Finance

What is the expected return of a security with a beta of 1.2 if the risk-free rate is 4 percent and the expected return on the market is 12 percent?

13.6% 4% + 1.2(12% - 4%) = 13.6%

If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?

An efficient market reaction

The CAPM can also be used for a portfolio by first determining the portfolio's _____

Beta

Which of the following are examples of unsystematic risk?

Changes in management Labor strikes

The smaller the variance or standard deviation is, the more spread out the returns will be. T OR F

False

True or false: Expected return and inflation are the two components of risky return in the total return equation.

False

True or false: Portfolio weights can be defined as the dollars invested in each asset.

False

If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be?

Positive (If investors are averse to risk, they will demand higher returns from the market, thereby meaning that the risk premium will be positive (greater than zero).

The risk ___________ can be interpreted as the reward for bearing risk.

Premium

On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

Risk Premuim

The true risk of any investment comes from _______________ ?

Surprises

The risk premium for an individual security is based on which one of the following types of risk?

Systematic

What is the intercept of the security market line (SML)?

The risk-free rate

Which statement is true?

The weights of the securities held in any portfolio must equal 1.0.

How are the unsystematic risks of two different companies in two different industries related?

There is no relationship.

What is the equation for total return?

Total return = Expected return + Unexpected return

True or false: Adding securities will reduce unsystematic risk only. Systematic risk is unaffected by diversification?

True

True or false: It is possible for the unsystematic risk of a portfolio to be reduced almost to zero.

True

True or false: Labor strikes are an example of unsystematic risk?

True

True or false: Unsystematic risk is specific only to a single company or industry?

True

What are the two components of risky return (U) in the total return equation?

Unsystematic risk Market risk

Which of the following statements is (are) true about variance?

Variance is a measure of the squared deviations of a security's return from its expected return and Standard deviation is the square root of variance.

If you wish to create a portfolio of stocks, what is the required minimum number of stocks?

You must invest in stocks of more than one corporation.

What is the beta of the risk-free asset?

Zero

What is the Reward-to-Risk Ratio?

[E(RA) - Rf]/βA

What is the expected return for a security if the risk-free rate is 5%, the expected return on the market is 9%, and the security's beta is 1.5?

11% Expected return for a security= 5 + 1.5 x (9 - 5) = 11%

Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio?

Declines

______ risk is reduced as more securities are added to the portfolio?

Diversifiable Unsystematic Company-specific

The ______ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return?

Excess

The _______________ return on a portfolio is a combination of the expected returns on the assets in the portfolio.

Expected

The expected return of a portfolio is a combination of the weights of each asset in a portfolio? T OR F

False (The expected return on a portfolio is a combination of the expected returns on the assets in the portfolio.)

True or false: The surprise part of any announcement is the information the market uses to form the expectation of the return on the stock.

False (The surprise is the news that influences the unanticipated return on the stock.)

The security market line (SML) shows that the relationship between a security's expected return and its beta is ______?

Postive

The variance and its square root, the _______________________ are the most commonly used measures of volatility?

Standard Deviation

True or false: According to the capital asset pricing model (CAPM), the risk-free rate of return is the expected return on a security with a beta of zero?

True (According to the capital asset pricing model (CAPM), the risk-free rate of return is the expected return on a security with a beta of zero.)

Which one of the following portfolios will have a beta of zero?

A portfolio comprised solely of U. S. Treasury bills

Which one of the following is the best example of unsystematic risk?

A warehouse fire

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

All available information

Which of the following are examples of systematic risk?

Future rates of inflation and Regulatory changes in tax rates

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

any risk that affects a large number of assets.

Systematic risk or (Market risk)

Which of the following types of risk is not reduced by diversification?

Systematic, or market risk (Systematic risk cannot be diversified away).

What is the slope of the security market line (SML)?

The market-risk premium

Which of the following are needed to describe the distribution of stock returns?

The mean return The standard deviation of returns

Which of the following are examples of information that may impact the risky return of a stock?

The outcome of an application currently pending with the Food and Drug Administration and The Fed's decision on interest rates at their meeting next week

Unsystematic risk will affect?

a specific firm firms in a single industry

In an efficient market ______ investments have a _____ NPV.

all; zero

When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market?

already knew about most of the news item

Which answer creates a false sentence? Percentage returns:

are difficult to compute.

The average return on the stock market can be used to

compare stock returns with the returns on other securities

An efficient market is one that fully reflects all available ______.

information

If an asset has a reward-to-risk ratio of 6.0%, that means it has a __________ of 6.0% per unit of _______?

risk premium; systematic risk

If the financial markets are efficient then:

stock prices should respond only to unexpected news and events.

Beta tells us the amount of ________ risk of an asset or portfolio relative to ______?

systematic; an average risky asset

The systematic risk principle argues that the market does not reward risks?

that are borne unnecessarily that are diversifiable

The standard deviation measures the _____ of a security's returns over time.

volatility

In an efficient market, firms should expect to receive ______ value for securities they sell.

Fair

True or false: The calculation of the portfolio beta is similar to the calculation of the portfolio weights?

False (The calculation of the portfolio beta is similar to the calculation of the expected return.)

True or false: Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio increases?

False (Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio declines.)

Which of the following are examples of a portfolio?

Investing $100,000 in a combination of stocks and bonds Investing $100,000 in the stocks of 50 publicly traded corporations Investing $100,000 in a combination of US and Asian stocks

What does the security market line depict?

It is a graphical depiction of the capital asset pricing model.

What is unsystematic risk?

It is a risk that affects a single asset or a small group of assets.

What is a risk premium?

It is additional compensation for taking risk, over and above the risk-free rate.

What is an uncertain or risky return?

It is the portion of return that depends on information that is currently unknown.

What is the definition of expected return?

It is the return that an investor expects to earn on a risky asset in the future.

As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?

It may eventually be almost totally eliminated and It is likely to decrease.

Unsystematic risk can be defined by all of the following except

Market

The square of the standard deviation is equal to the ____.

Variance

The efficient markets hypothesis contends that _____________ capital markets such as the NYSE are efficient.

Well-organized

If the dispersion of returns on a particular security is very spread out from the security's mean return, the security ____.

is highly risky

The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk?

lower; lower

The slope of the security market line represents the:

market risk premium.

Systematic risk will ____ when securities are added to a portfolio?

No change

Which type of stock price adjustment time path occurs when there is a bubble (price run up) in the path followed by a decline after the market receives information about the stock?

Overreaction and correction

A portfolio can be described by its portfolio weights which are defined as _____________________?

the percentage of dollars invested in each asset

Normally, the excess rate of return is ___?

Positive

The computation of variance requires 4 steps. Place the steps in the correct order from the first step to the last step?

1. Calculate the expected retuen 2. Calculate the deviation of each return from the expected return 3. Square each deviation 4. Calculate the average squared deviation

The capital asset pricing model is the equation of the security market line showing the relationship between expected return and ________

Beta

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the

Beta coefficient.