Exam 8: Risk and Rates of Return

The expected returns for Stocks A, B, C, D, and E are 7 percent, 10 percent, 12 percent, 25 percent, and 18 percent, respectively. The corresponding standard deviations for these stocks are 12 percent, 18 percent, 15 percent, 23 percent, and 15 percent, respectively. Which one of the securities should a risk-averse investor purchase if the investment will be held in isolation (by itself)?

Which of the following statements about beta is correct?

The risk-free rate is 5 percent and the market risk premium is 8 percent. Stock Y's beta is 1.85 and the standard deviation of its returns is 62.5 percent. What should be the stock's expected rate of return for the stock price to be considered in equilibrium?

Which of the following portfolios would have no diversification benefits?

A stock's standard deviation indicates how the stock affects the riskiness of a diversified portfolio. Therefore, the standard deviation is a better measure of a stock's relevant risk than its beta coefficient, which measures total, or stand-alone, risk. 

Other things held constant, a risk-averse investor requires a higher return to invest in securities with higher risks, which means they will pay lower prices for such investments. 

Dividing the standard deviation of the returns of a stock by the stock's expected return gives us the stock's _____. 

The larger the standard deviation of returns on an investment, the _____. 

Which of the following statements gives the best definition/description of the risk that is associated with an investment?

The market for a stock is said to be in equilibrium when the _____. 

Steve Brickson currently has an investment portfolio that contains four stocks with a total value equal to $80,000. The portfolio has a beta (β) equal to 1.4. To earn higher returns, Steve wants to invest an additional $20,000 in a stock that has β equal to 2.4. After Steve adds the new stock to his portfolio, what will the portfolio's beta be?

Which of the following activities would most likely affect a particular company's systematic risk?

Which of the following is a measure of the extent to which the returns on a given stock move with the stock market?

Assume Danny is considering combining two investments to form a portfolio, and he is very concerned with the risk that will result from the combination. If he wants to attain the greatest effect from diversification, he would prefer that the assets _____. 

Which of the following measures captures the effects of both risk and return, which makes it a better measure than standard deviation for evaluating stand-alone risk in situations where investments differ with respect to both their amounts of total risk and their expected returns?

The relevant risk, which is the risk for which investors should be compensated, is the portion of the total risk that cannot be diversified away. 

Diversification refers to the _____. 

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

Which of the following statements about diversification 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 _____.