Question 1

Risk that affects at most a small number of assets is called _____ risk.
A)portfolio
B)nondiversifiable
C)market
D)unsystematic
E)total

Accepted Answer

Unsystematic risk, also known as specific risk or diversifiable risk, affects only a small number of assets and can be mitigated through diversification. Portfolio risk refers to the risk of a particular investment portfolio, market risk is the risk of the overall market, and total risk includes both systematic and unsystematic risk. Nondiversifiable risk, also known as systematic risk, affects the entire market and cannot be diversified away.

Question 2

Risk that affects a large number of assets,each to a greater or lesser degree,is called _____ risk.
A)idiosyncratic
B)diversifiable
C)systematic
D)asset-specific
E)total

Accepted Answer

A systematic risk is a risk that affects the entire market or a specific segment of the market, resulting in a widespread impact on the prices of assets. This type of risk cannot be diversified away through diversification since it is inherent in the market as a whole. In contrast, idiosyncratic or diversifiable risk is specific to an individual asset or a small group of assets and can be reduced through diversification. Asset-specific risk is also specific to an individual asset, while total risk is the sum of systematic and idiosyncratic risk. Therefore, the best choice is C) systematic risk.

Question 3

Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?
A)The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers.
B)The expected return is an arithmetic average of the individual returns for each state of the economy.
C)The expected return is a weighted average where the probabilities of the economic states are used as the weights.
D)The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state.
E)As long as the total probabilities of the economic states equal 100%,then the expected return on the stock is a geometric average of the expected returns for each economic state.

Accepted Answer

The expected return is a weighted average where the probabilities of the economic states are used as the weights. This is because the probability of each economic state occurring affects the overall return on the stock, and thus the expected return must take into account these probabilities. The weights used in the calculation are the probabilities of each economic state.

Question 4

You are considering purchasing stock S.This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period.The overall expected rate of return on this stock will:
A)be equal to one-half of 8% if there is a 50% chance of an economic boom.
B)vary inversely with the growth of the economy.
C)increase as the probability of a recession increases.
D)be equal to 75% of 8% if there is a 75% chance of a boom economy.
E)increase as the probability of a boom economy increases.

Accepted Answer

The overall expected rate of return on the stock will increase as the probability of a boom economy increases. This is because the expected return on the stock is higher during a boom economy (8%) compared to a recessionary period (3%). Therefore, as the probability of a boom economy increases, the overall expected rate of return on the stock will also increase.

Question 5

The amount of systematic risk present in a particular risky asset,relative to the systematic risk present in an average risky asset,is called the particular asset's:
A)beta coefficient.
B)reward-to-risk ratio.
C)total risk.
D)diversifiable risk.
E)Treynor index.

Accepted Answer

The specific measurement described in the question is beta coefficient, also known as beta. Beta measures the asset's volatility in relation to the market as a whole, making it a useful tool for determining an asset's risk level.

Question 6

The slope of an asset's security market line is the:
A)reward-to-risk ratio.
B)portfolio weight.
C)beta coefficient.
D)risk-free interest rate.
E)market risk premium.

Accepted Answer

The answer of The slope of an asset's security market...

Question 7

The expected return on a stock that is 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 will receive.

Accepted Answer

The expected return on a stock that is computed using economic probabilities is a mathematical expectation based on a weighted average and not an actual anticipated outcome. It is not guaranteed to equal the actual average return on the stock for the next five years, be the minimal rate of return on the stock over the next two years, or equal the actual return for the immediate twelve-month period. It is simply a prediction based on probabilities and past market trends.

Question 8

The characteristic line is graphically depicted as:
A)the plot of the relationship between beta and expected return.
B)the plot of the returns of the security against the beta.
C)the plot of the security returns against the market index returns.
D)the plot of the beta against the market index returns.
E)None of the above.

Accepted Answer

The characteristic line is the plot of the security returns against the market index returns. It shows the relationship between the security's returns and the returns of the overall market, and can be used to calculate the security's beta. A beta of 1 indicates that the security has the same volatility as the overall market, while a beta greater than 1 indicates the security is more volatile, and a beta less than 1 indicates the security is less volatile than the overall market.

Question 9

The beta of a security is calculated by:
A)dividing the covariance of the security with the market by the variance of the market.
B)dividing the correlation of the security with the market by the variance of the market.
C)dividing the variance of the market by the covariance of the security with the market.
D)dividing the variance of the market by the correlation of the security with the market.
E)None of the above.

Accepted Answer

The beta is calculated by dividing the covariance of the security with the market by the variance of the market. Beta measures the systematic risk of a security in relation to the market as a whole. A beta of 1 means that the security has the same volatility as the market, while a beta of more than 1 implies that the security is more volatile than the market and a beta of less than 1 means that the security is less volatile than the market.

Question 10

Standard deviation measures _____ risk.
A)total
B)nondiversifiable
C)unsystematic
D)systematic
E)economic

Accepted Answer

The answer of Standard deviation measures _____ risk.
A)total
B)nondiversifiable
C)unsystematic
D)systematic
E)economic...

Question 11

If investors possess homogeneous expectations over all assets in the market portfolio,when riskless lending and borrowing is allowed,the market portfolio is defined to:
A)be the same portfolio of risky assets chosen by all investors.
B)have the securities weighted by their market value proportions.
C)be a diversified portfolio.
D)All of the above.
E)None of the above.

