Question 1

Total risk equals unique security risk times systematic risk.

Accepted Answer

Total risk equals unique risk plus systematic risk, not multiplied by one another.

Question 2

Which of the following is NOT an example of systematic risk?

Accepted Answer

Inflation, recession, and interest rate risk are all examples of systematic risk because they affect a large portion of the market and cannot be diversified away. However, management risk is specific to a particular company or industry and can be reduced through proper management practices. Therefore, management risk is not an example of systematic risk.

Question 3

What type of risk can investors reduce through diversification?

Accepted Answer

Diversification can help reduce unsystematic risk, which is the risk associated with specific companies or industries. However, it cannot fully eliminate systematic risk, which is the risk influenced by broader economic or market factors. Therefore, option A and B are not correct. Option D is incorrect because diversification cannot reduce uncertainty, but instead helps mitigate risk associated with uncertainty.

Question 4

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

Accepted Answer

Beta is a measure of systematic risk that measures the volatility of a security or portfolio relative to the overall market. A beta of 1 indicates that the security's price will move with the market, while a beta greater than 1 indicates higher volatility and a beta less than 1 indicates lower volatility than the market.

Question 5

Changes in the general economy,such as changes in interest rates or tax laws,represent what type of risk?

Accepted Answer

Changes in the general economy affect the entire market, rather than just one specific firm, hence representing market risk.

Question 6

The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.

Accepted Answer

The CAPM (Capital Asset Pricing Model) is a model that relates expected return to risk. It assumes that the risk-return tradeoff in the market is determined by the systematic risk, which is measured by beta. Therefore, the statement is true.

Question 7

If you hold a portfolio made up of the following stocks: 
What is the beta of the portfolio?

Accepted Answer

The beta of each stock in the portfolio is not given, so we cannot calculate the beta of the portfolio. Therefore, the answer is D, "Can't be determined from information given."

Question 8

A stock with a beta greater than 1.0 has returns that are ________ volatile than the market,and a stock with a beta of less than 1.0 exhibits returns which are ________ volatile than those of the market portfolio.

Accepted Answer

A stock with a beta greater than 1.0 is more volatile than the market, indicating that it will typically move more than the market. Conversely, a stock with a beta of less than 1.0 is less volatile than the market, meaning it will typically move less than the market.

Question 9

Which of the following is a good measure of the relationship between an investment's returns and the market's returns?

Accepted Answer

The beta coefficient measures the volatility or systematic risk of an investment compared to the overall market. A beta of 1 indicates that the investment moves in line with the market, while a beta greater than 1 indicates the investment is more volatile than the market, and a beta less than 1 indicates the investment is less volatile than the market. Therefore, a higher beta means that the investment's returns are more closely related to the market's returns.

Question 10

The market (systematic)risk associated with an individual stock is most closely identified with the:

Accepted Answer

The market (systematic) risk associated with an individual stock is most closely identified with the beta of the stock. Beta measures the sensitivity of a stock's returns to the returns of the overall market. A beta of 1 means the stock's returns move in sync with the market, while a beta greater than 1 indicates the stock is more volatile than the market, and a beta less than 1 indicates the stock is less volatile than the market. The variance of the returns of the stock and the standard deviation of the stock are measures of total risk, which includes both systematic and unsystematic risk. The variance of the returns of the market is a measure of the total risk of the market as a whole and does not solely identify the systematic risk of an individual stock.

Question 11

The beta of ABC Co.stock is the slope of:

Accepted Answer

The beta of a stock is calculated by regressing its returns against the returns of a market portfolio for the same period. The characteristic line for this plot gives the beta of the stock. Option A is incorrect because the slope of the security market line represents the expected return of the market for a given level of risk. Option B is incorrect because the slope of the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills gives the market risk premium. Option C is incorrect because the slope of the arbitrage pricing line represents the risk premium for a given factor.

Question 12

Investment risk is:

Accepted Answer

Investment risk refers to the probability of achieving a return that is less than what was expected. This can be due to various factors such as market volatility, economic conditions, political instability, or company-specific issues. Option A is incorrect as it describes a positive outcome, while option B is specific to beta coefficient and not a general risk measure. Option D is also incorrect as standard deviation is a measure of the spread of data and not a risk measure in itself.

Question 13

You hold a portfolio with the following securities: 
Compute the expected return and beta for the portfolio.

Accepted Answer

The answer of You hold a portfolio with the following...

Question 14

Your broker mailed you your year-end statement.You have $25,000 invested in Dow Chemical,$18,000 tied up in GM,$36,000 in Microsoft stock,and $11,000 in Nike.The betas for each of your stocks are 1.55 for Dow,1.12 for GM,2.39 for Microsoft,and .76 for Nike.What is the beta of your portfolio?

