FINC Module 4 HW

Unique security risk can be eliminated from an​ investor's portfolio through diversification.

True

Variation in the rate of return of an investment is a measure of the riskiness of that investment.

True

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

common stocks of small companies

Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.

True

The required rate of return for an asset is equal to the Risk-Free Rate plus a risk premium

True

Most stocks have betas between

0.60 and 1.60.

If we are able to fully​ diversify, what is the appropriate measure of risk to​ use?

Beta

The relevant variable a financial manager uses to measure returns is

Cash Flows

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

Diversification is mainly achieved by the asset allocation​ decision, not the selection of individual securities within each asset category.

Which of the following statements is MOST correct regarding​ beta?

Even professionals may not agree on the measurement of beta.

According to the​ CAPM, for each unit of​ beta, an​ asset's required rate of return increases by the​ market's return.

False

Accounting profits is the most relevant variable the financial manager uses to measure returns.

False

Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds.

False

Another name for an​ asset's expected rate of return is holding-period return

False

Asset allocation is not recommended by financial planners because mixing different types of​ assets, such as stocks with​ bonds, makes it more difficult to track performance and adjust portfolios to changing market conditions.

False

For a well−diversified investor, an investment with an expected return of​ 10% with a standard deviation of​ 3% dominates an investment with an expected return of​ 10% with a standard deviation of​ 5%.

False

In an efficient​ market, a stock with a standard deviation of returns of​ 12% could have a higher expected return than a stock with a standard deviation of​ 10% because the beta for the higher standard deviation stock could be lower than the beta for the lower standard deviation stock.

False

Investment A and Investment B both have the same expected​ return, but Investment A is more risky than Investment B. In the technical jargon of modern portfolio​ theory, Investment A is said to​ "dominate" Investment B.

False

Negative historical returns are not possible during periods of high volatility​ (high standard deviations of​ returns) due to the risk-return trade-off

False

The beta of a T-Bill is one

False

The characteristic line for any well −diversified portfolio is horizontal.

False

The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.

False

The risk-return trade-off that investors face on a day-to-−day basis is based on realized rates of return because expected returns involve too much uncertainty.

False

​Historically, investments with the highest returns have the lowest standard deviations because investors do not like risk.

False

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. III. Risk resulting from an explosion in a grain elevator owned by Continental. IV. Risk resulting from a pending lawsuit against Continental.

I and II

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

Market Risk

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected​ return?

Purchase a variety of​ securities; i.e., diversify.

A stock with a beta of 1 has systematic or market risk equal to the​ "typical" stock in the marketplace.

True

A well diversified portfolio typically has systematic risk equal to about​ 40% of the​ portfolio's total risk.

True

Beta is a measurement of the relationship between a​ security's returns and the general​ market's returns.

True

Beta represents the average movement of a​ company's stock returns in response to a movement in the​ market's returns.

True

In​ general, the required rate of return is a function of​ (1) the time value of​ money, (2) the risk of an​ asset, and​ (3) the​ investor's attitude toward risk.

True

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns

True

The CAPM designates the risk-return trade-off existing in the market,, where risk is defined in terms of beta

True

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

True

The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.

True

A typical measure for the risk-free rate of return is the

U.S Treasury Bill Rate

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?

U.S. Treasury bills

What is the name given to the equation that financial managers use to measure an​ investor's required rate of​ return?

the capital asset pricing model

The beta of ABC Co. stock is the slope of

the characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period.

Beta is a statistical measure of

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

The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the

​investor's required rate of return.