Accepted Answer

Homogeneous expectations imply that all investors have the same expectations about the future returns and risks of all assets in the market, which leads to the same optimal portfolio choice for all investors. The market portfolio is the only portfolio that satisfies this condition and represents the aggregate of all investors' holdings. Since the market portfolio is a diversified portfolio that includes all risky assets weighted by their market values, it provides the highest expected return for a given level of risk. Moreover, riskless lending and borrowing allow investors to leverage the market portfolio and adjust their risk exposure without changing their optimal allocation of risky assets. Therefore, the market portfolio is a well-diversified, efficient, and scalable investment option for all investors.

Question 12

A portfolio is:
A)a group of assets,such as stocks and bonds,held as a collective unit by an investor.
B)the expected return on a risky asset.
C)the expected return on a collection of risky assets.
D)the variance of returns for a risky asset.
E)the standard deviation of returns for a collection of risky assets.

Accepted Answer

A portfolio is a collection of assets, such as stocks and bonds, held as a collective unit by an investor. The investor aims to achieve a certain level of diversification by holding a variety of assets that exhibit different levels of risk and return potential. By doing so, the investor can reduce their overall portfolio risk while still seeking to achieve their desired return.

Question 13

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.
A)Efficient Markets Hypothesis (EMH)
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), states that the expected return on a risky asset depends only on that asset's systematic risk (also known as nondiversifiable risk). This principle is used to determine the appropriate required rate of return for an investment based on its level of risk.

Question 14

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

Accepted Answer

The principle of diversification tells us that spreading an investment across many diverse assets will eliminate some of the risk. While it does not eliminate all risk, diversification can greatly reduce the impact of any one asset or industry on an investor's overall portfolio. By spreading investments across different types of assets, such as stocks, bonds, and real estate, an investor can reduce the overall risk of their portfolio.

Question 15

The risk premium for an individual security is computed by:
A)multiplying the security's beta by the market risk premium.
B)multiplying the security's beta by the risk-free rate of return.
C)adding the risk-free rate to the security's expected return.
D)dividing the market risk premium by the quantity (1 - beta).
E)dividing the market risk premium by the beta of the security.

Accepted Answer

The answer of The risk premium for an individual security...

Question 16

Which one of the following is an example of a nondiversifiable risk?
A)a well-respected president of a firm suddenly resigns
B)a well-respected chairman of the Federal Reserve suddenly resigns
C)a key employee suddenly resigns and accepts employment with a key competitor
D)a well-managed firm reduces its work force and automates several jobs
E)a poorly managed firm suddenly goes out of business due to lack of sales

Accepted Answer

A nondiversifiable risk, also known as a systematic risk or market risk, is a risk that affects the entire market and cannot be eliminated through diversification. The sudden resignation of a well-respected chairman of the Federal Reserve would have a significant impact on the entire market and is an example of a nondiversifiable risk. The other options are examples of diversifiable risks, which can be reduced through diversification.

Question 17

The percentage of a portfolio's total value invested in a particular asset is called that asset's:
A)portfolio return.
B)portfolio weight.
C)portfolio risk.
D)rate of return.
E)investment value.

Accepted Answer

The percentage of a portfolio's total value invested in a particular asset is called that asset's portfolio weight.

Question 18

When computing the expected return on a portfolio of stocks the portfolio weights are based on the:
A)number of shares owned in each stock.
B)price per share of each stock.
C)market value of the total shares held in each stock.
D)original amount invested in each stock.
E)cost per share of each stock held.

Accepted Answer

The portfolio weights are based on the market value of the total shares held in each stock. This takes into account both the number of shares and the price per share of each stock, giving a more accurate representation of the portfolio's overall investment in each stock.

Question 19

The portfolio expected return considers which of the following factors?
I.the amount of money currently invested in each individual security
II.various levels of economic activity
III.the performance of each stock given various economic scenarios
IV.the probability of various states 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 answer of The portfolio expected return considers which of...

Question 20

The linear relation between an asset's expected return and its beta coefficient is the:
A)reward-to-risk ratio.
B)portfolio weight.
C)portfolio risk.
D)security market line.
E)market risk premium.

Accepted Answer

The linear relation between an asset's expected return and its beta coefficient is represented by the security market line (SML) in the Capital Asset Pricing Model (CAPM). The SML helps investors to determine whether an asset is undervalued or overvalued and provides a benchmark for the expected return on an asset based on its risk as measured by beta.

Quiz 11: Return and Risk: the Capital Asset Pricing Model

Risk that affects at most a small number of assets is called _____ risk.

Risk that affects a large number of assets,each to a greater or lesser degree,is called _____ risk.

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

You are considering purchasing stock S.This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period.The overall expected rate of return on this stock will:

The amount of systematic risk present in a particular risky asset,relative to the systematic risk present in an average risky asset,is called the particular asset's:

The slope of an asset's security market line is the:

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

The characteristic line is graphically depicted as:

The beta of a security is calculated by:

Standard deviation measures _____ risk.

If investors possess homogeneous expectations over all assets in the market portfolio,when riskless lending and borrowing is allowed,the market portfolio is defined to:

A portfolio is:

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

The principle of diversification tells us that:

The risk premium for an individual security is computed by:

Which one of the following is an example of a nondiversifiable risk?

The percentage of a portfolio's total value invested in a particular asset is called that asset's:

When computing the expected return on a portfolio of stocks the portfolio weights are based on the:

The portfolio expected return considers which of the following factors? I.the amount of money currently invested in each individual security II.various levels of economic activity III.the performance of each stock given various economic scenarios IV.the probability of various states of the economy

The linear relation between an asset's expected return and its beta coefficient is the: