Finance chap. 11 (test 4)

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 percent rate? Expected return
Stock A comprises 28 percent of Susan’s portfolio. Which one of the following terms applies to the 28 percent? Portfolio weight
Systematic risk is defined as: any risk that affects a large number of assets.
Unsystematic risk can be defined by all of the following except: market risk.
Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk? Diversification
The systematic risk principle states that the expected return on a risky asset depends only on the asset’s ___ risk. market
The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the: beta coefficient.
The security market line is a linear function that is graphed by plotting data points based on the relationship between the: expected return and beta.
The slope of the security market line represents the: market risk premium.
The security market line is defined as a positively sloped straight line that displays the relationship between the: expected return and beta of either a security or a portfolio.
Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive? Cost of capital
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 lower the overall expected rate of return on this stock? A decrease in the probability of an economic boom
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, β is the security’s beta, and E(RM) is the expected rate of return on the market. β[E(RM) -Rf]
Which one of the following statements is correct? If a risky security is correctly priced, its expected risk premium will be positive.
Which statement is true? The weights of the securities held in any portfolio must equal 1.0.
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 product
Which one of the following is the best example of unsystematic risk? A warehouse fire
Which one of these represents systematic risk? Increase in consumption created by a reduction in personal tax rates
Which one of these is the best example of systematic risk? Decrease in gross domestic product
Standard deviation measures _____ risk while beta measures _____ risk. total; systematic
Which one of the following best exemplifies unsystematic risk? Unexpected increase in the variable costs for a firm
The risk premium for an individual security is based on which one of the following types of risk? Systematic
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
Which statement is correct? An underpriced security will plot above the security market line.
Portfolio diversification eliminates: unsystematic risk.
Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following? Reduce the portfolio’s unique risks
For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta: that is > 0 but < 1.
The addition of a risky security to a fully diversified portfolio: may or may not affect the portfolio beta.
A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is .74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta: will be greater than or equal to .74 but less than or equal to 1.51.
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
If a security plots to the right and below the security market line, then the security has ____ systematic risk than the market and is ____. more; overpriced
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 security market line.
Which statement is correct? A security with a beta of 1.54 will plot on the security market line if it is correctly priced.
Which one of the following is the vertical intercept of the security market line? Risk-free rate
According to the capital asset pricing model, the expected return on a security will be affected by all of the following except the: security’s standard deviation.
World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stock’s rate of return without affecting the risk level of the stock, all else constant? Increase in the market risk-to-reward ratio
The expected return on a security is not affected by the: security’s unique risks.
The capital asset pricing model: considers the relationship between the fluctuations in a security’s returns versus the market’s returns.

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