Finance exam 2

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

Company-specific Unsystematic Diversifiable

What is the equation for the capital asset pricing model?

Expected return on security = Risk-free rate + Beta × (Return on market - Risk-free rate)

What are examples of systematic risk?

Future rates of inflation Regulatory changes in tax rates

Which of the following are examples of systematic risk?

Future rates of inflation Regulatory changes in tax rates

What does the security market line depict?

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

What is an uncertain or risky return?

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

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

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

The market-risk premium

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

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

declines

Labor strikes are an example of systematic risk.

false

True or false: Discounting a news item is the same as taking the present value of that item.

false

true or false: Labor strikes are an example of systematic risk.

false

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

positive

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

risk-free rate

The true risk of any investment comes from _______________ .

surprises

what type of risk is not reduced by diversification?

systematic or market risk

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

What is the beta of the risk-free asset?

zero