Business Finance - Risk and Return

Suppose you have a portfolio comprised of the following 2 assets. If you have 60% invested in asset A and 40% in asset B, what is the Beta of your portfolio? Asset A, 1.25, 60%; Asset B, .75, 40%. A. 1.05 B. 1.00 C. 2.00

A

What are the two components of risky return in the total return equation? A. Unsystematic Risk B. Market Risk C. Expected Return D. Expected Risk

A & B

Which of the following are examples of systematic risk? A. Future rates of inflation B. Regulatory changes in tax rates C. An increase in competition in the industry D. Labor strikes

A & B

The risk of owning an asset comes from: A. unanticipated events B. expectations C. forecasts D. surprises

A & D

Systematic Risk

A risk that influences a large number of assets. Also, market risk.

Which of the following are examples of a portfolio? A. Investing $100,000 in a combination of US and Asian stocks B. Investing $100,000 in the stocks of 50 publicly traded corporations C. Investing $100,000 in a combination of stocks and bonds D. Investing $100,000 to buy 100 shares of the best performing stock on the NYSE

A, B, & C

________ risk is reduced as more securities are added to the portfolio. A. Diversifiable B. Unsystematic C. Unique D. Marketwide

A, B, & C

If you wish to create a portfolio of stocks, what is the required minimum number of stocks? A. You must invest in at least 2 stocks of 1 corporation B. You must invest in stocks of at least 2 corporations C. You must invest in stocks of at least 10 corporations D. You must invest in the stocks of at least 30 corporations

B

Systematic risk will _________ when securities are added to a portfolio. A. Be eliminated B. Not change C. Decrease D. Increase

B

What is the beta of the risk-free asset? A. unknown B. zero C. 0.5 D. 1.0

B

What is the return on a portfolio that consists of: $50,000 in an index fund, $30,000 in a bond fund, and $20,000 in a foreign stock fund? The expected returns are 7 percent, -3 percent, and 18 percent, respectively. A. 22% B. 6.2% C. 7.26% D. .06%

B

Which of the following types of risk is not reduced by diversification? A. Asset-specific risk B. Systematic, or market risk C. Unsystematic risk D. Unique risk

B

The systematic risk principle argues that the market does not reward risks: A. in any circumstances B. that are borne unnecessarily C. that are diversifiable D. that are systematic

B & C

Which of the following are examples of unsystematic risk? A. The expected rate of inflation next year B. Changes in management C. Changes in the federal tax code D. Labor strikes

B & D

How are the unsystematic risks of two different companies in two different industries related? A. There is a negative relationship B. There is a positive relationship C. There is no relationship D. The relationship can be either positive or negative

C

If the variance of a portfolio is .0025, what is the standard deviation? A. 6.25% B. 25% C. 5% D. 12.5%

C

John's portfolio consists of $1,200 worth of Chi Corporation common stock and $400 worth of Lambda Corporation common stock. Lamdba's portfolio weight is 25%, and Chi's portfolio weight is: A. 25% B. 33.33% C. 75% D. 300%

C

Systematic risk is also called ______ risk. A. diversifiable B. world-wide C. market D. industry-specific

C

The calculation of a portfolio beta is similar to the calculation of: A. a portfolio's standard deviation B. a portfolio's variance C. a portfolio's expected return D. the value of a put option

C

What is the expected return of a portfolio consisting of stocks A and B if the expected return is 10 percent for A and 15 percent for B? Assume you are equally invested in both the stocks. A. 15% B. 10% C. 12.5% D. 25%

C

As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk? A. It is likely to increase B. It will not change C. It may eventually be almost totally eliminated D. It is likely to decrease

C & D

Unsystematic risk will affect A. all manufacturing firms B. the market as a whole C. a specific firm D. firms in a single industry

C & D

Given the following probability distribution for the returns of a portfolio, what is the standard deviation of the portfolio? State, Probability, Portfolio Return: Boom, 0.25, 10% Normal, 0.50, 4% Bust, 0.25, -6% A. 3.3% B. 4.5% C. 6.0% D. 5.74%

D

Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio: A. fluctuates randomly B. increases C. does not change D. declines

D

What is systematic risk? A. It is a risk that increases in a systematic, gradual fashion. B. It is a risk that is caused by failure of the internal control system of a corporation. C. It is a risk that affects only one or a few assets. D. It is a risk that pertains to a large number of assets.

D

What is unsystematic risk? A. It is a risk that is unavoidable B. It is a risk that is always caused by external factors C. It is a risk that affects all the assets in a diversified portfolio D. It is a risk that affects a single asset or a small group of assets

D

When an investor is diversified only ________________ risk matters. A. unnatural B. unsystematic C. diversifiable D. systematic

D

True of false: A well-diversified portfolio will eliminate all risks.

False

Capital Asset Pricing Model (CAPM)

a model that relates the required rate of return on a security to its systematic risk as measured by beta

Efficient Markets

a result of investors trading on the unexpected portion of announcements

Unsystematic Risk

a risk that affects at most a small number of assets. Also, unique or asset-specific risk

Expected Risk

standard deviation/expected return

expected return on a portfolio

the weighted average of the expected returns on the assets held in the portfolio