Question 1

Which one of the following is the type of risk that only affects either a single firm or just a small number of firms?
A) unexpected
B) market
C) systematic
D) unsystematic
E) expected

Accepted Answer

Unsystematic risk is also known as specific risk and it only affects a single firm or a small number of firms. Market risk and systematic risk affect the entire market whereas unexpected and expected risks can apply to any type of risk.

Question 2

Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month.This announcement will cause the firm's stock price to:
A) increase.
B) either increase or remain constant.
C) remain constant.
D) decrease.
E) either increase, decrease, or remain constant.

Accepted Answer

The announcement of a Chief Operating Officer retiring can have varying impacts on a firm's stock price depending on how investors perceive the departure. If they view it as a loss of valuable leadership, the stock price might decrease. If they see it as an opportunity for fresh perspectives and positive change, the stock might increase. Or, the market might view the retirement as neutral, causing little to no immediate change in the stock price. Therefore, the stock price could either increase, decrease, or remain constant.

Question 3

The security market line depicts the graphical relationship between which two of the following?
I.expected return
II.surprise return
III.systematic risk
IV.unsystematic risk
A) I and III
B) I and IV
C) II and III
D) II and IV
E) none of these

Accepted Answer

The security market line (SML) is a graphical representation of the capital asset pricing model (CAPM), which shows the relationship between expected return (I) and systematic risk (III). The SML measures the required rate of return by investors for a given level of risk. Therefore, option A is the correct answer as it only includes the relevant variables in the SML.

Question 4

Which one of the following announcements is most apt to cause the price of a firm's stock to increase?
A) The firm met its quarterly earnings forecast.
B) An unpopular CEO unexpectedly announced he is resigning effective immediately.
C) A firm officially confirmed the rumors that it is merging with a competitor.
D) The firm just lowered its projected earnings per share for next year.
E) Analysts are expected to lower the firm's credit rating on its debt.

Accepted Answer

The announcement of an unpopular CEO's resignation is likely to be seen as a positive development for the firm and could increase investor confidence, leading to an increase in the stock price. The other options are likely to have a negative impact on the firm's stock price.

Question 5

Which one of the following stocks has the highest expected risk premium?

A) A
B) B
C) C
D) D
E) E

Accepted Answer

The answer of Which one of the following stocks has...

Question 6

Which one of the following qualifies as diversifiable risk?
A) market risk
B) systematic risk associated with an individual security
C) market crash
D) the systematic portion of an expected return
E) the unsystematic portion of an unexpected return

Accepted Answer

Diversifiable risk, also known as unsystematic risk, refers to the risk that is unique to a specific company or industry. This can be mitigated through diversification. The unsystematic portion of an unexpected return (choice E) fits this description, as it represents variability in returns that can be reduced by holding a variety of investments.

Question 7

Which one of the following is the best example of unsystematic risk?
A) decrease in company sales
B) increase in market interest rates
C) change in corporate tax rates
D) increase in inflation
E) This risk is related to expected portfolio returns

Accepted Answer

Unsystematic risk, also known as specific risk, is the risk inherent in an individual stock arising from factors specific to that particular company. The decrease in company sales is a specific factor affecting a single company's performance and is therefore the best example of unsystematic risk. The other options (B, C, and D) are examples of systematic risk, also known as market risk, which affects the entire market and cannot be diversified away. Option E is not a valid answer as it contradicts the definition of unsystematic risk.

Question 8

Which one of the following is the best example of a risk associated with stock ownership?
A) The stock paid a regular quarterly dividend.
B) The firm's net income decreased by 4 percent for the quarter, as had been expected.
C) One of the firm's patent applications was unexpectedly rejected.
D) The firm's cost of debt increased as the result of an expected tax cut.
E) The firm's production costs increased in line with previous years.

Accepted Answer

The rejection of a patent application could negatively impact the firm's future profits and competitiveness, which would result in a decrease in the value of the stock. The other options do not represent significant risks that would materially affect the stock's value.

