1. The return on a risky asset which is anticipated being earned in the future is called the _____ return.
a. average
b. historical
c. expected
d. geometric
e. required
Expected
2. A group of assets, such as stocks and bonds, held by an investor is called a(n):
a. index.
b. portfolio.
c. collection.
d. grouping.
e. tranche.
Portfolio
3. The percentage of a portfolio's total value invested in a particular asset is called that asset's:
a. portfolio return.
b. portfolio weight.
c. degree of risk.
d. composite value.
e. index value.
Portfolio Weight
4. Risk that affects a large number of assets is called _____ risk.
a. idiosyncratic
b. diversifiable
c. systematic
d. asset-specific
e. total
Systematic
5. Risk that affects at most a small number of assets is called _____ risk.
a. portfolio
b. nondiversifiable
c. market
d. unsystematic
e. total
Unsystematic
6. The principle of diversification tells us that:
a. concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.
b. concentrating an investment in three companies all within the same industry will greatly reduce
Spreading an investment across many diverse assets will eliminate some total risk
The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.
a. efficient markets hypothesis
b. systematic risk principle
c. open markets theorem
d. law of one price
e. principle of diversification
Systematic Risk Principle
8. The amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset, is called the:
a. beta coefficient.
b. reward-to-risk ratio.
c. risk ratio.
d. diversifiable risk.
e. Treynor index.
beta-coefficient
9. The positively sloped linear function which illustrates the relationship between an asset's expected return and its beta coefficient is the:
a. reward-to-risk ratio.
b. portfolio weight.
c. portfolio risk.
d. security market line.
e. market risk premiu
Security Market Line
10. Which one of the following is the slope of the security market line?
a. reward-to-risk ratio
b. portfolio weight
c. beta coefficient
d. risk-free interest rate
e. market risk premium
Market Risk Premium
11. The equation of the SML which defines the relationship between the expected return and beta is the:
a. capital asset pricing model.
b. time value of money equation.
c. risk-return model.
d. market equation.
e. expected risk formula.
Capital Asset pricing model
12. The minimum required return on a new risky investment is called the:
a. average arithmetic return.
b. expected return.
c. geometric average return.
d. time value of money.
e. cost of capital.
Cost of capital
13. The expected return on a stock given various states of the economy is equal to the:
a. highest expected return given any economic state.
b. arithmetic average of the returns for each economic state.
c. summation of the individual expected rates of ret
Weighted average of the returns at each economic state
14. The expected return on a stock computed using economic probabilities is:
a. guaranteed to equal the actual average return on the stock for the next five years.
b. guaranteed to be the minimal rate of return on the stock over the next two years.
c. gua
A mathematical expectation based on a weighted average and not an actual anticipated outcome
15. The expected risk premium on a stock is equal to the expected return on the stock minus the:
a. expected market rate of return.
b. risk-free rate.
c. inflation rate.
d. standard deviation.
e. variance.
Risk Free Rate
16. Standard deviation measures _____ risk.
a. total
b. nondiversifiable
c. unsystematic
d. systematic
e. economic
Total
17. The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:
a. number of shares owned of each stock.
b. market price per share of each stock.
c. market value of the investment in each stock.
d. original a
Market Value of the investment in each stock
18. The portfolio expected return considers which of the following factors?
I. percentage of the portfolio invested in each individual security
II. projected states of the economy
III. the performance of each security given various economic states
IV. pro
ALL
19. The expected return on a portfolio:
I. can never exceed the expected return of the best performing security in the portfolio.
II. must be equal to or greater than the expected return of the worst performing security in the portfolio.
III. is independe
I and II
20. If a stock portfolio is well diversified, then the portfolio variance:
a. will equal the variance of the most volatile stock in the portfolio.
b. may be less than the variance of the least risky stock in the portfolio.
c. must be equal to or greater t
may be less than the variance of the least risky stock in the whole portfolio
21. The standard deviation of a portfolio:
a. is a weighted average of the standard deviations of the individual securities which comprise the portfolio.
b. can never be less than the standard deviation of the most risky security in the portfolio.
c. must
can be less than the SD of the least risky security in the portfolio
22. Which of the following are included in the computation of a portfolio's standard deviation?
I. weight assigned to each security comprising the portfolio
II. weighted average of the standard deviations of the individual securities held in the portfolio
I,III,IV
23. Which one of the following statements is correct concerning a portfolio of multiple securities and multiple states of the economy when both the securities and the economic states have unequal weights?
a. Given multiple economic states with unequal wei
Given both the unequal weights of the securities and the unequal weights of the economic states, a portfolio can be created that has an expected standard deviation of zero.
