finance chapter 11 info
the security market line is a linear function which is graphed by plotting data points based on the relationship between which two of the following variables
expected return and beta
which one of the following best describes a portfolio
group of assets held by an investor
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 the following is an example of systematic risk?
increase in consumption created by a reduction in personal tax rates
which of the following terms can be used to describe unsystematic risk?
I, II, and IV only I-asset-specfic risk II-diversifiable risk IV-unique risk
based on the capital asset pricing model, investors are compensated based on which of the following?
I, III and IV I-market risk premium III-portfolio beta IV-risk-free rate
the expected return on a security depends on which of the following?
I and III I-risk free rate of return III-market rate of return
the expected return on a Security is currently based on a 22 percent chance go a 15 percent return given an economic boom and a 78 percent chance of a 12 percent return given a normal economy. which of the following changes will decrease the expected return on this security?
II and III only II- a decrease in the rate of return given a normal economy III- an increase in the probability of a normal economy
standard deviation measures _______________ risk while beta measures ________ risk.
Toal, systematic
which one of the following portfolios will have a beta of 0?
a portfolio compromised solely of US treasury bills
which one of the following statements related to the SML is correct?
a security with a beta of 1.54 will plot on the SML if it is correctly priced
which of the following is the best example of unsystematic risk?
a warehouse fire
which of the following statements is correct?
an underpinned security will plot above the SML
which one of the following is the computation of the risk premium for an individual security? E(r) is the expected return on the security, rf is the risk-free rate, b is the security's beta, and E(r)m is the expected rate of return on the market
b[E(r)M-rf]
which one of the following measures the amount of systematic risk present in in a particular risky asset relative to that in an average risky asset?
beta coefficient
a risky security has less risk than the overall market. what must the beta of this security be?
between 0 and 1, but greater than 0 and less than 1
the capital asset pricing model
considers the time value of money
which one of the following Is the minimum required rate of return on a new investment that makes that investment attractive?
cost of capital
which one of the following is the best example of systematic risk?
decrease in gross domestic product
a stock is expected to return 13 percent in an economic boom, 10 percent. in a normal economy and 3 percent in a recessionary economy, which one of the following will Lowe the overall expected rate pf return on this stock?
decrease in the probability of an economic boom
which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?
diversification
Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. which one of the following best describes the 16.5?
expected return
the SML is defined as a positively sloped straight line that displays the relationship between which two of the following variables
expected return and beta
world united stock currently plots on the SML and has a beta of 1.04. which one of the following will increase that stocks rate of return without affecting the risk level of the stock, all else constant?
increase in the market risk to reward ratio
the systematic risk principle states that the expected return on a risky asset depends on which one of the following?
market risk
which one of the following is the slope of the security market line
market risk premium
the addition of a risky security to a fully diversified portfolio
may or may not affect the portfolio beta
systematic risk is:
measured by beta
if a security plots to the right and below the SML, then the SML has _______________ systematic risk than the market and is ______________.
more; overpriced
which one of the following describes systematic risk
risk that affects a large number of assets
assume you own a portfolio of diverse securities which are each correctly priced. given this, the reward-to risk ratio:
of each security must equal the slope of the SML
stock A compromises 28 percent of Susan's portfolio. which one of the following terms applies to the 28 percent?
portfolio weight
diversifying a portfolio across various sectors and industries might do more than one of the following. however, the diversification must do which of the following?
reduce the portfolios unique risks
which one of the following is the vertical intercept of the SML?
risk free rate
which one of the following is the best example of an announcement that is most apt to result in an unexpected return?
statement by a firm that it has just discovered a manufacturing defect and is recalling its products
the risk premium for an individual security is based on which one of the following types of risk?
systematic
the beta of a risky portfolio cannot be less than _______ nor greater than ________.
the lowest individual beta in the portfolio; the highest individual beta in the portfolio.
consider a portfolio compromised of 4 risky securities assume the economy has 3 states with varying probabilities of occurrence. which one of the following will guarantee that the portfolio variance will equal zero?
the portfolio expected rate of return must be the same for each economic state
you are assigned the task of computing the expected the expected return on a portfolio containing several individual stocks. which one of the following statements is correct concerning this task?
the summation of the return deviation from the portfolio expected return for each economic state must qual zero.
the expected rate of return on the Delaware shores inc stock is based on 3 possible states of the economy. these states are boom, normal, and recession which have probabilities
the variance must be positive provided that each state of the economy produces a different expected rate of return
which one of the following best exemplifies unsystematic risk?
unexpected increase in the variable costs for a firm
portfolio diversification eliminates which one of the following?
unsystematic risk
a portfolio is compromised of 35 securities with varying betas. the lowest beta for an individual security is .74 and the highest of the security betas is 1.51. given this info you know that the portfolio beta
will be greater than or equal to .74, but less than or equal to 1.51
which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security?
zero
