Question 1

Negatively correlated assets are quite hard to find.

Accepted Answer

A) True 
 B)False

Question 2

On average, when the overall market changes by 10%, the stock of Veracity Communications changes 12%. Veracity's beta is

Accepted Answer

A)  1.2. 
B)  8.33%. 
C)  12%. 
D)  Insufficient information is provided 
A)  1.2. 
B)  8.33%. 
C)  12%. 
D)  Insufficient information is provided

Question 3

A stock's beta is a measure of its

Accepted Answer

A)  systematic risk. 
B)  unsystematic risk. 
C)  company-specific risk. 
D)  diversifiable risk. 
A)  systematic risk. 
B)  unsystematic risk. 
C)  company-specific risk. 
D)  diversifiable risk.

Question 4

Total risk equals unsystematic risk times systematic risk.

Accepted Answer

A) True 
 B)False

Question 5

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.

Accepted Answer

A)  10.67%, 1.02 
B)  9.9%, 1.02 
C)  34.4%, .94 
D)  9.9%, .94 
A)  10.67%, 1.02 
B)  9.9%, 1.02 
C)  34.4%, .94 
D)  9.9%, .94

Question 6

When constructing a portfolio, it is a good idea to put all your eggs in one basket, then watch the basket closely.

Accepted Answer

A) True 
 B)False

Question 7

The market risk premium is measured by

Accepted Answer

A)  beta. 
B)  market return less risk-free rate. 
C)  T-bill rate. 
D)  standard deviation. 
A)  beta. 
B)  market return less risk-free rate. 
C)  T-bill rate. 
D)  standard deviation.

Question 8

Firm B's risk premium is

Accepted Answer

A)  2.66%. 
B)  4.8%. 
C)  6.3%. 
D)  8.1%. 
A)  2.66%. 
B)  4.8%. 
C)  6.3%. 
D)  8.1%.

Question 9

A portfolio containing a mix of stocks, bonds, and real estate is likely to be more diversified than a portfolio made up of only one asset class.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following portfolios is clearly preferred to the others? Expected Standard
Return Deviation
A 14% 12%
B 22% 20%
C 18% 16%

Accepted Answer

A)  Investment A 
B)  Investment B 
C)  Investment C 
D)  Cannot be determined 
A)  Investment A 
B)  Investment B 
C)  Investment C 
D)  Cannot be determined

Question 11

The appropriate measure for risk according to the capital asset pricing model is

Accepted Answer

A)  the standard deviation of a firm's cash flows. 
B)  alpha. 
C)  beta. 
D)  probability of correlation. 
A)  the standard deviation of a firm's cash flows. 
B)  alpha. 
C)  beta. 
D)  probability of correlation.

Question 12

The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%. The coefficient of correlation between the stocks is .75. The standard deviation of any portfolio combining the two stocks will be less than 20%.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

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

Question 14

If your portfolio consists of 20% RJH (expected return 16% ) 30% PAV (expected return -2%), and 50% MB (expected return 8%), what is the expected rate of return on the portfolio?

Accepted Answer

A)  7.8% 
B)  7.3% 
C)  6.6% 
D)  8.7% 
A)  7.8% 
B)  7.3% 
C)  6.6% 
D)  8.7%

Question 15

A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.

Accepted Answer

A) True 
 B)False

Question 16

You are considering investing in U.S. Steel. Which of the following is an example of nondiversifiable risk?

Accepted Answer

A)  Risk resulting from foreign expropriation of U.S. Steel property 
B)  Risk resulting from oil exploration by Marathon Oil (a U.S. Steel subsidy) 
C)  Risk resulting from a strike against U.S. Steel 
D)  None of the above 
A)  Risk resulting from foreign expropriation of U.S. Steel property 
B)  Risk resulting from oil exploration by Marathon Oil (a U.S. Steel subsidy) 
C)  Risk resulting from a strike against U.S. Steel 
D)  None of the above

Question 17

On average, the market rewards assuming additional systematic risk with additional returns.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is true?

Accepted Answer

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. 
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.

Question 19

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

Accepted Answer

A)  Inflation 
B)  Recession 
C)  Management risk 
D)  Interest rate risk 
A)  Inflation 
B)  Recession 
C)  Management risk 
D)  Interest rate risk

Question 20

A negative coefficient of correlation implies that

Accepted Answer

A)  on average, returns to such assets are negative. 
B)  asset returns tend to move in opposite directions. 
C)  asset return tend to move in opposite directions. 
D)  None of the above because the coefficient of correlation cannot be negative. 
A)  on average, returns to such assets are negative. 
B)  asset returns tend to move in opposite directions. 
C)  asset return tend to move in opposite directions. 
D)  None of the above because the coefficient of correlation cannot be negative.

Negatively correlated assets are quite hard to find.

On average, when the overall market changes by 10%, the stock of Veracity Communications changes 12%. Veracity's beta is

A stock's beta is a measure of its

Total risk equals unsystematic risk times systematic risk.

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.

When constructing a portfolio, it is a good idea to put all your eggs in one basket, then watch the basket closely.

The market risk premium is measured by

Firm B's risk premium is

A portfolio containing a mix of stocks, bonds, and real estate is likely to be more diversified than a portfolio made up of only one asset class.

Which of the following portfolios is clearly preferred to the others? Expected Standard Return Deviation A 14% 12% B 22% 20% C 18% 16%

The appropriate measure for risk according to the capital asset pricing model is

The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%. The coefficient of correlation between the stocks is .75. The standard deviation of any portfolio combining the two stocks will be less than 20%.

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

If your portfolio consists of 20% RJH (expected return 16% ) 30% PAV (expected return -2%), and 50% MB (expected return 8%), what is the expected rate of return on the portfolio?

A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.

You are considering investing in U.S. Steel. Which of the following is an example of nondiversifiable risk?

On average, the market rewards assuming additional systematic risk with additional returns.

Which of the following statements is true?

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

A negative coefficient of correlation implies that

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, Taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters

Exam 8: Risk and Return-Capital Market Theory

Negatively correlated assets are quite hard to find.

On average, when the overall market changes by 10%, the stock of Veracity Communications changes 12%. Veracity's beta is

A stock's beta is a measure of its

Total risk equals unsystematic risk times systematic risk.

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.

When constructing a portfolio, it is a good idea to put all your eggs in one basket, then watch the basket closely.

The market risk premium is measured by

Firm B's risk premium is

A portfolio containing a mix of stocks, bonds, and real estate is likely to be more diversified than a portfolio made up of only one asset class.

Which of the following portfolios is clearly preferred to the others? Expected Standard Return Deviation A 14% 12% B 22% 20% C 18% 16%

The appropriate measure for risk according to the capital asset pricing model is

The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%. The coefficient of correlation between the stocks is .75. The standard deviation of any portfolio combining the two stocks will be less than 20%.

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

If your portfolio consists of 20% RJH (expected return 16% ) 30% PAV (expected return -2%), and 50% MB (expected return 8%), what is the expected rate of return on the portfolio?

A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.

You are considering investing in U.S. Steel. Which of the following is an example of nondiversifiable risk?

On average, the market rewards assuming additional systematic risk with additional returns.

Which of the following statements is true?

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

A negative coefficient of correlation implies that

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, Taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters