GB Module 14

B. the beta coefficient 6

Which of the following measures market risk? Select the single best answer. A. the standard deviation B. the beta coefficient 6 C. the variance D. the mean E. the coefficient of diversification F. None of the above is the single best answer

B. unsystematic risk; D. asset-specific

Which of the following risks are irrelevant to a well-diversified investor? Select one or more correct answers. A. systematic risk B. unsystematic risk C. market risk D. asset-specific E. total risk F. None of the above is correct.

E. Small-company stocks

Which of the following securities had the most volatile returns for the period since 1925? Select the single best answer. A. U.S. Treasury bills B. Large-company stocks C. Long-term corporate bonds D. Long-term government bonds E. Small-company stocks F. None of the above is the single best answer.

Expected return

the average return investors expect to receive if they hold an asset for many periods in which there are uncertain events

1.56

The common stock of Chrysler Corporation has an annual expected return of 14.7 percent. The expected return on the S&P 500 is 10.8 percent and the rate of return or a Treasury bill is currently 3.8 percent. What is the beta of Chrysler's stock? Round your answer to two decimal places.

15.82%

The risk-free rate of return is 4.2% per year and the market rate of return is expected to be 12.5% annually. What is the expected return on Mercedes Benz if it has a beta of 1.4? Round your answer to the basis point.

14.02%

Treasury bills yield 4.6 percent and the expected market risk premium is 7.3 percent, both annual. What is the expected return for Hyundai Automobiles if it has a beta of 1.29? Round your answer to the basis point.

F. None of these statements is true.

Which of the statements below are true about a return that plots below the security market line? Select one or more correct answers. A. The stock has too high a return for the risk assumed. B. The stock has an appropriate risk premium. C. The stock's ratio of reward to risk is too high. D. The stock is underpriced. E. An investor would be indifferent between this stock and the next best stock of similar risk. F. None of these statements is true.

Unsystematic Risk (Asset-Specific Risks)

a risk that affects at most a smaller number of assets

Systematic Risk (Market Risks)

a risk that influences a large number of assets

Diversifiable risk

a term used interchangeably with asset-specific risk. A risk that is unique to an asset meaning that it can be reduced by holding a portfolio of assets that are uncorrelated.

The Capital Asset Pricing Model (CAPM)

the equation of the security market line (SML) showing the relationship between expected return and beta

Risk premium

the excess return from an investment in a risky asset over that required from a risk-free investment

A. The change will decrease Nissan's risk premium.; B. The compensation a Nissan investor receives for inflation and waiting increases.; C. Nissan's expected return decreases.

Nissan stock has a beta of 1.03. What effect will an increase in the risk-free rate of return have? Select one or more correct answers. A. The change will decrease Nissan's risk premium. B. The compensation a Nissan investor receives for inflation and waiting increases. C. Nissan's expected return decreases. D. The change will impact Nissan's the expected return, but the direction cannot be determined without knowing the expected return on the market. E. It will not affect Nissan's expected return. F. None of these choices is correct.

A. E, D, B, C

Rank the assets below from lowest to highest average return since 1925. A. U.S. Treasury bills B. large company stocks C. small company stocks D. long-term corporate bonds E. long-term government bonds

D. The frequency distribution of the returns on large-company stocks is wider than the frequency distribution of the returns on long-term corporate bonds.; E. The normal distribution is useful in analyzing security returns because it can be used to assign probabilities to possible outcomes.

Since 1925, which of the following statements are correct? Select one or more correct answers. A. The standard deviation of returns on large-company stocks exceeded small-company stocks. B. The average annual rate of inflation exceeded the average annual return on U.S. Treasury bills. C. The standard deviation of returns on U.S. Treasury bills was zero percent. D. The frequency distribution of the returns on large-company stocks is wider than the frequency distribution of the returns on long-term corporate bonds. E. The normal distribution is useful in analyzing security returns because it can be used to assign probabilities to possible outcomes. F. None of these answers is correct.

15.02%

The risk-free rate of return is four percent and the expected return on the market is 13.5 percent. What is the expected return of Ford Motor Company if it has a beta of 1.16? Round your answer to the basis point.

