Question 1

The relevant risk to an investor is that portion of the variability of returns that cannot be diversified away.

Accepted Answer

This statement is true. Relevant risk is often referred to as systematic or non-diversifiable risk, which is the portion of risk that is related to the overall market or economy and cannot be eliminated through diversification. This type of risk affects all investments in a particular asset class or sector, such as a recession affecting all stocks in the stock market.

Question 2

The Beta of a T-bill is one.

Accepted Answer

The beta of a T-bill is zero, not one. T-bills are considered risk-free investments, meaning they have no systematic risk, so their beta is zero.

Question 3

The Beta of a T-bill is zero.

Accepted Answer

The Beta of a T-bill is considered to be zero because it is assumed to be a risk-free asset with a fixed rate of return. Beta measures the sensitivity of an asset's returns to the overall market movements, and since T-bills do not have any variability in their returns, their Beta is zero.

Question 4

Unique security risk can be eliminated from an investor's portfolio through diversification.

Accepted Answer

Diversification helps to reduce the impact of unique security risk by spreading the investment across different assets and asset classes. This minimizes the overall risk of the portfolio and can help to mitigate the impact of any one security performing poorly. However, systematic risk, which affects the entire market or economy, cannot be diversified away.

Question 5

A security with a beta of one has a required rate of return equal to the overall market rate of return.

Accepted Answer

A security with a beta of one indicates that it moves in line with the market, and therefore its required rate of return would be equal to the overall market rate of return.

Question 6

Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12.Wendy sold the shares on 12/31/12 for $3.45.Genetics stock has a beta of 1.9,the risk-free rate of return is 4%,and the market risk premium is 9%.Wendy's holding period return is
A)15.0%.
B)16.5%.
C)17.6%.
D)21.1%.

Accepted Answer

The answer of Wendy purchased 800 shares of Genetics Stock...

Question 7

The market rewards the patient investor,for between 1926 and 2008,there has never been a time when an investor lost money if she held an all-stock portfolio for ten years.

Accepted Answer

The statement is true. According to historical data from 1926 to 2008, there has never been a ten-year period where an all-stock portfolio has resulted in a loss for the investor. However, past performance is not a guarantee of future results and it is important to always consider the potential risks and uncertainties of investing.

Question 8

The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.

Accepted Answer

The portfolio beta is not simply the sum of the betas of the individual stocks in the portfolio. The formula for calculating the portfolio beta takes into consideration the weights and correlations of each stock in the portfolio.

Question 9

Portfolio performance is determined mainly by stock selection and market timing,with less emphasis on asset allocation.

Accepted Answer

Portfolio performance is determined by a combination of stock selection, market timing, and asset allocation. Asset allocation is a crucial element in determining long-term performance as it helps reduce risk and ensure that investments align with an individual's goals and risk tolerance. Neglecting asset allocation can lead to undiversified portfolios that are vulnerable to market volatility.

Question 10

An investor currently holds the following portfolio:  The investor is worried that the beta of his portfolio is too high,so he wants to sell some stock C and add stock D,which has a beta of 1.0,to his portfolio.If the investor wants his portfolio to have a beta of 1.72,how much stock C must he replace with stock D?
A)$18,000
B)$24,000
C)$31,000
D)$36,000

Accepted Answer

The answer of An investor currently holds the following portfolio:...

Question 11

Which of the following statements is MOST correct concerning diversification and risk?
A)Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio.
B)Diversification is mainly achieved by the asset allocation decision,not the selection of individual securities within each asset category.
C)Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated.
D)Asset allocation is important for pension funds but not for individual investors.

Accepted Answer

Diversification is mainly achieved through asset allocation, which involves selecting a mix of different asset classes (such as stocks, bonds, and cash) to achieve a balance between risk and return. The selection of individual securities within each asset category is important, but less so than the overall allocation of assets. Option A is incorrect because diversification should involve different asset categories, not just individual securities within the same category. Option C is incorrect because the correlation between large and small company stocks is actually positive, meaning they tend to move in the same direction. Option D is incorrect because asset allocation is important for all investors, not just pension funds.

Question 12

You are thinking of adding one of two investments to an already well- diversified portfolio.  If you are a risk-averse investor,which one is the better choice?
A)Security A
B)Security B
C)Either security would be acceptable because they have the same beta.
D)Security B,but only if Security B's required return is greater than 12%

Accepted Answer

The answer of You are thinking of adding one of...

Question 13

Because risk is measured by variability of returns,how long we hold our investments does not matter very much when it comes to reducing risk.

Accepted Answer

The longer we hold our investments, the less likely they are to experience short-term fluctuations in value, which can help to reduce risk. In other words, the length of time we hold our investments does matter when it comes to reducing risk.

Question 14

The characteristic line for any well-diversified portfolio is horizontal.

Accepted Answer

The characteristic line of a well-diversified portfolio is not horizontal; it typically has a positive slope, indicating a relationship between the portfolio returns and the market returns. A horizontal line would imply no relationship, which is not the case for diversified portfolios that still bear some market risk.

Question 15

You are going to invest all of your funds in one of three projects with the following distribution of possible returns:  If you are a risk averse investor,which one should you choose?
A)Project 1
B)Project 2
C)Project 3
D)either Project 1 or Project 2 because they have the same expected return

Accepted Answer

The answer of You are going to invest all of...

Question 16

You are considering investing in Ford Motor Company.Which of the following are examples of diversifiable risk? 
I.Risk resulting from possibility of a stock market crash. 
II.Risk resulting from uncertainty regarding a possible strike against Ford.
III.Risk resulting from an expensive recall of a Ford product. 
IV.Risk resulting from interest rates decreasing.
A)I only
B)I and IV
C)I,II,III,IV
D)II,III

Accepted Answer

Risks II and III are examples of diversifiable risk because they are specific to Ford Motor Company and can be reduced by investing in a diverse range of companies. Risks I and IV are non-diversifiable market risks that affect the entire market and cannot be reduced through diversification.

Question 17

Beta represents the average movement of a company's stock returns in response to a movement in the market's returns.

Accepted Answer

This is a correct definition of beta.

Question 18

Which of the following statements is MOST correct concerning diversification and risk?
A)Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.
B)Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk.
C)Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification.
D)Proper diversification generally results in the elimination of risk.

Accepted Answer

A diversified portfolio spreads risk by investing in companies from different industries with different levels of risk. This reduces the overall risk compared to investing in companies from the same industry. However, diversification cannot completely eliminate risk.

Question 19

Beta is a measurement of the relationship between a security's returns and the general market's returns.

Accepted Answer

Beta is a measurement of the systematic risk of a security relative to the market as a whole. It indicates how much a security's price moves in relation to the market overall. A beta of 1 means the security moves in line with the market, while a beta greater than 1 indicates it moves more than the market, and a beta less than 1 indicates it moves less than the market.

Question 20

The slope of the characteristic line of a security is that security's Beta.

Accepted Answer

The slope of the characteristic line of a security is equal to the security's Beta. This statement is true. Beta is a measure of the systematic risk associated with a security and indicates the security's volatility in relation to the overall market. The slope of the characteristic line is a measure of the security's sensitivity to changes in the market index, and this sensitivity is exactly what Beta measures.

Quiz 6: The Meaning and Measurement of Risk and Return