24. Which one of the following events would be included in the expected return on Delta stock?
a. The directors of Delta just fired the CEO because of remarks he made this morning to one of the directors.
b. A fire just destroyed Delta's main distribution
This moning delta confimed its CEO is retiring
25. Which one of the following statements is correct?
a. The unexpected return is always negative.
b. The expected return minus the unexpected return is equal to the total return.
c. Over time, the average return is equal to the unexpected return.
d. The
Over time the average unexpected return will be zero
26. Which one of the following is true concerning unexpected returns?
a. All announcements by a firm affect that firm's unexpected returns.
b. Unexpected returns over time have a negative effect on the total return of a firm.
c. Unexpected returns are rel
Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term
27. Which one of the following is an example of systematic risk?
a. coal miners go on strike against Deep Vein Coal Company
b. Baker's Dozen experiences a kitchen fire which halts operations
c. inflation unexpectedly increases by 1.5 percent in the U.S.
d
Inflation unexpectedly increases by 1.5 percent
28. Unsystematic risk:
a. can be effectively eliminated by portfolio diversification.
b. is compensated for by the risk premium.
c. is measured by beta.
d. is measured by standard deviation.
e. is related to the overall economy.
can be efffectively eliminated by diversification
29. Which one of the following is an example of unsystematic risk?
a. the exchange rate rises against the other major currencies
b. a national sales tax is adopted
c. an explosion occurs at a chemical plant
d. the Federal Reserve surprisingly raises inter
explosion at a chemical plant
30. Which one of the following is least apt to reduce the unsystematic risk of a portfolio?
a. adding additional shares of each stock in a portfolio to that portfolio
b. adding bonds to a stock portfolio
c. adding international securities into a portfolio
adding additional shares of each stock in the portfolio to the portfolio
31. Which one of the following statements is correct concerning unsystematic risk?
a. Assuming unsystematic risk is rewarded by the market place.
b. Eliminating unsystematic risk is the responsibility of the individual investor.
c. Unsystematic risk is re
eliminating unsystematic risk is the responsibility of the individual investor
32. Which one of the following is another name for systematic risk?
a. diversifiable risk
b. unique risk
c. asset-specific risk
d. market risk
e. unrewarded risk
market risk
33. Which one of the following risks is irrelevant to a well-diversified investor?
a. systematic risk
b. unsystematic risk
c. market risk
d. nondiversifiable risk
e. systematic portion of a surprise
Unsystematic risk
34. Which of the following are examples of diversifiable risk?
I. tornado strikes an industrial park in Kansas
II. federal government imposes new workplace safety laws
III. local government increases property tax rates
IV. cost of worker's compensation in
I and III
35. Which of the following statements are correct concerning diversifiable risks?
I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities.
II. The market rewards investors for diversifiable risk by paying a risk pr
I and III
36. Which of the following are examples of diversifiable risks?
I. the inflation rate spikes suddenly
II. terrorists strike the United States
III. the price of corn increases due to a nationwide drought
IV. taxes are increased on hotel room rentals
a. I a
III,IV
37. Which of the following statements concerning risk are correct?
I. Nondiversifiable risk is measured by beta.
II. The risk premium increases as diversifiable risk increases.
III. Systematic risk is another name for nondiversifiable risk.
IV. Diversifia
I,III
38. The primary purpose of portfolio diversification is to:
a. increase returns and risks.
b. eliminate all risks.
