Deck 13: Return, Risk, and the Security Market Line

Question 1

The weights that are commonly used when computing the expected return of a portfolio given
various economic scenarios are based on the probability of each economic scenario occurring.

Answer 1

True

Question 2

Risk premium = Expected return - Risk-free rate

Answer 2

True

Question 3

A decrease in the rate of inflation is an example of systematic risk.

Answer 3

True

Question 4

The weights that are commonly used when computing the expected return of a portfolio given
various economic scenarios are based on the amount invested in each security held in the portfolio.

Question 5

Diversification works because forming stocks into portfolios reduces the standard deviation of
returns for each stock.

Question 6

A decrease in a firm's cost of borrowing is an example of systematic risk.

Question 7

The weights that are commonly used when computing the expected return of a portfolio given
various economic scenarios are based on the expected returns of the securities within the portfolio.

Question 8

Diversification works because unsystematic risk exists.

Question 9

The weights that are commonly used when computing the expected return of a portfolio given
various economic scenarios are based on the systematic risk of each security held in the portfolio.

Question 10

It is NOT possible to construct a portfolio with zero variance of expected returns from assets whose
expected returns have positive variance individually.

Question 11

The expected return of the portfolio considers the probability of various states of the economy.

Question 12

The expected return of the portfolio considers the amount of money currently invested in each
individual security.

Question 13

If the standard deviation of return on the stocks of the S&P/TSX Composite Index has been
approximately 24% per year over the last decade, it must be true that half of the firms in the index
have a standard deviation of return below 24% over the same period.

Question 14

The expected return of the portfolio considers the performance of each stock given various
economic scenarios.

Question 15

Announcement = Expected part - Surprise

Question 16

You believe that the possible returns on stock A will be either 25% or -15% over the coming year,
depending on whether the economy does well or does poorly. Given some probabilities of the
future state of the economy, you compute the standard deviation of the possible returns. To get the
dispersion of the possible outcomes in the same units as the outcomes themselves (i.e., in %), you
must then compute the variance.

Question 17

The expected return of the portfolio considers various levels of economic activity.

Question 18

Total risk - Systematic risk = Unsystematic risk

Question 19

Diversification works because firm-specific risk can be dramatically reduced if not eliminated.

Question 20

The realized return on an asset can be broken down into an expected component and a discounted
component.

Question 21

Diversifiable risks are generally associated with an individual firm or industry.

Question 22

An example of systematic risk would be if the stock of the major airlines dropped after two
airplanes crashed on the same day, making many passengers too nervous to fly.

Question 23

Adding some international securities into a portfolio of Canadian stocks helps reduce unsystematic
risk in a portfolio.

Question 24

A firm in Moose Jaw announces a revolutionary way to make auto airbags in a way that decreases
their risk to automobile occupants. This is a type of surprise that would be characterized as
unsystematic risk.

Question 25

Diversifiable risks can be essentially eliminated by investing in several unrelated securities.

Question 26

Eliminating unsystematic risk is the responsibility of the individual investor.

Question 27

A market risk factor is a risk that influences only a small number of assets.

Question 28

An increase in the productivity of ABC Co. workers is an example of systematic risk.

Question 29

If you invest in stocks with higher-than-average betas, you are certain to earn higher-than-average
returns over the next year.

Question 30

Lower consumer spending than expected is considered an example of unsystematic risk.

Question 31

Common stock sold and replaced with Treasury bills would increase a portfolio's systematic risk.

Question 32

Lower quarterly sales for Chapters than expected is considered an example of systematic risk.

Question 33

Combining stocks with bonds in a portfolio helps reduce unsystematic risk in a portfolio.

Question 34

Adding some Treasury bills to a risky portfolio helps reduce unsystematic risk in a portfolio.

Question 35

A unique risk is a risk that affects a relatively large number of the assets in the market.

Question 36

Latest unemployment figures increased, as expected is considered an example of unsystematic
risk.

