Finance 2150 Exam 2

Which rate of return in the popup​ table is the​ risk-free rate?

3.7% U.S. Treasury Bills

Stock A has an expected return of 12% with a standard deviation of 8%. If returns are normally distributed, then approximately two-thirds of the time the return on stock A will be

Between 4% and 20%

If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the least risky investment?

Common stock of small firms

Of the following different types of securities, which is typically considered most risky?

Common stocks of small companies

You are considering buying some stock in Continental Grain. Which of the following are examples of non-diversifiable risks?

I. Risk resulting from a general decline in the stock market. II. Risk resulting from a possible increase in income taxes.

You are considering investing in Ford Motor Company. Which of the following are examples of diversifiable risk?

II. Risk resulting from uncertainty regarding a possible strike against Ford. III. Risk resulting from an expensive recall of a Ford product.

Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio?

Investment B

Changes in the general economy, like changes in interest rates or tax laws represent what type of risk?

Market risk

What is the name of additional compensation required for assuming greater​ risk?

Risk Premium

Which of the following statements is most correct concerning diversification and risk?

Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.

You must add one of two investments to an already well- diversified portfolio. If you are a risk-averse investor, which one is the better choice?

Security B

You have the choice of two equally risk annuities (the annuities have the same interest rate), each paying $5,000 per year for 8 years. One is an annuity due and the other is an ordinary annuity. If you are going to be receiving the annuity payments, which annuity would you choose to maximize your wealth? A) The annuity due B) The ordinary annuity C) Since we don't know the interest rate, we can't find the value of the annuities and hence we cannot tell which one is better. D) Either one because they have the same present value.

The annuity due

"The​ holding-period rate of return is the return an investor would receive from holding a security for a designated period of​ time.

True

Treasury bills are​ risk-free assets because they have a​ short-term maturity​ date, their price is less​ volatile, and there is no chance of default on them.

True

Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________.

beta; standard deviation

Beta is a statistical measure of

the relationship between an investment's returns and the market return.

Investment A has an expected return of 15% per year, while investment B has an expected return of 12% per year. A rational investor will choose

investment A if A and B are of equal risk.

Which of the following is the slope of the security market line?

the market risk premium

Stock A has a beta of 1.2 and a standard deviation of returns of 18%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the market risk premium increases, then

the required return on stock B will increase more than the required return on stock A.