Question 1

Nuvo, Inc. stock has a beta of.86 and an expected return of 10.5%. The risk-free rate of return is 3.2% and the market rate of return is 11.2%. Which one of the following statements is true given this information?

Accepted Answer

The answer of Nuvo, Inc. stock has a beta of.86...

Question 2

The concept of stock correlation shows:

Accepted Answer

Stock correlation measures how the returns on two assets move in relation to each other, indicating whether they tend to increase or decrease together.

Question 3

Which of the following is the best definition of market risk premium?

Accepted Answer

The market risk premium is defined as the difference between the expected return on a market portfolio of investments (risky investment) and the risk-free rate of return. It represents the extra return investors expect to earn for choosing to invest in a risky asset rather than a risk-free asset.

Question 4

Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?

Accepted Answer

The expected return on an individual stock, given various states of the economy, is calculated as a weighted average where the probabilities of the economic states are used as the weights. This approach accounts for the likelihood of each state occurring and its corresponding return, providing a more accurate measure of expected return.

Question 5

The common stock of PDS has a beta of.98 and an expected return of 12.34%. The risk-free rate of return is 4.1% and the market rate of return is 11.65%. Which one of the following statements is true given this information?

Accepted Answer

The answer of The common stock of PDS has a...

Question 6

Which of the following is the best definition of beta coefficient?

Accepted Answer

The beta coefficient measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset. It is a key concept in the Capital Asset Pricing Model (CAPM), which describes the relationship between systematic risk and expected return for assets.

Question 7

_____ measures total risk.

Accepted Answer

The standard deviation is a statistical measure that quantifies the amount of variation or dispersion of a set of values. In finance, it is used to measure the total risk of an investment, as it reflects both the systematic and unsystematic risk components.

Question 8

Which one of the following is an example of diversifiable risk?

Accepted Answer

Diversifiable risk, also known as unsystematic risk, is specific to a company or industry. The scenario where employees of Textile, Inc. voted to go on strike is an example of diversifiable risk because it affects only the specific company and not the entire market or economy.

Question 9

Systematic risk is measured by:

Accepted Answer

Beta is the measure used to determine the systematic risk of an investment, indicating how much the investment's returns are likely to fluctuate in relation to the overall market's returns.

Question 10

Which of the following is the best definition of capital asset pricing model (CAPM)?

Accepted Answer

The Capital Asset Pricing Model (CAPM) is best defined as an equation of the Security Market Line (SML) that shows the relationship between the expected return of an investment and its beta, which measures the investment's volatility or risk compared to the market as a whole. This model helps in understanding the expected return on an asset for its given level of risk.

Question 11

Which of the following is the best definition of expected return?

Accepted Answer

Expected return is the average return an investor anticipates to receive from an investment, which is risky, over a period of time. It is a projection based on historical data and analysis of the asset's potential performance.

Question 12

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

Accepted Answer

Systematic risk refers to the risk that affects the entire market or economy, rather than a specific industry or company. The Bank of Canada increasing interest rates is an example of systematic risk because it impacts the entire economy by affecting borrowing costs, consumer spending, and investment decisions.

Question 13

Which one of the following statements is correct about a portfolio that is invested 30% in stock A, 40% in stock B, and 30% in stock C?

Accepted Answer

The expected return of a portfolio is indeed calculated by considering the risk-free rate of return plus a risk premium, which is determined by the weighted average of the betas of the individual securities in the portfolio and the market risk premium. This aligns with the Capital Asset Pricing Model (CAPM) approach to estimating expected returns, taking into account the risk-free rate, the securities' systematic risk (beta), and the market risk premium.

Question 14

Given the following information: The risk-free rate is 7%, the beta of stock A is 1.2, the beta of stock B is 0.8, the expected return on stock A is 13.5%, and the expected return on stock B is 11.0%. Further, we know that stock A is fairly priced and that the betas of stocks A and B are correct. Which of the following regarding stock B must be true?

Accepted Answer

The answer of Given the following information: The risk-free rate...

Question 15

Which of the following is a true statement?

Accepted Answer

The risk premium is indeed calculated as the difference between the expected return on a risky asset and the return on a risk-free asset. This reflects the additional return investors expect for taking on the additional risk compared to a risk-free investment.

Question 16

Which of the following is the best definition of portfolio weights?

Accepted Answer

Portfolio weights refer to the fraction or percentage of the total value of a portfolio that is invested in a particular asset. This concept is crucial for understanding and managing the diversification and risk of an investment portfolio.

Question 17

Which of the following is the best definition of portfolio?

Accepted Answer

A portfolio refers to a collection of financial assets such as stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange traded funds (ETFs) held by investors.

Question 18

You are looking at two different stocks. IBX has a beta of 1.25 and Microsquish has a beta of 1.95. Which statement is true about these investments?

Accepted Answer

The answer of You are looking at two different stocks....

Question 19

The process of eliminating systematic risk through the purchase of a number of assets is called:

Accepted Answer

Portfolio diversification is the strategy of investing in a variety of assets to reduce exposure to any single asset or risk. This process helps in mitigating systematic risk, which is the risk inherent to the entire market or market segment.

Question 20

A portfolio is _________________.

Accepted Answer

A portfolio refers to a collection of financial assets such as stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange traded funds (ETFs) held by investors and managed as a single entity with specific investment goals in mind. Choices B, C, D, and E refer to metrics or characteristics used to evaluate the performance or risk of assets, not the definition of a portfolio itself.

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