Question 1

The part of a security's risk associated with economic factors that affect all firms to some extent is also known as the _____.

Accepted Answer

A)  diversifiable risk 
B)  unsystematic risk 
C)  stand-alone risk 
D)  market risk 
E)  business risk 
A)  diversifiable risk 
B)  unsystematic risk 
C)  stand-alone risk 
D)  market risk 
E)  business risk

Question 2

Which of the following statements is true about the beta of a portfolio?

Accepted Answer

A)  If the beta of a portfolio doubles, its required return also doubles. 
B)  If a stock has a negative beta, its required return is negative. 
C)  Higher beta stocks have more company-specific risk, but do not necessarily have more market risk. 
D)  If a portfolio's beta increases from 1.2 to 1.5, its required rate of return will increase by an amount equal to its market risk premium. 
E)  If the beta of a stock is three, the stock's relevant risk is thrice as volatile as the market portfolio. 
A)  If the beta of a portfolio doubles, its required return also doubles. 
B)  If a stock has a negative beta, its required return is negative. 
C)  Higher beta stocks have more company-specific risk, but do not necessarily have more market risk. 
D)  If a portfolio's beta increases from 1.2 to 1.5, its required rate of return will increase by an amount equal to its market risk premium. 
E)  If the beta of a stock is three, the stock's relevant risk is thrice as volatile as the market portfolio.

Question 3

Risk is indicated by variability, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.

Accepted Answer

A) True 
 B)False

Question 4

The risk that is limited to a particular industry is also known as _____.

Accepted Answer

A)  unsystematic risk 
B)  non-diversifiable risk 
C)  market risk 
D)  relevant risk 
E)  combined risk 
A)  unsystematic risk 
B)  non-diversifiable risk 
C)  market risk 
D)  relevant risk 
E)  combined risk

Question 5

For an investment in a stock, the probability of the return being -10.0% is 0.3, 10.0% is 0.4, and 30.0% is 0.3. Given the probability distributions, what is the expected rate of return for the investment?

Accepted Answer

A)  10.0% 
B)  9.5% 
C)  15.0% 
D)  12.5% 
E)  13.0% 
A)  10.0% 
B)  9.5% 
C)  15.0% 
D)  12.5% 
E)  13.0%

Question 6

Which of the following statements about risk-return relationship is correct?

Accepted Answer

A)  An increase in the expected inflation would lead to an increase in the required return on all the risky assets by the same amount, assuming all other things were held constant. 
B)  A graph of the SML would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis. 
C)  As a result of change in investors' risk aversion, the required rate of return on low-beta stocks is impacted more when compared to the required rate of return on high-beta stocks. 
D)  If investors became more averse to risk, then the slope of the SML would become less steep. 
E)  The market risk premium is lower for higher beta stocks and higher for lower beta stocks. 
A)  An increase in the expected inflation would lead to an increase in the required return on all the risky assets by the same amount, assuming all other things were held constant. 
B)  A graph of the SML would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis. 
C)  As a result of change in investors' risk aversion, the required rate of return on low-beta stocks is impacted more when compared to the required rate of return on high-beta stocks. 
D)  If investors became more averse to risk, then the slope of the SML would become less steep. 
E)  The market risk premium is lower for higher beta stocks and higher for lower beta stocks.

Question 7

Stock A has a beta (β) equal to 2.1 and Stock B has a beta equal to 0.7. Based on this information, according to the capital asset pricing model (CAPM), which of the following statements is correct?

Accepted Answer

A)  The required rate of return for Stock A, rA, should be 2.1 times the required rate of return for Stock B, rB. 
B)  The risk premium associated with Stock A, RPA, should be 2.1 times the risk premium associated with Stock B, RPB. 
C)  The required rate of return for Stock A, rA, should be three times the required rate of return for Stock B, rB. 
D)  The risk premium associated with Stock A, RPA, should be three times the risk premium associated with Stock B, RPB. 
E)  The required rate of return for Stock A, rA, should be three times the risk premium associated with Stock A, RPA 
A)  The required rate of return for Stock A, rA, should be 2.1 times the required rate of return for Stock B, rB. 
B)  The risk premium associated with Stock A, RPA, should be 2.1 times the risk premium associated with Stock B, RPB. 
C)  The required rate of return for Stock A, rA, should be three times the required rate of return for Stock B, rB. 
D)  The risk premium associated with Stock A, RPA, should be three times the risk premium associated with Stock B, RPB. 
E)  The required rate of return for Stock A, rA, should be three times the risk premium associated with Stock A, RPA

Question 8

Which of the following statements about risk measures is correct?

