Question 1

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

Accepted Answer

A) An increase in the expected inflation rate 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 shows required rates of return on the vertical axis and standard deviations of returns on the horizontal axis. 
C) If investors' risk attitudes change, the required rates of return on low-beta stocks will be impacted more than the required rates 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 high-beta stocks than it is for low-beta stocks. 
A) An increase in the expected inflation rate 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 shows required rates of return on the vertical axis and standard deviations of returns on the horizontal axis. 
C) If investors' risk attitudes change, the required rates of return on low-beta stocks will be impacted more than the required rates 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 high-beta stocks than it is for low-beta stocks.

Question 2

The market portfolio contains only unsystematic risk, therefore the market risk premium represents the return that investors require to be compensated for taking an average amount of relevant, or unsystematic, risk.

Accepted Answer

A) True 
 B)False

Question 3

A firm can affect its beta risk by changing the composition of its assets and by modifying its use of debt financing, but external factors do not have any bearing on a firm's beta.

Accepted Answer

A) True 
 B)False

Question 4

The greater the variability of the possible returns on an investment, _____.

Accepted Answer

A) the lesser the expected return 
B) the lower the standard deviation of the investment 
C) the higher the actual return on the investment 
D) the riskier the investment 
E) the lower the beta of the investment 
A) the lesser the expected return 
B) the lower the standard deviation of the investment 
C) the higher the actual return on the investment 
D) the riskier the investment 
E) the lower the beta of the investment

Question 5

Which of the following statements about market risk and firm-specific risk is true?

Accepted Answer

A) Market risk is an unsystematic risk, whereas firm-specific risk is systematic risk. 
B) Investors are not rewarded for taking market risk, whereas they are rewarded for taking firm-specific risk. 
C) Market risk is a diversifiable risk, whereas firm-specific risk is a nondiversifiable risk. 
D) Market risk is the relevant risk, whereas firm-specific risk is an irrelevant risk. 
E) Market risk includes a firm's default risk, whereas firm-specific risk includes economic risk. 
A) Market risk is an unsystematic risk, whereas firm-specific risk is systematic risk. 
B) Investors are not rewarded for taking market risk, whereas they are rewarded for taking firm-specific risk. 
C) Market risk is a diversifiable risk, whereas firm-specific risk is a nondiversifiable risk. 
D) Market risk is the relevant risk, whereas firm-specific risk is an irrelevant risk. 
E) Market risk includes a firm's default risk, whereas firm-specific risk includes economic risk.

Question 6

Risk refers to the chance that no unfavorable event will occur.

Accepted Answer

A) True 
 B)False

Question 7

Two stocks can be combined to form a portfolio that is risk free (i.e., has no risk) if the stocks are perfectly negatively correlated (r = −1.0) with each other.

Accepted Answer

A) True 
 B)False

Question 8

Stock A has a beta coefficient (β) equal to 2.1, and Stock B has a beta coefficient (β) equal to 0.7. 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 9

Which of the following pairs of terms are names for the same risk?

Accepted Answer

A) Market risk and unsystematic risk 
B) Market risk and relevant risk 
C) Firm-specific risk and nondiversifiable risk 
D) Firm-specific risk and systematic risk 
E) Firm-specific risk and market risk 
A) Market risk and unsystematic risk 
B) Market risk and relevant risk 
C) Firm-specific risk and nondiversifiable risk 
D) Firm-specific risk and systematic risk 
E) Firm-specific risk and market risk

Question 10

Economic risk is an unsystematic risk that can be diversified by the investors.

Accepted Answer

A) True 
 B)False

Question 11

For Investment A, the probability of the return being 20 percent is 0.5, 10 percent is 0.4, and -10 percent is 0.1. Compute the standard deviation for the investment with the given information.

Accepted Answer

A) 85.0% 
B) 15.0% 
C) 34.0% 
D) 17.0% 
E) 9.0% 
A) 85.0% 
B) 15.0% 
C) 34.0% 
D) 17.0% 
E) 9.0%

Question 12

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?

