Chapter 13

systematic risk of the market is measured by

a beta of 1.0

Total risk is measured by _____ and systematic risk is measured by ____

Standard Deviation, beta

Standard Deviation measures which type of risk?

Total Risk

Unsystematic Risk

can be effectively eliminated by portfolio diversification.

The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock:

is underpriced

Which of the following statements are correct concerning diversifiable risks? I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk.

I, II and III only

The expected return on a portfolio: I. can never exceed the expected return of the best performing security in the portfolio. II. must be equal to or greater than the expected return of the worst performing security in the portfolio. III. is independent of the unsystematic risks of the individual securities held in the portfolio. IV. is independent of the allocation of the portfolio amongst individual securities.

I, II, and III only

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.

Risk Premium

Which one of the following should earn the most risk premium based on CAPM

Stock with a beta of 1.38

Which one of the following is an example of systematic risk?

investors panic causing security prices around the globe to fall precipitously