Question 1

Standard deviation measures the _____ risk of a security.

Accepted Answer

A)  unique 
B)  asset-specific 
C)  systematic 
D)  total 
E)  diversifiable 
A)  unique 
B)  asset-specific 
C)  systematic 
D)  total 
E)  diversifiable

Question 2

Which of the following is the best definition of portfolio weights?

Accepted Answer

A)  Percentage of a portfolio's total value in a particular asset. 
B)  Group of assets such as stocks and bonds held by an investor. 
C)  The difference between the return on a risky investment and a risk-free investment 
D)  Return on a risky asset expected in the future. 
E)  Equation of the SML showing the relationship between expected return and beta. 
A)  Percentage of a portfolio's total value in a particular asset. 
B)  Group of assets such as stocks and bonds held by an investor. 
C)  The difference between the return on a risky investment and a risk-free investment 
D)  Return on a risky asset expected in the future. 
E)  Equation of the SML showing the relationship between expected return and beta.

Question 3

Which of the following is the best definition of capital asset pricing model (CAPM)?

Accepted Answer

A)  Percentage of a portfolio's total value in a particular asset. 
B)  Group of assets such as stocks and bonds held by an investor. 
C)  The difference between the return on a risky investment and a risk-free investment 
D)  Return on a risky asset expected in the future. 
E)  Equation of the SML showing the relationship between expected return and beta. 
A)  Percentage of a portfolio's total value in a particular asset. 
B)  Group of assets such as stocks and bonds held by an investor. 
C)  The difference between the return on a risky investment and a risk-free investment 
D)  Return on a risky asset expected in the future. 
E)  Equation of the SML showing the relationship between expected return and beta.

Question 4

Which one of the following measures is relevant to the systematic risk principle?

Accepted Answer

A)  Variance. 
B)  Alpha. 
C)  Standard deviation. 
D)  Theta. 
E)  Beta. 
A)  Variance. 
B)  Alpha. 
C)  Standard deviation. 
D)  Theta. 
E)  Beta.

Question 5

Brady Lady Cosmetics just announced that earnings for the first quarter of the current year grew at an annualized rate of 3%, well above the rate for the same quarter the previous year. Upon the announcement, the stock price did not change. (The market in general was unchanged also.) Which of the following is most likely correct?

Accepted Answer

A)  Brady's price didn't change since the market was surprised by the announcement. 
B)  Interest rates in the economy must have increased. 
C)  Brady's price didn't change because investors likely anticipated the news release. 
D)  Brady's price didn't change because the market in general was unchanged. 
E)  Brady must have a beta coefficient equal to 1. 
A)  Brady's price didn't change since the market was surprised by the announcement. 
B)  Interest rates in the economy must have increased. 
C)  Brady's price didn't change because investors likely anticipated the news release. 
D)  Brady's price didn't change because the market in general was unchanged. 
E)  Brady must have a beta coefficient equal to 1.

Question 6

Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?

Accepted Answer

A)  The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers. 
B)  The expected return is an arithmetic average of the individual returns for each state of the economy. 
C)  The expected return is a weighted average where the probabilities of the economic states are used as the weights. 
D)  The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state. 
E)  As long as the total probabilities of the economic states equal 100%, then the expected return on the stock is a geometric average of the expected returns for each economic state. 
A)  The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers. 
B)  The expected return is an arithmetic average of the individual returns for each state of the economy. 
C)  The expected return is a weighted average where the probabilities of the economic states are used as the weights. 
D)  The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state. 
E)  As long as the total probabilities of the economic states equal 100%, then the expected return on the stock is a geometric average of the expected returns for each economic state.

Question 7

The Capital Asset Pricing Model (CAPM) assumes that a risk-free asset has no systematic risk.

Accepted Answer

A) True 
 B)False

Question 8

The common stock of Taylor & Smith is expected to earn 2% in a recession, 9% in a normal economy, and 13% in a booming economy. The probability of a boom is 15% while the probability of a normal economy is 75% and the chance of a recession is 10%. What is the expected rate of return on this stock?

Accepted Answer

A)  8.35% 
B)  8.52% 
C)  8.67% 
D)  8.81% 
E)  8.90% 
A)  8.35% 
B)  8.52% 
C)  8.67% 
D)  8.81% 
E)  8.90%

Question 9

The projected risk premium is defined as the sum of the expected return on a risky investment and the return on a risk-free investment.

Accepted Answer

A) True 
 B)False

Question 10

Systematic risks are _____ events and unsystematic risks are _____ events.

Accepted Answer

A)  Anticipated; anticipated. 
B)  Anticipated; unanticipated. 
C)  Unanticipated, anticipated. 
D)  Unanticipated; unanticipated. 
A)  Anticipated; anticipated. 
B)  Anticipated; unanticipated. 
C)  Unanticipated, anticipated. 
D)  Unanticipated; unanticipated.

Question 11

Systematic risk is relevant to a well-diversified investor.

Accepted Answer

A) True 
 B)False

Question 12

The true risk of any investment is the  ________________.

Accepted Answer

A)  Magnitude of the investment's return. 
B)  Part of the return resulting from surprises. 
C)  Expected part of any announcement. 
D)  Impact of unsystematic risk. 
E)  Risk premium of the investment. 
A)  Magnitude of the investment's return. 
B)  Part of the return resulting from surprises. 
C)  Expected part of any announcement. 
D)  Impact of unsystematic risk. 
E)  Risk premium of the investment.