Question 37

Higher quarterly loss than expected for Air Canada is considered an example of unsystematic risk.

Question 38

An increase in the rate of GDP growth is an example of systematic risk.

Question 39

Assume all of the stocks in a given industry fall as a result of an announcement about the general
health of the economy. This is an example of systematic risk.

Question 40

Beta measures diversifiable risk.

Question 41

Systematic risk is relevant to a well-diversified investor.

Question 42

No matter how much total risk an asset has, only the unsystematic portion is relevant in determining
the expected return on that asset.

Question 43

Quarterly profit for Imperial Oil equals expectations is considered an example of systematic risk.

Question 44

Low-beta stocks are sold and replaced with high-beta stocks would increase a portfolio's systematic
risk.

Question 45

The market rewards investors for diversifiable risk by paying a risk premium.

Question 46

The risk premium increases as the non-diversifiable risk increases.

Question 47

The Capital Asset Pricing Model specifically rewards investors for assuming unsystematic risk via
the application of beta in the formula.

Question 48

Unsystematic risk is rewarded by the marketplace.

Question 49

Market risk is relevant to a well-diversified investor.

Question 50

Non-diversifiable risks are those risks you cannot avoid if you are invested in the financial markets.

Question 51

Spreading the retail industry portion of a portfolio over five separate stocks helps reduce
unsystematic risk in a portfolio.

Question 52

Systematic risk is a type of risk that influences all assets to a greater or lesser degree.

Question 53

Systematic risk is relevant to a well-diversified investor.

Question 54

Stocks with a beta equal to the market beta are added to a portfolio of Treasury bills would increase
a portfolio's systematic risk.

Question 55

Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk.

Question 56

Systematic risk is another name for non-diversifiable risk.

Question 57

Non-diversifiable risk is relevant to a well-diversified investor.

Question 58

For a stock with beta equal to 1.5 signifies that the market risk premium is 10%, and the expected
return on the stock is 15%.

Question 59

Non-diversifiable risk is measured by standard deviation.

Question 60

Lower trade deficit than expected is considered an example of systematic risk.

Question 61

Portfolio betas will always be greater than 1.0.

Question 62

A portfolio of Treasury bills will have a beta equal to minus one.

Question 63

The market risk premium of an individual security is dependent upon the security's systematic risk.

Question 64

The market risk premium of an individual security is dependent upon the market rate of return.

Question 65

If the portfolio beta is greater than one then the portfolio has more risk than the overall market.

Question 66

For a stock with beta equal to 1.5 signifies that the stock has a 50% higher expected return than the
average stock.

Question 67

The market risk premium of an individual security is dependent upon the security's unique risk.

Question 68

The projected risk premium is defined as the sum of the expected return on a risky investment and
the return on a risk-free investment.

Question 69

The CAPM shows that the expected return for a particular asset depends on the reward for bearing
systematic risk.

Question 70

If world events cause investors to become more risk-averse, we would expect the market risk
premium to increase.

Question 71

The CAPM shows that the expected return for a particular asset depends on the amount of
unsystematic risk.

Question 72

The market risk premium of an individual security is dependent upon the risk-free rate of return.

Question 73

Slope of the SML = [E(RA) + Rf]/ßA

Question 74

A portfolio beta is a weighted average of the betas of the individual securities contained in the
portfolio.

Question 75

For a stock with beta equal to 1.5 signifies that the stock has 50% more systematic risk than the
average stock.

Question 76

If the total risk of firm X is greater than that of firm Y, then the beta of firm X must be greater than
that of firm Y.

Question 77

Beta is needed to estimate the amount of additional reward you will receive for purchasing a risky
asset instead of a risk-free asset.

Question 78

Delta is needed to estimate the amount of additional reward you will receive for purchasing a risky
asset instead of a risk-free asset.

Question 79

Market risk premium is needed to estimate the amount of additional reward you will receive for
purchasing a risky asset instead of a risk-free asset.

Question 80

The CAPM shows that the expected return for a particular asset depends on the pure time value of
money.