C. eliminate asset-specific risk.
d. eliminate systematic risk.
e. lower both returns and risks.
Eliminate Asset specific risk
39. Which one of the following indicates a portfolio is being effectively diversified?
a. an increase in the portfolio beta
b. a decrease in the portfolio beta
c. an increase in the portfolio rate of return
d. an increase in the portfolio standard deviati
A decrease in the portfolio SD
40. How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?
a. 3
b. 5
c. 30
d. 40
e. 50
30
41. Systematic risk is measured by:
a. the mean.
b. beta.
c. the geometric average.
d. the standard deviation.
e. the arithmetic average.
beta
42. The systematic risk principle implies the _____ an asset depends on that asset's systematic risk.
a. variance of the returns on
b. standard deviation of the returns on
c. expected return on
d. total risk assumed by owning
e. diversification benefits o
Expected return on
43. Which one of the following statements is correct concerning a portfolio beta?
a. Portfolio betas range between 1.0 and +1.0.
b. A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.
c. A portfolio
A portfolio beta is weighted average of the betas of the individual securities
44. The systematic risk of the market is measured by:
a. a beta of 1.0.
b. a beta of 0.0.
c. a standard deviation of 1.0.
d. a standard deviation of 0.0.
e. a variance of 1.0.
a beta of 1
45. Which of the following variables do you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset?
I. asset standard deviation
II. asset beta
III. risk-free rate of return
IV. m
II,IV
46. Total risk is measured by _____ and systematic risk is measured by _____.
a. beta; epsilon
b. beta; standard deviation
c. epsilon; beta
d. standard deviation; beta
e. standard deviation; variance
SD Beta
47. The intercept point of the security market line is the rate of return which corresponds to:
a. the risk-free rate.
b. the market rate.
c. a return of zero.
d. a return of 1.0 percent.
e. the market risk premium.
Risk Free Rate
48. A stock with an actual return that lies above the security market line has:
a. more systematic risk than the overall market.
b. more risk than warranted based on the realized rate of return.
c. yielded a higher return than expected for the level of ri
yielded a higher return than the expected for the level of risk
49. The market rate of return is eleven percent and the risk-free rate of return is four percent. Treynak stock has three percent more risk than the market and has an actual return of eleven percent. This stock:
a. is underpriced.
b. is correctly priced.
Will plot below the security line
50. If the market is efficient and securities are priced fairly then the _____ will be constant for all securities.
a. systematic risk
b. standard deviation
c. reward-to-risk ratio
d. beta
e. risk premium
reward to risk ratio
51. The reward-to-risk ratio for stock A exceeds the reward-to-risk ratio of stock B. Stock A has a beta of 1.4 and stock B has a beta of .90. This information implies that:
a. stock A is riskier than stock B and both stocks are fairly priced.
b. stock A
Either stock A is underpriced or B is overpriced or both
52. The market risk premium is computed by:
a. adding the risk-free rate of return to the inflation rate.
b. adding the risk-free rate of return to the market rate of return.
c. subtracting the risk-free rate of return from the inflation rate.
d. subtract
subtracting the risk free rate of return from the market rate
53. The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-free asset is referred to as the:
a. market rate of return.
b. market risk premium.
c. systematic return.
d. total return.
e. real rate of return.
market risk premium
54. The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.
a. real return
b. actual return
c. nominal return
d. risk premium
e. expected return
risk premium
56. According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:
a. amount of total risk assumed and the market risk premium.
b. market risk premium and the amount of systematic risk inheren
Market risk premium and the amount of systematic risk inherent in the security
55. The capital asset pricing model (CAPM) assumes:
I. a risk-free asset has no systematic risk.
II. beta is a reliable estimate of total risk.
III. the risk-to-reward ratio is constant.
IV. the market rate of return can be approximated.
a. I and III only
c
57. Which one of the following should earn the most risk premium based on CAPM?
a. diversified portfolio with returns similar to the overall market
b. stock with a beta of 1.23
c. stock with a beta of .98
d. U.S. Treasury bill
e. portfolio with a beta of
stock with a beta of 1.23