4.30%; 7.00%

Volkswagen common stock has a beta is 0.8 and an expected return is 6.14% per annum. If the risk-free rate is 2.7% per year, what is the implied market risk premium and the expected return on the market? Round your answer to the basis point.

C. systematic risk

What are other terms for nondiversifiable risk? Select one or more correct answers. A. unique risk B. asset-specific risk C. systematic risk D. total risk E. non-systematic risk F. None of these choices is a term for nondiversifiable risk

E. Diversification works by reducing the unsystematic component of total risk.

What does the principle of diversification tells us? Select one or more correct answers. A. There is a limit to the benefits of diversification. B. Buying stocks within the same industry is an effective diversification strategy. C. Spreading an investment across five diverse companies will not lower the total risk. D. Investing in two or three large-company stocks will eliminate more than 80% of the systematic risk. E. Diversification works by reducing the unsystematic component of total risk. F. None of the above is correct.

A. Panicked investors cause security prices around the globe to fall precipitously.; D. The Federal Reserve raises short-term interest rates.

Which of the following are examples of systematic risk? Select one or more correct answers. A. Panicked investors cause security prices around the globe to fall precipitously. B. A flood washes away a Toyota warehouse. C. Madison imposes an additional one percent sales tax on all products. D. The Federal Reserve raises short-term interest rates. E. Corn prices in Iowa increase due to increased demand for alternative fuels. F. None of these choices are examples of systematic risk.

A. The number of vehicles sold by Subaru was better than anticipated.; C. Tesla announced a recall of 100,000 vehicles because of defective batteries.

Which of the following are examples of unsystematic risk? Select one or more correct answers. A. The number of vehicles sold by Subaru was better than anticipated. B. GDP was 0.5 percent lower than expected. C. Tesla announced a recall of 100,000 vehicles because of defective batteries. D. The inflation rate increased by two percent. E. The unemployment rate came in as expected. F. None of the above is correct.

C. U.S. Treasury bills

Which of the following investments was the least risky over the period since 1925? Select the single best answer. A. Small-company stocks B. Large-company stocks C. U.S. Treasury bills D. Long-term government bonds E. Long-term corporate bonds F. None of the above is the single best answer

A. beta

Which of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset? Select the single best answer. A. beta B. standard deviation C. alpha D. reward-to-risk ratio E. variance F. None of the above is the single best answer.

B. market risk and systematic risk; E. unique risk and diversifiable risk

Which of the following pairs of terms are synonymous? Select one or more correct answers. A. systematic risk and unique risk B. market risk and systematic risk C. unsystematic risk and asset-specific risk D. diversifiable risk and market risk E. unique risk and diversifiable risk F. None of these terms are synonymous.

C. unsystematic; D. asset-specific; E. diversifiable

Which of the following risks can be eliminated by holding many assets in a portfolio? Select one or more correct answers. A. market B. systematic C. unsystematic D. asset-specific E. diversifiable F. None of the above choices is correct.

C. Corporate bonds have a larger risk premium than long-term Treasurys.; D. Assets returns are roughly normally distributed, if you use your imagination.

Which of the following statements are correct about U. S. capital market history? Select one or more correct answers. A. The greater the volatility of returns, the greater the compensation for inflation. B. A large-company stock portfolio has a larger standard deviation of returns than that of a small- company portfolio. C. Corporate bonds have a larger risk premium than long-term Treasurys. D. Assets returns are roughly normally distributed, if you use your imagination. E. On average, Treasury bills cover inflation then pay a few extra basis points as a risk premium. F. None of the answers is correct.

A. The risk premium a security should earn depends on the security's beta.

Which of the following statements are correct? Select one or more correct answers. A. The risk premium a security should earn depends on the security's beta. B. The higher the beta, the lower the expected return on a security. C. It takes a portfolio of seventy-five diverse securities or more before the majority of the unsystematic risk is eliminated from the portfolio. D. Beta measures total risk. E. The security market line plots the inflation rate against an asset's expected return. F. None of these statements is correct.

B. It has a risk premium appropriate for the amount of risk assumed.; C. It has too much risk given the return.; D. It has a negative risk premium.

Which of the following statements are false about a rate of return that plots above the security market line? Only select "All are true." if none of the other statements are false. A. The security is underpriced. B. It has a risk premium appropriate for the amount of risk assumed. C. It has too much risk given the return. D. It has a negative risk premium. E. It indicates the security has too much compensation given the risk borne by an investor. F. All are true.