Accepted Answer

A)  Beta is the measure of total risk, whereas standard deviation is the measure of unsystematic risk. 
B)  Beta is the measure of unsystematic risk, whereas standard deviation is the measure of total risk. 
C)  Beta is the measure of total risk, whereas standard deviation is the measure of systematic risk. 
D)  Beta is the measure of systematic risk, whereas standard deviation is the measure of total risk. 
E)  Beta is the measure of total risk, whereas Standard deviation is the measure of systematic risk. 
A)  Beta is the measure of total risk, whereas standard deviation is the measure of unsystematic risk. 
B)  Beta is the measure of unsystematic risk, whereas standard deviation is the measure of total risk. 
C)  Beta is the measure of total risk, whereas standard deviation is the measure of systematic risk. 
D)  Beta is the measure of systematic risk, whereas standard deviation is the measure of total risk. 
E)  Beta is the measure of total risk, whereas Standard deviation is the measure of systematic risk.

Question 9

The difference between the expected rate of return on a given risky asset and the expected rate of return on a less risky asset is known as the _____.

Accepted Answer

A)  standard deviation of returns 
B)  variance of returns 
C)  actual rate of return 
D)  risk premium 
E)  risk adjusted return 
A)  standard deviation of returns 
B)  variance of returns 
C)  actual rate of return 
D)  risk premium 
E)  risk adjusted return

Question 10

The only condition under which the unsystematic portfolio risk can be reduced to zero is to combine securities that are perfectly negatively correlated (r = −1.0) with each other.

Accepted Answer

A) True 
 B)False

Question 11

The type of security that generates a return that is closest to a risk-free rate of return is a _____.

Accepted Answer

A)  treasury bill 
B)  treasury note 
C)  commercial paper 
D)  corporate bond 
E)  corporate stock 
A)  treasury bill 
B)  treasury note 
C)  commercial paper 
D)  corporate bond 
E)  corporate stock

Question 12

Which of the following statements about the various kinds of risk is true?

Accepted Answer

A)  Interest rate risk and inflation risk are diversifiable risks. 
B)  Liquidity risk and political risk are systematic risks. 
C)  Business risk and exchange rate risk are firm-specific risks. 
D)  Financial risk and maturity risk are market risks. 
E)  Default risk and inflation risk are relevant risks. 
A)  Interest rate risk and inflation risk are diversifiable risks. 
B)  Liquidity risk and political risk are systematic risks. 
C)  Business risk and exchange rate risk are firm-specific risks. 
D)  Financial risk and maturity risk are market risks. 
E)  Default risk and inflation risk are relevant risks.

Question 13

If the risk-free rate is 7 percent, the expected return on the market is 10 percent, and the expected return on Security J is 13 percent, what is the beta of Security J?

Accepted Answer

A)  1.0 
B)  1.5 
C)  2.0 
D)  2.5 
E)  3.0 
A)  1.0 
B)  1.5 
C)  2.0 
D)  2.5 
E)  3.0

Question 14

Other things held constant, if the expected inflation rate decreases, and at the same time investors become more risk averse, the Security Market Line (SML) would shift _____.

Accepted Answer

A)  down and have a steeper slope 
B)  up and have a less steep slope 
C)  up and keep the same slope 
D)  down and keep the same slope 
E)  down and have a less steep slope 
A)  down and have a steeper slope 
B)  up and have a less steep slope 
C)  up and keep the same slope 
D)  down and keep the same slope 
E)  down and have a less steep slope

Question 15

Which of the following statements about beta is correct?

