Exam 13: Return, Risk, and the Security Market Line

Ted believes that he currently owns a portfolio which is adequately diversified. If he is correct, the addition of a _____ asset to the portfolio will have minimal, if any, effect on the portfolio's _____.

All else the same, actions or events that cause firm returns to be less correlated with changes in the economy will _______ the firm's systematic risk.

Systematic risk is measured by:

You want your portfolio beta to be 1.10. Currently, your portfolio consists of $3,000 invested in stock A with a beta of 1.65 and $2,000 in stock B with a beta of.72. You have another $5,000 to invest and want to divide it between an asset with a beta of 1.48 and a risk-free asset. How much should you invest in the risk-free asset?

Slope of the SML = [E(R_A) + R_f]/ß_A

What is the expected return on security B?

The risk-free rate of return is 3.78% and the market risk premium is 6.42%. What is the expected rate of return on a stock with a beta of 1.09?

Which of the following is the best definition of expected return?

What is the expected return on a portfolio that is invested 30% in stock A and 70% in stock B, given the following information?

The expected return of the portfolio considers various levels of economic activity.

A particular risky asset's risk premium, measured relative to its beta coefficient, is its:

Which of the following is the best definition of unsystematic risk

According to the capital asset pricing model:

You recently purchased a stock that is expected to earn 16% in a booming economy, 12% in a normal economy, and lose 8% in a recessionary economy. There is a 20% probability of a boom, a 70% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock?

The pure time value of money is called the:

Market risk is relevant to a well-diversified investor.

Systematic risk is a type of risk that influences all assets to a greater or lesser degree.

An example of systematic risk would be if the stock of the major airlines dropped after two airplanes crashed on the same day, making many passengers too nervous to fly.

Which of the following is correct regarding the CAPM?

The process of eliminating systematic risk through the purchase of a number of assets is called: