dollar return by the investment's value at the end of the period. D. divide the dollar return by the investment's value at the end of the period.

B

This is another term for market risk. A. firm specific risk B. modern portfolio risk C. nondiversifiable risk D. total risk

C

Which of the following is correct regarding the coefficient of variation? A. It measures the amount of standard deviation for each one percent of covariance. B. It measures the amount of return achieved for each one percent of risk taken. C. It measures the amount of risk taken for each one percent of return achieved. D. None of these statements are correct.

C

Which of the following describes what will occur as you randomly add stocks to your portfolio? A. The nondiversifiable risk will decrease. B. Both the diversifiable and nondiversifiable risk will decrease. C. The portfolio return will increase. D. The diversifiable risk will decrease.

D

Which of the following is correct? A. Investors can reduce the risk in their portfolio by investing in international stocks since they tend to have low correlation with our own stock market. B. Combining both stocks and bonds will likely reduce risk in a portfolio because the two assets have low correlation. C. Your optimal portfolio is an efficient portfolio with your desired risk level. D. All of these statements are correct

D

Which of the following is correct? A. Over a long time frame, stocks have performed better than Long-term Treasury Bonds. B. Average stock returns are not an indication of what an investor may earn in any ONE year. C. In some years, Long-term Treasury Bonds performed better than stocks. D. All of these statements are correct

D

Which of the following is correct? A. Total risk is measured by the standard deviation. B. There is a positive relationship between risk and return. C. If you observe a high variability in a stock's returns you can infer that the stock is very risky. D. All of these statements are correct.

D

Which of the following statements is correct regarding total risk? A. A conglomerate will have more total risk than a firm that has one line of business. B. All firms have about the same total risk because they are all exposed to the same market risk. C. Total risk can be quantified by measuring the covariance between the firm and the overall market. D. None of these statements are correct.

D

Which of the following statements is correct? A. For a few firms in completely different industries, it is possible to have a correlation that approaches -2.0. B. A correlation of -1.0 means that the two firms are uncorrelated or that they have no relationship. C. Most common stocks have low correlation with each other since they operate in different industries. D. None of these statements are correct.

D

Which of the following statements is correct? A. Stocks and long-term Treasury bonds are highly positively correlated. B. Stocks and Treasury bills are highly positively correlated. C. Stocks, long-term Treasury bonds and Treasury bills are all highly correlated. D. None of these statements is correct.

D

Which of the following statements is correct? A. The dollar return is a more useful measure to compare performance because it more accurately reflects the change in wealth of the investor. B. A dominant portfolio is one that has the highest risk and highest return within a set of portfolios. C. By adding stocks to your portfolio, it is possible to effectively eliminate nearly all of the market risk. D. None of these statements are correct.

D

This is the dollar return characterized as a percentage of money invested. A. average return B. dollar return C. market return D. percentage return

D

Which of the following are investor diversification problems? A. Many employees hold mostly their employer's stocks as investments. B. Many households hold relatively few individual stocks—the median is three. C. Investors seem to prefer local firms thereby limiting diversification opportunities. D. All of these are investor diversification problems.

D

This is defined as a combination of investment assets held by an investor. A. bundle B. market basket C. portfolio D. All of these

C

This is the investor's combination of securities that achieves the highest expected return for a given risk level. A. efficient portfolio B. modern portfolio C. optimal portfolio D. total portfolio

C

This includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment. A. average return B. dollar return C. market return D. portfolio

B

This is a measurement of the co-movement between two variables that ranges between -1 and +1. A. coefficient of variation B. correlation C. standard deviation D. total risk

B

This is the portion of total risk that is attributable to overall economic factors. A. firm specific risk B. market risk C. modern portfolio risk D. total risk

B

Which of these statements is true? A. When people purchase a stock, they know exactly what their dollar and percent return are going to be. B. Many people purchase stocks as they find comfort in the certainty for this safe form of investing. C. When people purchase a stock, they know the short-term return, but not the long term return. D. When people purchase a stock, they do not know what their return is going to be - either short term or in the long run.

D