Accepted Answer

A)  If the returns on a stock vary widely, then its standard deviation is large, and as a result, the stock will also have a large beta coefficient. 
B)  A stock's standard deviation of returns is a measure of the stock's stand-alone risk, while its beta measures its unsystematic risk. 
C)  A portfolio that contains 100 high-beta stocks will not be riskier than a portfolio containing 100 low-beta stocks. 
D)  A stock that is perfectly positively correlated with the market would not have a beta coefficient that is greater than one. 
E)  A stock with a negative beta has very high firm-specific risk. 
A)  If the returns on a stock vary widely, then its standard deviation is large, and as a result, the stock will also have a large beta coefficient. 
B)  A stock's standard deviation of returns is a measure of the stock's stand-alone risk, while its beta measures its unsystematic risk. 
C)  A portfolio that contains 100 high-beta stocks will not be riskier than a portfolio containing 100 low-beta stocks. 
D)  A stock that is perfectly positively correlated with the market would not have a beta coefficient that is greater than one. 
E)  A stock with a negative beta has very high firm-specific risk.

Question 16

The beta coefficient of Zed Corporation is equal to 0.7 and the required rate of return on the stock equals 12 percent. If the expected return on the market is 12.5 percent, what is the risk-free rate of return? (Round off the answer to two decimal places.)

Accepted Answer

A)  11.56% 
B)  10.83% 
C)  9.52% 
D)  12.25% 
E)  8.89% 
A)  11.56% 
B)  10.83% 
C)  9.52% 
D)  12.25% 
E)  8.89%

The part of a security's risk associated with economic factors that affect all firms to some extent is also known as the _____.

Which of the following statements is true about the beta of a portfolio?

Risk is indicated by variability, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.

The risk that is limited to a particular industry is also known as _____.

For an investment in a stock, the probability of the return being -10.0% is 0.3, 10.0% is 0.4, and 30.0% is 0.3. Given the probability distributions, what is the expected rate of return for the investment?

Which of the following statements about risk-return relationship is correct?

Stock A has a beta (β) equal to 2.1 and Stock B has a beta equal to 0.7. Based on this information, according to the capital asset pricing model (CAPM), which of the following statements is correct?

Which of the following statements about risk measures is correct?

The difference between the expected rate of return on a given risky asset and the expected rate of return on a less risky asset is known as the _____.

The only condition under which the unsystematic portfolio risk can be reduced to zero is to combine securities that are perfectly negatively correlated (r = −1.0) with each other.

The type of security that generates a return that is closest to a risk-free rate of return is a _____.

Which of the following statements about the various kinds of risk is true?

If the risk-free rate is 7 percent, the expected return on the market is 10 percent, and the expected return on Security J is 13 percent, what is the beta of Security J?

Other things held constant, if the expected inflation rate decreases, and at the same time investors become more risk averse, the Security Market Line (SML) would shift _____.

Which of the following statements about beta is correct?

The beta coefficient of Zed Corporation is equal to 0.7 and the required rate of return on the stock equals 12 percent. If the expected return on the market is 12.5 percent, what is the risk-free rate of return? (Round off the answer to two decimal places.)

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 8: Risk and Rates of Return

The part of a security's risk associated with economic factors that affect all firms to some extent is also known as the _____.

Which of the following statements is true about the beta of a portfolio?

Risk is indicated by variability, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.

The risk that is limited to a particular industry is also known as _____.

For an investment in a stock, the probability of the return being -10.0% is 0.3, 10.0% is 0.4, and 30.0% is 0.3. Given the probability distributions, what is the expected rate of return for the investment?

Which of the following statements about risk-return relationship is correct?

Stock A has a beta (β) equal to 2.1 and Stock B has a beta equal to 0.7. Based on this information, according to the capital asset pricing model (CAPM), which of the following statements is correct?

Which of the following statements about risk measures is correct?

The difference between the expected rate of return on a given risky asset and the expected rate of return on a less risky asset is known as the _____.

The only condition under which the unsystematic portfolio risk can be reduced to zero is to combine securities that are perfectly negatively correlated (r = −1.0) with each other.

The type of security that generates a return that is closest to a risk-free rate of return is a _____.

Which of the following statements about the various kinds of risk is true?

If the risk-free rate is 7 percent, the expected return on the market is 10 percent, and the expected return on Security J is 13 percent, what is the beta of Security J?

Other things held constant, if the expected inflation rate decreases, and at the same time investors become more risk averse, the Security Market Line (SML) would shift _____.

Which of the following statements about beta is correct?

The beta coefficient of Zed Corporation is equal to 0.7 and the required rate of return on the stock equals 12 percent. If the expected return on the market is 12.5 percent, what is the risk-free rate of return? (Round off the answer to two decimal places.)

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters