Deck 8: Risk and Its Measurement

Question 1

The numerical value of a stock's beta tends to be stable over time.​

Answer 1

False

Question 2

A portfolio consisting of securities that are highly correlated is well diversified.​

Answer 2

False

Question 3

A beta coefficient is an index of an asset's unsystematic risk.​

Answer 3

False

Question 4

The larger the standard deviation of an investment's return, the larger is the investment's risk.​

Question 5

Systematic risk is reduced through portfolio diversification.​

Question 6

Unsystematic risk is the tendency for stock prices to move together.​

Question 7

Beta coefficients are computed with estimated data concerning the asset's expected return.​

Question 8

A beta of 2.0 indicates an asset's return is more volatile than the market.​

Question 9

The capital asset pricing model specifies the required return adjusted for systematic risk.​

Question 10

Beta coefficients and standard deviations may be used as indicators of risk.​

Question 11

The expected return on an investment includes both the expected income plus expected price appreciation.​

Question 12

An aggressive investor will tend to prefer stocks with high betas during rising markets.​

Question 13

​A diversified portfolio

A) ​increases systematic risk
B) ​reduces systematic risk
C) ​increases unsystematic risk
D) ​reduces unsystematic risk

Question 14

The standard deviation measures an asset's expected return.​

Question 15

A beta of 1.0 indicates that the stock's price is stable.​

Question 16

Realized returns frequently differ from expected returns.​

Question 17

Stocks with low beta coefficients have higher required rates of return.​

Question 18

The larger an investment's standard deviation, the smaller is the element of risk.​

Question 19

The risk premium in the capital asset pricing model rises with the expected return on the market.​

Question 20

There is no risk in a world of certainty. ue of an annuity due.​

Question 21

​Systematic risk
1) is the tendency for a stock's return and the return on the market to move together
2) is reduced by constructing a diversified portfolio
3) depends on the firm's business and financial risk
4) is measured by beta coefficients

A)​1 and 2
B)​2 and 3
C)​1 and 4
D)​2 and 4

Question 22

​Sources of risk include
1) fluctuations in stock prices
2) inflation
3) possibility of bankruptcy

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​all three

Question 23

A diversified portfolio reduces​

A) ​unsystematic risk
B) ​systematic risk
C) ​purchasing power risk
D) ​interest rate risk

Question 24

The standard deviation measures​

A) ​the dispersion around an average value
B) ​systematic risk
C) ​unsystematic risk
D) ​the security's high‑low prices

Question 25

You bought a stock with a beta of 1.4 and earned a return of 8.3%. Did you outperform the market if, during the same period, the market rose by 7.4% and you could have earned 5.4% by investing in a Treasury bill?​

Question 26

An investor may reduce risk by selecting​

A) ​high beta stocks
B) ​stocks with poorly correlated returns
C) ​a cross‑section of firms in the same industry
D) ​stocks traded on organized exchanges

Question 27

A beta coefficient is a measure of the volatility of​

A) ​a firm's position in its industry
B) a stock's return relative to the market return​
C) ​aggregate market stock prices
D) ​a firm's earnings

Question 28

A beta coefficient for a stock of 0.8 implies​

A) ​an 8% return on the market will cause the return on this stock to be 10%
B) an 8% decrease in the market will cause the return on this stock to be 8%​
C) ​a return of 10% on the market will cause the return on this stock to be 8%
D) a return of 10% on the market will cause the return on this stock to be ‑8%​

Question 29

To measure risk, the capital asset pricing model uses​

A) ​beta
B) ​an asset's standard deviation
C) ​the volatility of an asset's cash flows
D) ​the term during which the asset is held

Question 30

The risk associated with dispersion around an expected value (e.g., expected return) is measured by the​

A) ​beta coefficient
B) ​range (i.e., high‑low values)
C) ​standard deviation
D) ​debt to total assets (i.e., the debt ratio)

Question 31

​What is the required return using the capital asset pricing model if a stock's beta is 1.2 and the individual, who expects the market to rise by 11.2%, can earn 4.4% invested in a risk-free Treasury bill?

Question 32

​The risk-adjusted required rate of return excludes

A) ​the stock's standard deviation
B) ​the stock's beta
C) ​the risk-free rate
D) ​the anticipated return on the market

Question 33

Which of the following will reduce the required return on an investment?​

A) ​an increase in beta and a reduction in the Treasury bill rate
B) ​an increase in the Treasury bill rate and a decrease in beta
C) ​a decrease in the Treasury bill rate and a decrease in beta
D) an increase in the Treasury bill rate and an increase in beta​

Question 34

What is the expected return on a stock if the firm will earn 24% during a period of economic boom, 14% during normal economic periods, and 2% during a period of recession if the probabilities of these economic environments are 20%, 65%, and 15%, respectively?​

Question 35

For a security to help diversify a portfolio, the asset​

A) ​must generate a greater return than the average return on the portfolio
B) should not be sensitive to changes in security prices​
C) ​should have a return that is negatively correlated with the return on other securities in the portfolio
D) ​must be a debt instrument if the portfolio consists primarily of stocks

Question 36

A beta coefficient for a risky stock is​

A) ​less than 1.0
B) ​equal to 1.0
C) ​greater than 1.0
D) ​negative

Question 37

Components of the capital asset pricing model include​

A) ​a stock's market price
B) ​the standard deviation of a stock's return
C) ​the rate on a risk-free security
D) ​the investor's need for income versus capital gains

Question 38

A beta coefficient of 1.2 implies​
1) the stock is more risky than the market
2) the stock's return is 1.2 times the return on the market
3) the stock is less risky than the market
4) the market's return is 1.2 times the return on the stock

A)​1 and 2
B)​1 and 4
C)​2 and 3
D)​3 and 4

Question 39

An investor may reduce risk by​
1) selecting low beta stocks
2) constructing a diversified portfolio
3) selecting high beta stocks

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​only 1