Question 1

The risk of owning a security comes from
A) Expected news
B) Surprises
C) Anticipated events
D) Predictable announcement
E) Expected returns

Accepted Answer

The risk of owning a security comes from surprises that the market was not anticipating, such as unexpected news or events. Expected news and predictable announcements are already factored into market prices, and expected returns are not considered a risk factor. Anticipated events may have an impact on market prices, but they are not necessarily considered risks.

Question 2

The _______ risk principle states that the reward on an asset is based on the amount of market risk of the asset.
A) Systematic
B) asset-specific
C) Unsystematic
D) Unique
E) Diversifiable

Accepted Answer

The systematic risk principle states that the reward on an asset is based on the amount of market risk of the asset. This risk is also known as non-diversifiable risk or market risk. The other options, such as asset-specific risk, unsystematic risk, unique risk, and diversifiable risk, refer to specific risks associated with a particular asset or company, and do not encompass the general market risk.

Question 3

A certain stock has a beta of 1.5 and an expected return of 21 percent. This means:
A) the expected return of the stock is 1.5 times greater than the expected return of the market.
B) the stock will increase the risk of any portfolio.
C) the risk of the stock is 1.5 times greater than the risk of the market.
D) the expected return is too high for the level of risk of the stock.
E) the beta of the stock is 50 percent of the beta of the market.

Accepted Answer

Beta measures the stock's volatility relative to the market. A beta of 1.5 indicates the stock is 1.5 times more volatile than the market.

Question 4

__________ is a theory where the price of an asset depends on multiple factors and arbitrage efficiency prevails.
A) CAPM
B) APT
C) SML
D) APV
E) YTM

Accepted Answer

The theory described in the question is the Arbitrage Pricing Theory (APT), which differs from the Capital Asset Pricing Model (CAPM) and the Security Market Line (SML) in that it allows for multiple factors to affect an asset's price rather than just the market return. The Adjusted Present Value (APV) and Yield to Maturity (YTM) are not theories related to asset pricing.

Question 5

The return on the market above the risk-free rate of interest is known as the market _______. That is, E(R_m) - R_F. A) riskless return. B) beta. C) risk premium. D) Variance E) Covariance

Accepted Answer

The market risk premium is the return earned on an investment in the market, above and beyond the risk-free rate of return. It represents the additional compensation investors require for the extra risk of investing in the market as a whole. Thus, the correct option is C, risk premium.

Question 6

Which of the following stocks has the greatest systematic risk? $\begin{array}{c}
\begin{array}{lll}
\
  \text { Stock A}\
  \text { Stock B}\
  \text { Stock C}\
  \text { Stock D}
\end{array}
\begin{array}{c}
 \text {Standard deviation}\
62 \% \
47 \% \
53 \% \
59 \% \%
\end{array}
\begin{array}{lll}
  \text {Beta}\
 1.10 \
 1.05 \
1.30 \
0.90
\end{array}
\end{array}$

A) Stock A
B) Stock B
C) Stock C
D) Stock D
E) Insufficient information.

Accepted Answer

The systematic risk (also known as market risk or non-diversifiable risk) is measured by the beta coefficient. A higher beta coefficient implies greater systematic risk. Thus, Stock C with a beta of 1.30 has the highest systematic risk among the given options. The standard deviation of returns is a measure of total risk, which includes both systematic and unsystematic (company-specific) risk. Therefore, standard deviation cannot be used to determine systematic risk.

Question 7

Which of the following stocks has the greatest expected return? $\begin{array}{c}
\begin{array}{lll}
\
  \text { Stock A}\
  \text { Stock B}\
  \text { Stock C}\
  \text { Stock D}
\end{array}
\begin{array}{c}
 \text {Standard deviation}\
62 \% \
47 \% \
53 \% \
59 \% \%
\end{array}
\begin{array}{lll}
  \text {Beta}\
 1.10 \
 1.05 \
1.30 \
0.90
\end{array}
\end{array}$
 
A) Stock A
B) Stock B
C) Stock C
D) Stock D
E) Insufficient information.