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%

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

The Security Market Line (SML) relates the risks of individual securities to their required rate of return. If investors conclude that the inflation rate is going to increase, which of the following change would occur?

Accepted Answer

A) The market risk premium will increase. 
B) The beta of a stock will increase. 
C) The slope of the SML will become steeper. 
D) The standard deviation of a stock will increase. 
E) The required returns on all stocks will increase. 
A) The market risk premium will increase. 
B) The beta of a stock will increase. 
C) The slope of the SML will become steeper. 
D) The standard deviation of a stock will increase. 
E) The required returns on all stocks will increase.

Question 15

A stock might be quite risky if held by itself, but if much of this total (stand-alone) risk can be eliminated through diversification, then its relevant risk-that is, its contribution to the portfolio's risk-is much smaller than its total risk.

Accepted Answer

A) True 
 B)False

Question 16

A probability distribution consists of a listing of all possible outcomes, or events, with the chance of occurrence assigned to each.

Accepted Answer

A) True 
 B)False

Question 17

Diversifiable risk includes _____.

Accepted Answer

A) reinvestment rate risk 
B) economic risk 
C) business risk 
D) political risk 
E) interest rate risk 
A) reinvestment rate risk 
B) economic risk 
C) business risk 
D) political risk 
E) interest rate risk

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

The market portfolio contains only unsystematic risk, therefore the market risk premium represents the return that investors require to be compensated for taking an average amount of relevant, or unsystematic, risk.

A firm can affect its beta risk by changing the composition of its assets and by modifying its use of debt financing, but external factors do not have any bearing on a firm's beta.

The greater the variability of the possible returns on an investment, _____.

Which of the following statements about market risk and firm-specific risk is true?

Risk refers to the chance that no unfavorable event will occur.

Two stocks can be combined to form a portfolio that is risk free (i.e., has no risk) if the stocks are perfectly negatively correlated (r = −1.0) with each other.

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

Which of the following pairs of terms are names for the same risk?

Economic risk is an unsystematic risk that can be diversified by the investors.

For Investment A, the probability of the return being 20 percent is 0.5, 10 percent is 0.4, and -10 percent is 0.1. Compute the standard deviation for the investment with the given information.

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?

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?

The Security Market Line (SML) relates the risks of individual securities to their required rate of return. If investors conclude that the inflation rate is going to increase, which of the following change would occur?

A stock might be quite risky if held by itself, but if much of this total (stand-alone) risk can be eliminated through diversification, then its relevant risk-that is, its contribution to the portfolio's risk-is much smaller than its total risk.

A probability distribution consists of a listing of all possible outcomes, or events, with the chance of occurrence assigned to each.

Diversifiable risk includes _____.

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 Debt Characteristics 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

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

The market portfolio contains only unsystematic risk, therefore the market risk premium represents the return that investors require to be compensated for taking an average amount of relevant, or unsystematic, risk.

A firm can affect its beta risk by changing the composition of its assets and by modifying its use of debt financing, but external factors do not have any bearing on a firm's beta.

The greater the variability of the possible returns on an investment, _____.

Which of the following statements about market risk and firm-specific risk is true?

Risk refers to the chance that no unfavorable event will occur.

Two stocks can be combined to form a portfolio that is risk free (i.e., has no risk) if the stocks are perfectly negatively correlated (r = −1.0) with each other.

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

Which of the following pairs of terms are names for the same risk?

Economic risk is an unsystematic risk that can be diversified by the investors.

For Investment A, the probability of the return being 20 percent is 0.5, 10 percent is 0.4, and -10 percent is 0.1. Compute the standard deviation for the investment with the given information.

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?

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?

The Security Market Line (SML) relates the risks of individual securities to their required rate of return. If investors conclude that the inflation rate is going to increase, which of the following change would occur?

A stock might be quite risky if held by itself, but if much of this total (stand-alone) risk can be eliminated through diversification, then its relevant risk-that is, its contribution to the portfolio's risk-is much smaller than its total risk.

A probability distribution consists of a listing of all possible outcomes, or events, with the chance of occurrence assigned to each.

Diversifiable risk includes _____.

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 Debt Characteristics 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