Question 1

An increase in the Treasury Bill rate ________.

Accepted Answer

An increase in the Treasury Bill rate is considered to be a risk-free rate of return. Since the required rate of return of a common stock is influenced by overall market conditions and risk-free rate of return, it will increase the required rate of return of a common stock.

Question 2

The beta of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.

Accepted Answer

The beta of a portfolio is primarily a function of the betas of the individual securities in the portfolio and the proportion of the portfolio invested in those securities, not directly the standard deviations or correlations.

Question 3

The portion of an asset's risk that is attributable to firm-specific, random causes is called ________.

Accepted Answer

Unsystematic risk, also known as idiosyncratic risk, refers to the portion of an asset's risk that is specific to the firm and is not affected by the overall market conditions. It is a type of risk that can be diversified away by holding a well-rounded portfolio of assets. Nondiversifiable risk, also known as systematic risk or market risk, refers to the portion of an asset's risk that is inherent to the overall market conditions and cannot be diversified away. Political risk refers to the potential negative impact of political decisions or instability on an investment.

Question 4

A beta coefficient of -1 represents an asset that ________.

Accepted Answer

A beta coefficient of -1 indicates that the asset moves in the opposite direction to the market portfolio but with the same magnitude of response.

Question 5

A beta coefficient of 0 represents an asset that ________.

Accepted Answer

A beta coefficient of 0 indicates that the asset's returns are unrelated to the market portfolio's returns, meaning it does not move in relation to the market.

Question 6

The higher an asset's beta, ________.

Accepted Answer

Beta measures an asset's volatility compared to the overall market. A higher beta means the asset is more responsive to changes in the market returns, while a lower beta means it is less responsive.

Question 7

The purpose of adding an asset with a negative or low positive beta is to ________.

Accepted Answer

The purpose of adding an asset with a negative or low positive beta is to reduce risk. Beta measures the volatility or systematic risk of an asset compared to the market. An asset with a beta of less than 1 indicates that it is less volatile than the market. By adding such an asset to a portfolio, the overall risk of the portfolio can be reduced without significantly sacrificing returns. On the other hand, adding an asset with a high positive beta can increase the risk of the portfolio.

Question 8

________ risk represents the portion of an asset's risk that can be eliminated by combining assets with less than perfect positive correlation.

Accepted Answer

Diversifiable risk, also known as unsystematic risk, can be eliminated by combining assets with less than perfect positive correlation through diversification. This type of risk can be reduced by spreading investments across different assets, sectors, and geographic regions. Market risk, systematic risk, and economic risk cannot be eliminated through diversification as they are not specific to individual assets but affect the entire market or economy.

Question 9

A beta coefficient of +1 represents an asset that ________.

Accepted Answer

A beta coefficient of +1 indicates that the asset's price moves with the market at the same rate, meaning it has the same response as the market portfolio.

Question 10

Systematic risk is also referred to as ________.

Accepted Answer

Systematic risk, also known as market risk, cannot be diversified away as it is inherent in the overall market or economy. It affects all securities in the market, and therefore is nondiversifiable. Options A and B refer to company-specific risks, which are diversifiable. Option D refers to the risk associated with changes in interest rates, and is not applicable to the concept of systematic risk.

Question 11

Unsystematic risk ________.

Accepted Answer

Unsystematic risk, also known as company-specific risk, can be reduced or eliminated through diversification. Diversification allows an investor to spread their portfolio across different company stocks, industries, and sectors, reducing the impact of risks specific to one company. The other options are incorrect as unsystematic risk can change, can be estimated, and only affects individual companies or sectors, not all firms in a market.

Question 12

War, inflation, and the condition of the foreign markets are all examples of ________.

Accepted Answer

These are all factors that can affect the entire market and cannot be mitigated through diversification. Therefore, they are examples of nondiversifiable or systematic risk. The other options relate to risks that are specific to a particular business or industry, and can be reduced through diversification.

Question 13

An increase in nondiversifiable risk would ________.

Accepted Answer

Nondiversifiable risk cannot be eliminated by diversification, so an increase in nondiversifiable risk would increase the systematic risk of the asset, which is measured by beta. As a result, the required return would increase to compensate for the higher risk.

Question 14

An investment banker has recommended a $100,000 portfolio containing assets B, D, and F. $20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a beta of 2.0; and $30,000 will be invested in asset F, with a beta of 0.5. The beta of the portfolio is ________.

Accepted Answer

The answer of An investment banker has recommended a $100,000...

Question 15

Risk that affects all firms is called ________.

Accepted Answer

Nondiversifiable risk, also known as market risk or systematic risk, is a risk that affects all firms in the market or economy. It cannot be avoided by diversification, and it is typically caused by macroeconomic factors such as interest rates, inflation, political instability, and natural disasters. The other options, such as maturity risk, reinvestment risk, and unsystematic risk, are specific types of risk that are not necessarily present in all firms or markets.

Question 16

Beta coefficient is an index of the degree of movement of an asset's return in response to a change in the risk-free asset.

Accepted Answer

Beta coefficient is an index of the degree of movement of an asset's return in response to a change in the overall market or benchmark index, not the risk-free asset.

Question 17

Strikes, lawsuits, regulatory actions, or the loss of a key account are all examples of ________.

Accepted Answer

These are examples of diversifiable risk, which refers to the risk specific to an individual company or industry that can be mitigated through diversification.

Question 18

Relevant portion of an asset's risk attributable to market factors that affect all firms is called ________.

Accepted Answer

Systematic risk, also known as market risk, is the portion of an asset's risk that is attributable to factors affecting an entire market or economy. This type of risk cannot be diversified away and affects all companies in the market. The other options - credit risk, diversifiable risk, and maturity risk - are specific types of risk that affect individual companies and can be mitigated through diversification or other risk management techniques.

Question 19

An example of an external factor that affects a corporation's risk or beta, is ________.

Accepted Answer

Toxic spills can lead to unfavorable publicity, lawsuits, and damage to the company's reputation, which can increase the corporation's risk or beta. Choices A, C, and D refer to internal factors, which may also affect the company's risk, but are not directly related to external factors.

Question 20

The beta associated with a risk-free asset ________.

Accepted Answer

The beta associated with a risk-free asset is equal to 0 as a risk-free asset is assumed to have no risk and its return is constant over time.

Quiz 8: Risk and Return