Accepted Answer

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

Question 8

The graphical representation of the Capital Asset Pricing Model outlining the linear relationship between systematic risk and the expected return of an asset is shown by:
A) covariance.
B) beta.
C) the market risk premium.
D) the reward-to-risk ratio.
E) the security market line.

Accepted Answer

The graphical representation of the Capital Asset Pricing Model is known as the security market line, which shows the linear relationship between systematic risk (measured by beta) and the expected return of an asset. The other options do not represent the CAPM graphically.

Question 9

Which of the following is considered a systematic risk?
A) Tahoe, Inc. fires its CEO for embezzlement.
B) The government announces inflation was higher than expected in the most recent quarter.
C) Bio-Norm announces a new drug to treat arthritis.
D) A company's sales decline for the seventh consecutive quarter.
E) A major lawsuit is announced against Kolby Corp.

Accepted Answer

Systematic risk refers to risks that affect the entire market or a specific segment of the market. In this case, the announcement of higher than expected inflation in the most recent quarter is a macroeconomic factor that affects the entire market or a specific segment of the market, thus making it a systematic risk. The other choices are specific to individual companies and do not affect the market as a whole, making them unsystematic risks.

Question 10

Systematic risk is defined as risk that
A) Influences a large number of assets
B) Is asset-specific
C) Is expected
D) Is diversifiable
E) Relates to a specific firm

Accepted Answer

Systematic risk is also known as market risk, which refers to the risk that affects the whole market or a particular asset class. It is not specific to a particular asset or firm and cannot be diversified away. Therefore, choice A is the correct answer.

Question 11

_______ is a measure of the tendency for two securities to move in the same direction.
A) Standard deviation.
B) Alpha
C) Variance
D) Covariance
E) The risk premium

Accepted Answer

Covariance measures the degree to which two securities move together. A positive covariance indicates that the two securities tend to move in the same direction, while a negative covariance indicates that they move in opposite directions.

Question 12

Which of the following stocks has the greatest total risk? $\begin{array}{c}
\begin{array}{lll}
\
  \text { Stock A}\
  \text { Stock B}\
  \text { Stock C}\
  \text { Stock D}
\end{array}
\begin{array}{c}
 \text {Standard deviation}\
62 \% \
47 \% \
53 \% \
59 \% \%
\end{array}
\begin{array}{lll}
  \text {Beta}\
 1.10 \
 1.05 \
1.30 \
0.90
\end{array}
\end{array}$

A) Stock A
B) Stock B
C) Stock C
D) Stock D
E) Insufficient information.

Accepted Answer

Total risk is best represented by the standard deviation of a stock's returns. Stock A has the highest standard deviation at 62%, indicating it has the greatest total risk.

Question 13

The ABC Inc. has just announced that its quarterly earnings will be $0.20 less than the prior quarter. This news will cause the stock price to
A) Increase
B) Either increase or remain constant
C) Remain constant
D) Decrease
E) Increase, decrease or remain constant

Accepted Answer

The answer of The ABC Inc. has just announced that...

Question 14

Risk that affects a single company is called ______ risk.
A) Systematic
B) Market
C) Unsystematic
D) Alpha
E) Nondiversifiable

Accepted Answer

Unsystematic risk is a risk that affects a single company, rather than the market or entire economy as a whole. This type of risk can be reduced through diversification of a portfolio by investing in different companies and industries. The other options, such as systematic and nondiversifiable risk, refer to risks that impact the overall market or economy rather than a single company.

Question 15

WAG Inc. has just announced that it lost $0.56 a share in the previous quarter yet the price of the stock remains the same. This is an example of the market having ___________ the announcement into the stock price.
A) incorporated
B) reputed
C) discounted
D) exercised
E) relinqished

Accepted Answer

This is an example of the market having "discounted" the announcement into the stock price, meaning the market had already anticipated the loss and adjusted the stock price accordingly before the actual announcement was made.

Question 16

To combine the risk-free asset with the efficient frontier, we have the
A) capital asset line.
B) Beta coefficient
C) reward-to risk ratio.
D) security market line.
E) market risk premium.

