Deck 6: Risk and Portfolio Management

Question 1

If a beta coefficient is 1.7,that implies the return on the stock tends to be less volatile than the return on the market.

Answer 1

False

Question 2

Systematic risk is reduced through diversification.

Answer 2

False

Question 3

In a world of certainty,there would be no risk.

Answer 3

True

Question 4

A portfolio's beta coefficient tends to be stable over time.

Question 5

If the return on two stocks is highly and positively correlated ,combining these stocks will reduce the risk associated with the portfolio.

Question 6

Diversification reduces reinvestment rate risk.

Question 7

The tendency of security prices to move together is one source of systematic risk.

Question 8

Portfolios that offer the highest return for a given level of risk are "efficient."

Question 9

If a stock's return has a large standard deviation,that suggests the stock has little risk.

Question 10

The dispersion around a stock's return is one measure of risk.

Question 11

A diversified portfolio requires the securities of at least fifty firms.

Question 12

A portfolio consisting of securities whose returns are highly correlated is not truly diversified.

Question 13

During a rising market,stocks with greater beta coefficients may be preferred.

Question 14

If a stock has a beta of 1.0,it is risk-free stock.

Question 15

Low beta stocks tend to generate higher returns in rising markets.

Question 16

A higher level of indifference,represented by a higher indifference curve,implies more risk taking.

Question 17

Portfolio risk is the summation of business and financial risk.

Question 18

While diversification decreases risk,it also increases the chance of a large gain.

Question 19

The numerical value of beta for the market equals 1.

Question 20

It is the anticipated or expected return that induces an investor to buy a stock.

Question 21

Indifference curves used in portfolio theory show the investor's indifference between

A) stocks and bonds
B) long- and short-term capital gains
C) systematic and unsystematic risk
D) risk and return

Question 22

The beta of a portfolio is a weighted average of each asset's beta coefficient.

Question 23

The flatter the individual's indifference curves,the less averse the investor is to bearing risk.

Question 24

Beta coefficients
1)are a measure of systematic risk
2)relate the return on an individual security to the return on the market
3)measure the variability of as asset's return

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 25

Unsystematic risk is

A) the risk associated with movements in securities prices
B) reduced through diversification
C) higher when interest rates rise
D) the risk of loss of purchasing power

Question 26

If the dispersion around a security's return is larger

A) the expected return is smaller
B) the standard deviation is smaller
C) the stock's price is higher
D) the security's risk is higher

Question 27

Arbitrage pricing theory is a multi-variable model used to explain securities returns.

Question 28

Arbitrage is the act of buying a high priced asset in one market and simultaneously selling it in another market at a lower price.

Question 29

Sources of unsystematic risk include
1)the firm's financing decisions
2)the firm's operations
3)fluctuating market prices

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 30

The security market line relates the return on a stock to interest rates and the market risk associated with the stock.

Question 31

The "efficient frontier" relates all the combinations of risk and return that represent the same level of satisfaction.

Question 32

The efficient frontier in portfolio theory

A) indicates the highest return for a given risk
B) illustrates the optimal tradeoff between long- and short-term capital gains
C) quantifies systematic and unsystematic risk
D) identifies the optimal portfolio for the investor

Question 33

Portfolio risk encompasses
1)a firm's financing decisions
2)interest rate risk
3)loss of purchasing power

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 34

According to the arbitrage pricing theory,the return on a stock

A) is not related to the expected return on the stock
B) depends on the stock's responsiveness to unexpected changes
C) is reduced through the construction of diversified portfolios
D) equals the market return if the expected rate of inflation is realized

Question 35

Beta coefficients of 1.3 indicate

A) the stock has more unsystematic risk
B) the stock has less unsystematic risk
C) the stock is more volatile than the market
D) the stock is less volatile than the market

Question 36

The security market line does not

A) indicate the relationship between risk and return
B) relate the market return and beta to a stock's return
C) identify the optimal portfolio for the investor
D) use beta coefficients as a measure of risk

Question 37

The expected return on an investment in stock is

A) the expected dividend payments
B) the anticipated capital gains
C) the sum of expected dividends and capital gains
D) less than the realized return

Question 38

For diversification to reduce risk,

A) the returns on the individual securities should be highly correlated
B) the prices of the stocks should be stable
C) the returns on the individual securities should be negatively correlated
D) one firm should offer dividends and the other should offer capital gains

Question 39

An efficient portfolio
1)maximizes risk for a given return
2)minimizes risk for a given return
3)maximizes return for a given level of risk
4)minimizes return for a given level of risk

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

Question 40

Investors who want to bear less risk should acquire stocks whose beta coefficients are

A) greater than 1.5
B) greater than 1.0
C) less than 1.0
D) less than 0.5

Question 41

What is the expected return on a stock that pays a 4 percent annual dividend and whose price is expected to appreciate annually at 6 percent?

Question 42

Given the following information:

Question 43

(This problem illustrating the computation of beta coefficients may be solved using the Investment Analysis Calculator or Excel.)The returns on the market and stock A and stock B are as follows:
Compute the beta coefficient for each stock and interpret the results of the computations.