Question 1

It is impossible to eliminate all risk through diversification.

Accepted Answer

While diversification can reduce risk, it cannot eliminate it completely. All investments come with some level of risk and diversification can only spread the risk across a variety of investments. Unexpected events can still impact the entire market and cause losses.

Question 2

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.
A)more,more
B)more,less
C)less,more
D)less,less

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 3

The market (systematic)risk associated with an individual stock is most closely identified with the
A)variance of the returns of the stock.
B)variance of the returns of the market.
C)beta of the stock.
D)standard deviation of the stock.

Accepted Answer

Beta is a measure of a stock's systematic risk, which refers to the risk of the overall market affecting the price of a stock. The higher the beta, the greater the stock's sensitivity to market movements, indicating greater systematic risk. Variance and standard deviation measure a stock's total risk, which includes both systematic and unsystematic risk. The variance and standard deviation of the market returns would not specifically identify the systematic risk of an individual stock.

Question 4

Total risk equals unique security risk times systematic risk.

Accepted Answer

Total risk is not equal to the product of unique security risk and systematic risk. It is the sum of both unique (idiosyncratic) risk and systematic risk.

Question 5

Which of the following statements is true?
A)A stock with a beta less than zero has no exposure to systematic risk.
B)A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.
C)A stock with a beta less than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.
D)A stock with a beta less than 1.0 has higher nondiversifiable risk than a stock with a beta of 1.0.

Accepted Answer

A stock with a beta less than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0 because it is less correlated with the overall market movements, meaning it will be less impacted by systematic risk factors. A beta greater than 1.0 indicates higher nondiversifiable risk, as it is more correlated with the market movements. A beta less than zero is not a valid measure, as beta measures the relationship between a stock and the overall market movements, and a negative beta would mean the stock moves in the opposite direction of the market.

Question 6

Which of the following is generally used to measure the market when calculating betas?
A)The Dow Jones Industrial Average
B)The Standard & Poors 500 Index
C)The Value Line Quantam Index
D)The Case Schiller Housing Index

Accepted Answer

The Standard & Poors 500 Index is the best choice because it includes a broad range of stocks and is therefore a better representation of the overall market than the other options. The Dow Jones Industrial Average only includes 30 large industrial companies, the Value Line Quantam Index is a lesser known index with only 1,700 stocks, and the Case Schiller Housing Index is focused on the housing market and does not provide as comprehensive of a view of the overall market.

Question 7

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?
A)1.46
B)1.70
C)2.60
D)0.41

Accepted Answer

To find the beta of the portfolio, we first need to calculate the weight of each stock in the portfolio. 
Weight of Dow Chemical = 25,000/(25,000+18,000+36,000+11,000) = 0.311
Weight of GM = 18,000/(25,000+18,000+36,000+11,000) = 0.224
Weight of Microsoft = 36,000/(25,000+18,000+36,000+11,000) = 0.447
Weight of Nike = 11,000/(25,000+18,000+36,000+11,000) = 0.018
Next, we can calculate the portfolio beta using the weighted average of the individual stock betas:
Portfolio Beta = (0.311*1.55) + (0.224*1.12) + (0.447*2.39) + (0.018*0.76)
Portfolio Beta = 1.70
Therefore, the best choice is B.

Question 8

Changes in the general economy,such as changes in interest rates or tax laws,represent what type of risk?
A)Firm-specific risk
B)Market risk
C)Unsystematic risk
D)Diversifiable risk

Accepted Answer

Changes in the general economy affect the overall market and are beyond the control of individual companies or industries. This represents market risk. Firm-specific risk (A), unsystematic risk (C), and diversifiable risk (D) all pertain to risks that are specific to a particular company or industry.

Question 9

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

Accepted Answer

The CAPM does indeed describe the risk-return tradeoff in the market using beta as a measure of risk.

Question 10

You hold a portfolio with the following securities:
Percent
Security of Portfolio Beta Return
X Corporation 20% 1.35 14%
Y Corporation 35% .95 10%
Z Corporation 45% .75 8%
Compute the expected return and beta for the portfolio.
A)10.67%,1.02
B)9.9%,1.02
C)34.4%,.94
D)9.9%,.94

Accepted Answer

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

Question 11

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
A)less than 1.0.
B)greater than 1.0.
C)equal to 1.0.
D)unknown based on the information provided.

Accepted Answer

If Alpha's required rate of return is equal to the expected return on the market, then its beta must be equal to 1.0. This means that Alpha has the same level of risk as the overall market. If Alpha's beta was less than 1.0, it would be considered less risky than the market, and its required rate of return would be lower than the expected return on the market. If Alpha's beta was greater than 1.0, it would be considered more risky than the market, and its required rate of return would be higher than the expected return on the market.