Question 9

Which one of the following measures systematic risk?
A) beta
B) alpha
C) variance
D) standard deviation
E) correlation coefficient

Accepted Answer

Beta measures the systematic risk of an asset or portfolio relative to the market as a whole. It measures how the asset's returns move in relation to the market returns. Higher beta means higher systematic risk.

Question 10

Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money,the reward for bearing systematic risk,and the amount of systematic risk?
A) reward-to-risk theory
B) capital asset pricing model
C) risk premium proposal
D) market slope hypothesis
E) security market line proposition

Accepted Answer

The theory described in the question is the capital asset pricing model (CAPM). It states that the expected return of a security is a function of the risk-free rate, the market risk premium and the security's systematic risk (beta). Essentially, it takes into account the time value of money (risk-free rate), the reward for bearing systematic risk (market risk premium), and the amount of systematic risk (beta). The other answer choices are not directly related to this theory.

Question 11

A stock with which one of the following betas has an expected return that most resembles the overall market expected rate of return?
A) 0.33
B) 0.74
C) 0.99
D) 1.06
E) 1.22

Accepted Answer

A beta of 1 indicates that the stock has the same level of risk as the overall market. A beta of less than 1 indicates lower risk than the market, and a beta of greater than 1 indicates higher risk than the market. Therefore, a stock with a beta of 0.99 would have an expected return that most closely resembles the overall market expected rate of return.

Question 12

Which one of the following terms is the measure of the tendency of two things to move or vary together?
A) variance
B) squared deviation
C) standard deviation
D) alpha
E) covariance

Accepted Answer

Covariance is the measure of the tendency of two things to move or vary together. It measures the strength of the linear relationship between two variables. Variance, squared deviation, and standard deviation all measure the variation and dispersion of a single variable. Alpha is typically used in statistical hypothesis testing to denote the level of significance.

Question 13

Which one of the following betas represents the greatest level of systematic risk?
A) 0.05
B) 0.68
C) 1.00
D) 1.19
E) 1.27

Accepted Answer

Beta measures the systematic risk of a security. A beta of 1.0 indicates that the security's price will move with the market, while a beta greater than 1.0 indicates that the security is more volatile than the market, and a beta less than 1.0 indicates that the security is less volatile than the overall market. Therefore, a beta of 1.27 represents the greatest level of systematic risk among the given choices.

Question 14

Which one of the following is the type of risk that affects a large number of assets?
A) unique
B) systematic
C) asset-specific
D) unsystematic
E) firm-specific

Accepted Answer

Systematic risk, also known as market risk, affects an entire market or a large number of assets. It is caused by factors such as economic, political, or social events that affect the economy as a whole. Unique and asset-specific risks affect one specific asset, unsystematic and firm-specific risks affect a single company or a small group of companies.

Question 15

Which one of the following statements applies to unsystematic risk?
A) It can be eliminated through portfolio diversification.
B) It is also called market risk.
C) It is a type of risk that applies to most, if not all, securities.
D) Investors receive a risk premium as compensation for accepting this risk.
E) This risk is related to expected returns.

Accepted Answer

Unsystematic risk can be eliminated through portfolio diversification.

Question 16

Which one of the following is expressed as "E(R_M)- R_f"? A) market risk premium B) individual security risk premium C) real rate of return D) total expected rate of return E) market rate of return

Accepted Answer

The expression "E(R_M)- R_f" represents the market risk premium, which is the expected return of the market minus the risk-free rate.

Question 17

According to the systematic risk principle,the reward for bearing risk is based on which one of the following types of risk?
A) unsystematic
B) firm specific
C) expected
D) systematic
E) diversifiable

Accepted Answer

The systematic risk principle states that the reward for bearing risk is based on the level of systematic risk, also known as market risk, which cannot be diversified away. Therefore, the best answer is D, systematic. The other options (A, B, C, E) relate to unsystematic or diversifiable risks that can be reduced through diversification and are not rewarded in the same way as systematic risk.