Accepted Answer

To calculate the beta of the portfolio, we first need to find the weights of each stock in the portfolio. 
Weight of Dow Chemical = 25000/(25000+18000+36000+11000) = 0.278
Weight of GM = 18000/(25000+18000+36000+11000) = 0.200
Weight of Microsoft = 36000/(25000+18000+36000+11000) = 0.400
Weight of Nike = 11000/(25000+18000+36000+11000) = 0.122

Then we can use the formula:
Portfolio Beta = Weight of Stock A x Beta of Stock A + Weight of Stock B x Beta of Stock B + Weight of Stock C x Beta of Stock C + Weight of Stock D x Beta of Stock D

Portfolio Beta = 0.278 x 1.55 + 0.200 x 1.12 + 0.400 x 2.39 + 0.122 x 0.76 
Portfolio Beta = 1.70

Therefore, the answer is B) 1.70

Question 15

Which of the following statements is true?

Accepted Answer

Beta measures the volatility of a stock’s returns compared to the market as a whole. A beta less than 1 means the stock is less volatile than the market, and therefore has lower nondiversifiable risk. A beta greater than 1 means the stock is more volatile than the market, and therefore has higher nondiversifiable risk. A beta of zero means the stock has no systematic risk, but it may still have diversifiable risk.

Question 16

Which of the following is generally used to measure the market when calculating betas?

Accepted Answer

The Standard & Poors 500 (S&P 500) is a broad-based index of 500 large companies listed on the New York Stock Exchange or Nasdaq. It is commonly used as a benchmark for the overall US stock market, and thus is generally used to measure the market when calculating betas.

Question 17

You are thinking of adding one of two investments to an already well diversified portfolio. 
If you are a risk-averse investor:

Accepted Answer

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

Question 18

Which of the following statements is true?

Accepted Answer

Unsystematic risk, also known as specific or idiosyncratic risk, is unique to a particular company or industry and can be reduced through diversification. Diversification involves spreading investments across various sectors or asset classes to reduce exposure to any single asset or risk. Systematic risk, on the other hand, affects the entire market and cannot be mitigated just by diversifying the portfolio.

Question 19

You are considering a portfolio of three stocks with 30% of your money invested in company X,45% of your money invested in company Y,and 25% of your money invested in company Z.If the betas for each stock are 1.22 for company X,1.46 for company Y,and 1.03 for company Z,what is the portfolio beta?

Accepted Answer

To calculate the portfolio beta, we need to take a weighted average of the betas of each stock:
Portfolio beta = (0.3 * 1.22) + (0.45 * 1.46) + (0.25 * 1.03) = 0.366 + 0.657 + 0.258 = 1.281
Therefore,the portfolio beta is 1.28, which is closest to answer choice C.

Question 20

Currently,the expected return on the market is 12.5% and the required rate of return for Alpha,Inc.is 12.5%.Therefore,Alpha's beta must be:

Accepted Answer

The required rate of return for Alpha, Inc. is the same as the expected return on the market, which means Alpha, Inc. has a beta of 1.0.

Quiz 8: Risk and Return-Capital Market Theory

Total risk equals unique security risk times systematic risk.

Which of the following is NOT an example of systematic risk?

What type of risk can investors reduce through diversification?

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

Changes in the general economy,such as changes in interest rates or tax laws,represent what type of risk?

The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.

If you hold a portfolio made up of the following stocks: What is the beta of the portfolio?

A stock with a beta greater than 1.0 has returns that are volatile than the market,and a stock with a beta of less than 1.0 exhibits returns which are volatile than those of the market portfolio.

Which of the following is a good measure of the relationship between an investment's returns and the market's returns?

The market (systematic) risk associated with an individual stock is most closely identified with the:

The beta of ABC Co.stock is the slope of:

Investment risk is:

You hold a portfolio with the following securities: Compute the expected return and beta for the portfolio.

Your broker mailed you your year-end statement.You have $25,000 invested in Dow Chemical,$18,000 tied up in GM,$36,000 in Microsoft stock,and $11,000 in Nike.The betas for each of your stocks are 1.55 for Dow,1.12 for GM,2.39 for Microsoft,and .76 for Nike.What is the beta of your portfolio?

Which of the following statements is true?

Which of the following is generally used to measure the market when calculating betas?

You are thinking of adding one of two investments to an already well diversified portfolio. If you are a risk-averse investor:

Which of the following statements is true?

You are considering a portfolio of three stocks with 30% of your money invested in company X,45% of your money invested in company Y,and 25% of your money invested in company Z.If the betas for each stock are 1.22 for company X,1.46 for company Y,and 1.03 for company Z,what is the portfolio beta?

Currently,the expected return on the market is 12.5% and the required rate of return for Alpha,Inc.is 12.5%.Therefore,Alpha's beta must be: