Question 1

The expected risk premium on a stock is equal to the expected return on the stock minus the:
A)expected market rate of return.
B)risk-free rate.
C)inflation rate.
D)standard deviation.
E)variance.

Accepted Answer

The risk premium is the additional return an investor expects to receive for taking on additional risk compared to the risk-free rate. Therefore, the expected return on the stock minus the risk-free rate is the expected risk premium.

Question 2

The expected return on a stock given various states of the economy is equal to the:
A)highest expected return given any economic state.
B)arithmetic average of the returns for each economic state.
C)summation of the individual expected rates of return.
D)weighted average of the returns for each economic state.
E)return for the economic state with the highest probability of occurrence.

Accepted Answer

The expected return on a stock given various states of the economy is a weighted average of the returns for each economic state. The weights are determined by the probabilities of each state occurring. This reflects the idea that a company's performance is influenced by the overall economy, and different economic conditions may have different impacts on the company's profitability. Therefore, the weighted average gives a more accurate representation of the expected return.

Question 3

If a stock portfolio is well diversified,then the portfolio variance:
A)will equal the variance of the most volatile stock in the portfolio.
B)may be less than the variance of the least risky stock in the portfolio.
C)must be equal to or greater than the variance of the least risky stock in the portfolio.
D)will be a weighted average of the variances of the individual securities in the portfolio.
E)will be an arithmetic average of the variances of the individual securities in the portfolio.

Accepted Answer

Diversification can reduce the overall risk of a portfolio to a level that is lower than the risk of the individual securities within the portfolio, including the least risky stock, due to the benefits of combining uncorrelated or negatively correlated assets.

Question 4

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:
A)number of shares owned of each stock.
B)market price per share of each stock.
C)market value of the investment in each stock.
D)original amount invested in each stock.
E)cost per share of each stock held.

Accepted Answer

The expected rate of return on a stock portfolio is based on the market value of the investment in each stock, as this reflects the current value and performance of the portfolio. The number of shares owned or original amount invested may not accurately reflect the current value of the investments, and the market price per share or cost per share may not accurately reflect the overall value of the portfolio.

Question 5

Standard deviation measures which type of risk?
A)total
B)nondiversifiable
C)unsystematic
D)systematic
E)economic

Accepted Answer

Standard deviation measures total risk, encompassing both systematic (market-related) and unsystematic (company-specific) risks.

Question 6

The principle of diversification tells us that:
A)concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.
B)concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.
C)spreading an investment across five diverse companies will not lower the total risk.
D)spreading an investment across many diverse assets will eliminate all of the systematic risk.
E)spreading an investment across many diverse assets will eliminate some of the total risk.

Accepted Answer

The principle of diversification tells us that by spreading an investment across many diverse assets, we can eliminate some of the total risk. While it may not eliminate all of the risk (including systematic risk), it can help to lower it by reducing exposure to any one particular asset or asset class. Option A is incorrect because it is not possible to eliminate all unsystematic risk with only two or three large stocks. Option B is incorrect because investing in companies within the same industry can actually increase systematic risk, as they may be affected by similar economic factors. Option C is incorrect because spreading an investment across diverse companies can lower total risk. Option D is incorrect because diversification cannot eliminate all systematic risk.

Question 7

Treynor Industries is investing in a new project.The minimum rate of return the firm requires on this project is referred to as the:
A)average arithmetic return.
B)expected return.
C)market rate of return.
D)internal rate of return.
E)cost of capital.

Accepted Answer

The minimum rate of return that the firm requires on the new project is referred to as the cost of capital.

Question 8

Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?
A)capital asset pricing model
B)time value of money equation
C)unsystematic risk equation
D)market performance equation
E)expected risk formula

Accepted Answer

The formula that explains the relationship between the expected return on a security and the level of that security's systematic risk is the capital asset pricing model (CAPM).

Question 9

Which one of the following is represented by the slope of the security market line?
A)reward-to-risk ratio
B)market standard deviation
C)beta coefficient
D)risk-free interest rate
E)market risk premium

Accepted Answer

The answer of Which one of the following is represented...

Question 10

A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent.What type of risk does this news flash represent?
A)portfolio
B)nondiversifiable
C)market
D)unsystematic
E)total

Accepted Answer

This is an example of unsystematic risk, which affects a specific group of securities or a particular sector, unlike market-wide risks.

Question 11

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total.Which one of the following terms most applies to Suzie's investments?
A)index
B)portfolio
C)collection
D)grouping
E)risk-free

Accepted Answer

A portfolio refers to a collection of investments owned by an individual, so this term best describes Suzie's investments in both bonds and stocks. The other options do not accurately describe the nature of her investments.

Question 12

Which one of the following is a risk that applies to most securities?
A)unsystematic
B)diversifiable
C)systematic
D)asset-specific
E)total

Accepted Answer

Systematic risk applies to most securities and is associated with market-wide factors such as interest rates, inflation, and geopolitical events. This type of risk cannot be eliminated through diversification and affects the overall performance of an investment portfolio. Unsystematic risk, on the other hand, is specific to a particular company or industry and can be diversified away by holding a variety of securities in different sectors.