Question 18

What is the beta of a risk-free security?
A) 0.00
B) 0.50
C) 1.00
D) 1.50
E) 2.00

Accepted Answer

The beta of a risk-free security is always 0.00 because it has no risk or volatility.

Question 19

Which one of the following terms is another name for systematic risk?
A) unique risk
B) firm risk
C) market risk
D) asset-specific risk
E) diversifiable risk

Accepted Answer

Systematic risk is also known as market risk, which is the risk that affects the overall market and cannot be diversified. Unique risk (A) and asset-specific risk (D) are other names for diversifiable risk, which affects a particular company or asset and can be reduced through diversification. Firm risk (B) refers to the specific risk associated with a company and may be a combination of unique and systematic risk.

Question 20

Which one of the following is the best example of systematic risk?
A) there is a shortage of nurses
B) a fire destroys a warehouse
C) gas prices rise sharply
D) the cost of sugar increases
E) two firms merge their operations

Accepted Answer

Systematic risk refers to the overall impact of the market or the economy on investments. A sharp rise in gas prices affects the entire economy, influencing costs for transportation, goods, and services broadly, unlike the other options which are more specific to certain sectors or companies.

Quiz 12: Return,Risk,and the Security Market Line

Which one of the following is the type of risk that only affects either a single firm or just a small number of firms?

Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month.This announcement will cause the firm's stock price to:

The security market line depicts the graphical relationship between which two of the following? I.expected return II.surprise return III.systematic risk IV.unsystematic risk

Which one of the following announcements is most apt to cause the price of a firm's stock to increase?

Which one of the following stocks has the highest expected risk premium?

Which one of the following qualifies as diversifiable risk?

Which one of the following is the best example of unsystematic risk?

Which one of the following is the best example of a risk associated with stock ownership?

Which one of the following measures systematic risk?

Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money,the reward for bearing systematic risk,and the amount of systematic risk?

A stock with which one of the following betas has an expected return that most resembles the overall market expected rate of return?

Which one of the following terms is the measure of the tendency of two things to move or vary together?

Which one of the following betas represents the greatest level of systematic risk?

Which one of the following is the type of risk that affects a large number of assets?

Which one of the following statements applies to unsystematic risk?

Which one of the following is expressed as "E(R_M) - R_f"?

According to the systematic risk principle,the reward for bearing risk is based on which one of the following types of risk?

What is the beta of a risk-free security?

Which one of the following terms is another name for systematic risk?

Which one of the following is the best example of systematic risk?

Quiz 12: Return,Risk,and the Security Market Line

Which one of the following is the type of risk that only affects either a single firm or just a small number of firms?

Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month.This announcement will cause the firm's stock price to:

The security market line depicts the graphical relationship between which two of the following? I.expected return II.surprise return III.systematic risk IV.unsystematic risk

Which one of the following announcements is most apt to cause the price of a firm's stock to increase?

Which one of the following stocks has the highest expected risk premium?

Which one of the following qualifies as diversifiable risk?

Which one of the following is the best example of unsystematic risk?

Which one of the following is the best example of a risk associated with stock ownership?

Which one of the following measures systematic risk?

Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money,the reward for bearing systematic risk,and the amount of systematic risk?

A stock with which one of the following betas has an expected return that most resembles the overall market expected rate of return?

Which one of the following terms is the measure of the tendency of two things to move or vary together?

Which one of the following betas represents the greatest level of systematic risk?

Which one of the following is the type of risk that affects a large number of assets?

Which one of the following statements applies to unsystematic risk?

Which one of the following is expressed as "E(RM) - Rf"?

According to the systematic risk principle,the reward for bearing risk is based on which one of the following types of risk?

What is the beta of a risk-free security?

Which one of the following terms is another name for systematic risk?

Which one of the following is the best example of systematic risk?

Which one of the following is expressed as "E(R_M) - R_f"?