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

Question 1

Risk premium = Expected return - Risk-free rate

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Diversification works because unsystematic risk exists.

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 probability of each economic scenario occurring.

Question 5

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

Question 6

Announcement = Expected part - Surprise

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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 12

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

Question 13

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

Question 14

Total risk - Systematic risk = Unsystematic risk

Question 15

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 16

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

Question 17

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 18

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

Question 19

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 20

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 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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 27

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

Question 28

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 29

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 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

Beta measures diversifiable risk.

Question 38

Eliminating unsystematic risk is the responsibility of the individual investor.

Question 39

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

Question 40

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

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

Systematic risk is another name for non-diversifiable risk.

Question 47

Unsystematic risk is rewarded by the marketplace.

Question 48

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

Question 49

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

Question 50

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

Question 51

Market risk is relevant to a well-diversified investor.

Question 52

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 53

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

Question 54

Systematic risk is relevant to a well-diversified investor.

Question 55

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

Question 56

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

Question 57

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 58

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

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

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 62

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 63

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

Question 64

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

Question 65

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

Question 66

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

Question 67

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

Question 68

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

Question 69

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

Question 70

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

Question 71

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

Question 72

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

Question 73

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

Question 74

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 75

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

Question 76

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 77

Portfolio betas will always be greater than 1.0.

Question 78

Slope of the SML = [E(R_A) + R_f]/ß_A

Question 79

Standard deviation 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

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.