Question 12

What type of risk can investors reduce through diversification?
A)All risk
B)Systematic risk only
C)Unsystematic risk only
D)Uncertainty

Accepted Answer

Diversification helps to reduce unsystematic risk, which is the risk specific to a particular company or industry. This can be achieved by investing in a portfolio of assets across different industries and sectors, which helps to minimize the impact of adverse events that may affect a specific company or industry. However, diversification cannot completely eliminate systematic risk, which is the risk that affects the entire market or economy.

Question 13

Which of the following is a good measure of the relationship between an investment's returns and the market's returns?
A)The beta coefficient
B)The standard variation
C)The CPI
D)The S&P 500 Index

Accepted Answer

The beta coefficient measures the sensitivity of an investment's returns to changes in the market's returns. A beta of 1 indicates a perfect correlation, while a beta greater than 1 indicates a higher degree of sensitivity, and a beta less than 1 indicates a lower degree of sensitivity. Therefore, the beta coefficient is a good measure of the relationship between an investment's returns and the market's returns.

Question 14

Which of the following statements is true?
A)Systematic,or market,risk can be reduced through diversification.
B)Both systematic and unsystematic risk can be reduced through diversification.
C)Unsystematic,or company,risk can be reduced through diversification.
D)Neither systematic nor unsystematic risk can be reduced through diversification.

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 15

The beta of ABC Co.stock is the slope of
A)the security market line.
B)the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills.
C)the arbitrage pricing line.
D)the line of best fit for a plot of ABC Co.returns against the returns of the market portfolio for the same period.

Accepted Answer

Beta is the measure of systematic risk of an individual security in relation to the overall market. The line of best fit for a plot of the returns of ABC Co. against the returns of the market portfolio for the same period is used to calculate the beta of ABC Co. Therefore, the correct choice is D.

Question 16

You are thinking of adding one of two investments to an already well diversified portfolio.
Security A Security B
Expected return = 12% Expected return = 12%
Standard deviation of returns = 20.9% Standard deviation of returns = 10.1%
Beta = .8 Beta = 2
If you are a risk-averse investor
A)security A is the better choice.
B)security B is the better choice.
C)either security would be acceptable.
D)cannot be determined with information given.

Accepted Answer

As a risk-averse investor, you would want to choose the investment with a lower standard deviation of returns. Security A has a higher standard deviation of returns compared to Security B, and thus, Security B is the better choice for a risk-averse investor. Additionally, Security A has a lower beta compared to Security B, which implies lower risks.

Question 17

Investment risk is
A)the probability of achieving a return that is greater than what was expected.
B)the probability of achieving a beta coefficient that is less than what was expected.
C)the probability of achieving a return that is less than what was expected.
D)the probability of achieving a standard deviation that is less than what was expected.

Accepted Answer

Investment risk refers to the potential for loss or negative deviation from expected returns. Therefore, option C is the correct definition of investment risk, as it highlights the probability of achieving a return that is less than what was expected. Options A, B, and D are incorrect as they do not accurately describe investment risk.

Question 18

Which of the following is NOT an example of systematic risk?
A)Inflation
B)Recession
C)Management risk
D)Interest rate risk

Accepted Answer

Inflation, recession, and interest rate risk are all examples of systematic risk because they affect the entire market and cannot be diversified away through portfolio management. Management risk, on the other hand, is a type of unsystematic risk that is specific to a particular company and can be mitigated through diversification.

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?
A)1.24
B)1.00
C)1.28
D)1.33

Accepted Answer

To calculate the portfolio beta, we need to use the following formula:

Portfolio beta = (weight of stock X * beta of stock X) + (weight of stock Y * beta of stock Y) + (weight of stock Z * beta of stock Z)

Plugging in the given values, we get:

Portfolio beta = (0.3 * 1.22) + (0.45 * 1.46) + (0.25 * 1.03) = 0.366 + 0.657 + 0.258 = 1.281

Rounding to two decimal places, the portfolio beta is 1.28. Therefore, the best choice is C.

Question 20

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

Accepted Answer

Beta measures the volatility or risk of a security by comparing its returns to those of the overall market. A beta of 1 indicates that the security is as volatile as the market, while a beta greater than 1 suggests higher volatility, and a beta less than 1 suggests lower volatility.

Quiz 8: Risk and Return-Capital Market Theory

It is impossible to eliminate all risk through diversification.

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.

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

Total risk equals unique security risk times systematic risk.

Which of the following statements is true?

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

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?

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.

You hold a portfolio with the following securities: Percent Security of Portfolio Beta Return X Corporation 20% 1.35 14% Y Corporation 35% .95 10% Z Corporation 45% .75 8% Compute the expected return and beta for the portfolio.

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

What type of risk can investors reduce through diversification?

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

Which of the following statements is true?

The beta of ABC Co.stock is the slope of

You are thinking of adding one of two investments to an already well diversified portfolio. Security A Security B Expected return = 12% Expected return = 12% Standard deviation of returns = 20.9% Standard deviation of returns = 10.1% Beta = .8 Beta = 2 If you are a risk-averse investor

Investment risk is

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

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?

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