A. Diversification can reduce total risk to nearly zero.

Which of the following statements are false. Only select "All are true." if none of the other choices is false. A. Diversification can reduce total risk to nearly zero. B. U .S. capital market history provides strong evidence that investors are risk averse. C. An advantage of assuming asset returns are normally distributed is that you can assign probabilities to return outcomes if you know the mean and standard deviation of the distribution. D. If an asset has a large return, you should infer it is quite risky. E. Announcement have both an expected part and a surprise component. F. All are true.

F. All true.

Which of the following statements are false? Only select "All are true." if none of the other choices is false. A. The risk premium is the difference between the return on an asset and that of a T-bill. B. Diversification results from combining assets in a portfolio that do not move alike. C. Beta is a measure of relative systematic risk. D. Total risk = systematic risk + asset-specific risk E. The standard deviation is a measure of return volatility. F. All true.

B. Its expected return is too high.; C. Its stock price is a bargain. You should buy it.; E. Its expected return has a risk premium that is too big.

Which of the following statements are true if Mazda Motor Company's expected return plots above the security market line? Select one or more correct answers. A. Its stock price is overpriced. Avoid it like the plague. B. Its expected return is too high. C. Its stock price is a bargain. You should buy it. D. Its stock price is in equilibrium. E. Its expected return has a risk premium that is too big. F. None of these statements is true.

A. U.S. Treasury bills have no risk premium.; B. Small-company stocks tend to have a higher risk premium than large-company stocks.

Which of the following statements are true regarding risk premiums? Select one or more correct answers. A. U.S. Treasury bills have no risk premium. B. Small-company stocks tend to have a higher risk premium than large-company stocks. C. The higher the risk premium, the lower the standard deviation of the returns. D. Bonds tend to have a higher risk premium than stocks. E. Short-term bonds tend to have a higher risk premium than long-term bonds. F. None of these statements is correct.

C. Generally speaking, the higher the beta the higher the expected return.

Which of the following statements are true regarding the beta coefficient? Select one or more correct answers. A. Beta is a measure of unsystematic risk. B. A beta greater than one represents less systematic risk than the market. C. Generally speaking, the higher the beta the higher the expected return. D. A beta of one indicates an asset is totally risk-free. E. The risk premium of an asset will increase if the beta of that asset decreases. F. None of these statements is true about beta

B. An explosion at a Chevrolet distribution warehouse.; C. The introduction of a wildly popular new Mini Cooper.

Which of the following will have little, if any, effect on a well-diversified portfolio? Select one or more correct answers. A. A terrorist attack on the U.S. B. An explosion at a Chevrolet distribution warehouse. C. The introduction of a wildly popular new Mini Cooper. D. An increase in the exchange rate between the dollar and euro. E. An unexpected drop in GDP. F. None of these choices is correct.

A. The risk-free rate of return is the reward for waiting for your money assuming there is no risk in doing so.

Which one of the following statements are correct? Select one or more correct answers. A. The risk-free rate of return is the reward for waiting for your money assuming there is no risk in doing so. B. Beta measures the amount of diversifiable risk in a stock versus the amount of diversifiable risk in the overall market. C. The market risk premium decreases as the risk of a security increases. D. It takes at least fifty stocks to diversify a portfolio such that the bulk of the systematic risk is 7 eliminated. E. The market risk premium is defined as the sum of the expected return on a risky investment and the return on a risk-free investment. F. None of these statements is correct

Portfolio

a collection of assets held by a person or organization as an investment

Beta coefficient

a measure of volatility, or systematic risk, of a security or a portfolio in comparison to the market as whole

The Security Market Line (SML)

a positively sloped straight line displaying the relationship between expected and return and beta

Systematic risk principle

the expected return on a risky asset depends only on that asset's systematic risk

Nondiversifiable risk

the minimum level of risk that can be achieved through holding a diversified portfolio. Synonymous with market risk.

Cost of capital

the minimum required rate of return on an investment

Diversification

the process of spreading investments across more than a single asset. Reduces unsystematic risk by investing in a variety of assets

Risk-averse

when individuals want to avoid risk unless adequately compensated for it