Question 13

Steve has invested in twelve different stocks that have a combined value today of $121,300.Fifteen percent of that total is invested in Wise Man Foods.The 15 percent is a measure of which one of the following?
A)portfolio return
B)portfolio weight
C)degree of risk
D)price-earnings ratio
E)index value

Accepted Answer

The 15 percent represents the percentage of the total portfolio value that is invested in Wise Man Foods, which is the portfolio weight. None of the other options are related to determining the allocation or weight of a specific stock within a portfolio.

Question 14

The expected return on a stock computed using economic probabilities is:
A)guaranteed to equal the actual average return on the stock for the next five years.
B)guaranteed to be the minimal rate of return on the stock over the next two years.
C)guaranteed to equal the actual return for the immediate twelve month period.
D)a mathematical expectation based on a weighted average and not an actual anticipated outcome.
E)the actual return you should anticipate as long as the economic forecast remains constant.

Accepted Answer

The expected return on a stock computed using economic probabilities is not a guaranteed outcome, but rather a mathematical expectation based on a weighted average of potential outcomes. It is not guaranteed to equal the actual return for any specific period of time, as market conditions and other factors can cause actual returns to deviate from expectations.

Question 15

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.
A)efficient markets hypothesis
B)systematic risk principle
C)open markets theorem
D)law of one price
E)principle of diversification

Accepted Answer

The systematic risk principle, also known as the capital asset pricing model (CAPM), suggests that an asset's expected return is determined by its systematic risk, or nondiversifiable risk, which is measured by beta. The efficient markets hypothesis is related, but not directly relevant to this specific concept. The open markets theorem and law of one price are not related to the concept of expected return and risk. The principle of diversification acknowledges that diversifying a portfolio can reduce the overall risk, but does not directly address the relationship between expected return and nondiversifiable risk.

Question 16

The expected return on a portfolio:
I.can never exceed the expected return of the best performing security in the portfolio.
II.must be equal to or greater than the expected return of the worst performing security in the portfolio.
III.is independent of the unsystematic risks of the individual securities held in the portfolio.
IV.is independent of the allocation of the portfolio amongst individual securities.
A)I and III only
B)II and IV only
C)I and II only
D)I, II, and III only
E)I, II, III, and IV

Accepted Answer

The expected return on a portfolio can indeed exceed the expected return of the best performing security in the portfolio due to diversification benefits, making statement I incorrect. Statement II is true because diversification cannot result in a portfolio return lower than the worst performing security assuming no leverage. Statement III is true because diversification reduces unsystematic risk, which is specific to individual securities. Statement IV is incorrect because the portfolio's expected return is highly dependent on how the portfolio is allocated among individual securities.

Question 17

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?
A)reward-to-risk matrix
B)portfolio weight graph
C)normal distribution
D)security market line
E)market real returns

Accepted Answer

The security market line is the positively sloped linear function created when expected returns are graphed against security betas.

Question 18

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?
A)beta
B)reward-to-risk ratio
C)risk ratio
D)standard deviation
E)price-earnings ratio

Accepted Answer

Beta measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset. It is a measure of the asset's sensitivity to market movements. Beta of 1 indicates that the asset's price movement is exactly the same as that of the market, while a beta greater than 1 means the asset is more volatile than the market, and a beta less than 1 means the asset is less volatile than the market.

Question 19

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy.Given the probabilities of each state of the economy occurring,you anticipate that your stock will earn 6.5 percent next year.Which one of the following terms applies to this 6.5 percent?
A)arithmetic return
B)historical return
C)expected return
D)geometric return
E)required return

Accepted Answer

The 6.5 percent is the expected return based on the given probabilities for a good and poor economy. Therefore, it is the expected return.

Question 20

The expected return on a portfolio considers which of the following factors?
I.percentage of the portfolio invested in each individual security
II.projected states of the economy
III.the performance of each security given various economic states
IV.probability of occurrence for each state of the economy
A)I and III only
B)II and IV only
C)I, III, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

The expected return on a portfolio considers the percentage of the portfolio invested in each individual security (I), projected states of the economy (II), the performance of each security given various economic states (III), and the probability of occurrence for each state of the economy (IV). These factors are all integral to calculating the expected return, as they help in assessing how different investments might perform under various economic conditions and the likelihood of those conditions occurring.

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

The expected risk premium on a stock is equal to the expected return on the stock minus the:

The expected return on a stock given various states of the economy is equal to the:

If a stock portfolio is well diversified,then the portfolio variance:

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

Standard deviation measures which type of risk?

The principle of diversification tells us that:

Treynor Industries is investing in a new project.The minimum rate of return the firm requires on this project is referred to as the:

Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?

Which one of the following is represented by the slope of the security market line?

A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent.What type of risk does this news flash represent?

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total.Which one of the following terms most applies to Suzie's investments?

Which one of the following is a risk that applies to most securities?

Steve has invested in twelve different stocks that have a combined value today of $121,300.Fifteen percent of that total is invested in Wise Man Foods.The 15 percent is a measure of which one of the following?

The expected return on a stock computed using economic probabilities is:

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?