Accepted Answer

The capital asset line is the line that represents the combination of the risk-free asset with the efficient frontier. It shows the tradeoff between risk and return that investors can achieve by combining a risk-free asset with a portfolio of risky assets on the efficient frontier. Therefore, the correct choice is A. The other options are related to different concepts in finance, but they are not directly related to the combination of the risk-free asset with the efficient frontier.

Question 17

The CAPM:
A) uses the risk free rate of return and the efficient market portfolio to estimate risk.
B) considers the sensitivity of a stock to different risk factors to calculate risk.
C) uses the expected return on a given security to determine its overall risk.
D) measures the amount of unsystemic risk to determine the expected return of a stock
E) All of these answers are correct

Accepted Answer

The CAPM uses the risk-free rate of return and the efficient market portfolio to estimate risk. It calculates the expected return of a security based on its systematic risk.

Question 18

"Discounting" an announcement into a stock price means:
A) The market has expected it an already incorporated it into the stock's price
B) The announcement affects the future and therefore is given less weight in present terms.
C) The announcement is less relevant to the stock price than other information regarding the company.
D) The announcement affects the discount rate and therefore stock valuation in the DDM model.
E) The announcement reflects the company's unsystemic risk and doesn't affect other stock prices.

Accepted Answer

"Discounting" an announcement into a stock price means that the market has already expected and incorporated it into the stock's price. This is because the market is always looking ahead and pricing in expected future events. Therefore, choice A is the correct answer.

Question 19

The level of systematic risk inherent in an asset is measured by
A) The reward-to-risk ratio
B) Alpha
C) Beta
D) The market risk premium
E) Covariance

Accepted Answer

The level of systematic risk inherent in an asset is measured by beta. Beta measures the sensitivity of a stock's returns to the market's movements. A beta of 1 implies that the stock's returns have been perfectly correlated with the market's returns, whereas a beta of less than 1 means that the stock's returns have been less volatile than the market's returns, and a beta of more than 1 indicates that the stock's returns have been more volatile than the market's returns.

Question 20

The theory that states the value of a security depends on the time value of money, the reward for bearing systematic risk, and the amount of systematic risk is called the:
A) reward-to-risk ratio.
B) efficient frontier.
C) capital asset pricing model.
D) market risk premium.
E) market pricing theory.

Accepted Answer

The statement describes the Capital Asset Pricing Model (CAPM), which is a widely used model for calculating the expected return of an asset based on its systematic risk. The CAPM takes into account the time value of money, the reward for bearing systematic risk (as measured by beta), and the market risk premium, which is the excess return that investors demand for investing in a risky asset over a risk-free asset. None of the other choices fully describe the theory mentioned in the statement.

Quiz 12: Return, Risk and Security Management

The risk of owning a security comes from

The _______ risk principle states that the reward on an asset is based on the amount of market risk of the asset.

A certain stock has a beta of 1.5 and an expected return of 21 percent. This means:

__________ is a theory where the price of an asset depends on multiple factors and arbitrage efficiency prevails.

The return on the market above the risk-free rate of interest is known as the market _______. That is, E(Rm) - RF.

The graphical representation of the Capital Asset Pricing Model outlining the linear relationship between systematic risk and the expected return of an asset is shown by:

Which of the following is considered a systematic risk?

Systematic risk is defined as risk that

_______ is a measure of the tendency for two securities to move in the same direction.

The ABC Inc. has just announced that its quarterly earnings will be $0.20 less than the prior quarter. This news will cause the stock price to

Risk that affects a single company is called ______ risk.

WAG Inc. has just announced that it lost $0.56 a share in the previous quarter yet the price of the stock remains the same. This is an example of the market having ___________ the announcement into the stock price.

To combine the risk-free asset with the efficient frontier, we have the

The CAPM:

"Discounting" an announcement into a stock price means:

The level of systematic risk inherent in an asset is measured by

The theory that states the value of a security depends on the time value of money, the reward for bearing systematic risk, and the amount of systematic risk is called the:

The return on the market above the risk-free rate of interest is known as the market _______. That is, E(R_m) - R_F.