Question 13

We routinely assume that investors are risk-averse return-seekers; i.e., they like returns and dislike risk. If so, why do we contend that only systematic risk is important? (Alternatively, why is total risk not important to investors, in and of itself?)

Accepted Answer

This question, of course, gets to the po

Question 14

The slope of the security market line is the ________________.

Accepted Answer

A)  Standard deviation. 
B)  Portfolio weight. 
C)  Beta coefficient. 
D)  Risk-free interest rate. 
E)  Market risk premium. 
A)  Standard deviation. 
B)  Portfolio weight. 
C)  Beta coefficient. 
D)  Risk-free interest rate. 
E)  Market risk premium.

Question 15

Which of the following is the best definition of principle of diversification?

Accepted Answer

A)  A theory showing that the expected return on any risky asset is a linear combination of various factors. 
B)  A risk that affects at most a small number of assets. Also called unique or asset-specific risks. 
C)  A risk that influences a large number of assets. Also called market risk. 
D)  Positively sloped straight line displaying the relationship between expected return and beta. 
E)  Principle stating that spreading an investment across a number of assets eliminates some, but not all, of the risk. 
A)  A theory showing that the expected return on any risky asset is a linear combination of various factors. 
B)  A risk that affects at most a small number of assets. Also called unique or asset-specific risks. 
C)  A risk that influences a large number of assets. Also called market risk. 
D)  Positively sloped straight line displaying the relationship between expected return and beta. 
E)  Principle stating that spreading an investment across a number of assets eliminates some, but not all, of the risk.

Question 16

Which of the following is the best definition of beta coefficient?

Accepted Answer

A)  Amount of systematic risk present in a particular risky asset relative to an average risky asset. 
B)  Group of assets such as stocks and bonds held by an investor. 
C)  The difference between the return on a risky investment and a risk-free investment 
D)  Return on a risky asset expected in the future. 
E)  Equation of the SML showing the relationship between expected return and beta. 
A)  Amount of systematic risk present in a particular risky asset relative to an average risky asset. 
B)  Group of assets such as stocks and bonds held by an investor. 
C)  The difference between the return on a risky investment and a risk-free investment 
D)  Return on a risky asset expected in the future. 
E)  Equation of the SML showing the relationship between expected return and beta.

Question 17

Total risk equals _________________.

Accepted Answer

A)  market risk plus firm-specific risk, 
B)  firm-specific risk plus diversifiable risk, 
C)  systematic risk minus unsystematic risk, 
D)  diversifiable risk plus unsystematic risk, 
E)  market risk plus non-diversifiable risk, 
A)  market risk plus firm-specific risk, 
B)  firm-specific risk plus diversifiable risk, 
C)  systematic risk minus unsystematic risk, 
D)  diversifiable risk plus unsystematic risk, 
E)  market risk plus non-diversifiable risk,

Question 18

What is the beta for the following portfolio?

Accepted Answer

A)  0.80 
B)  0.88 
C)  0.90 
D)  0.93 
E)  0.98 
A)  0.80 
B)  0.88 
C)  0.90 
D)  0.93 
E)  0.98

Question 19

What type of risk is exhibited in section A of the graph?

Accepted Answer

A)  Systematic risk. 
B)  Unsystematic risk. 
C)  Political risk. 
D)  Correlation risk. 
E)  Stock risk. 
A)  Systematic risk. 
B)  Unsystematic risk. 
C)  Political risk. 
D)  Correlation risk. 
E)  Stock risk.

Question 20

Adding some international securities into a portfolio of Canadian stocks helps reduce unsystematic risk in a portfolio.

Accepted Answer

A) True 
 B)False

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

Standard deviation measures the _____ risk of a security.

Which of the following is the best definition of portfolio weights?

Which of the following is the best definition of capital asset pricing model (CAPM)?

Which one of the following measures is relevant to the systematic risk principle?

Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?

The Capital Asset Pricing Model (CAPM) assumes that a risk-free asset has no systematic risk.

The common stock of Taylor & Smith is expected to earn 2% in a recession, 9% in a normal economy, and 13% in a booming economy. The probability of a boom is 15% while the probability of a normal economy is 75% and the chance of a recession is 10%. What is the expected rate of return on this stock?

The projected risk premium is defined as the sum of the expected return on a risky investment and the return on a risk-free investment.

Systematic risks are _____ events and unsystematic risks are _____ events.

Systematic risk is relevant to a well-diversified investor.

The true risk of any investment is the ________________.

We routinely assume that investors are risk-averse return-seekers; i.e., they like returns and dislike risk. If so, why do we contend that only systematic risk is important? (Alternatively, why is total risk not important to investors, in and of itself?)

The slope of the security market line is the ________________.

Which of the following is the best definition of principle of diversification?

Which of the following is the best definition of beta coefficient?

Total risk equals _________________.

What is the beta for the following portfolio?

What type of risk is exhibited in section A of the graph?

Adding some international securities into a portfolio of Canadian stocks helps reduce unsystematic risk in a portfolio.

Introduction to Corporate Finance

Financial Statements, Cash Flow, and Taxes

Working With Financial Statements

Long-Term Financial Planning and Corporate Growth

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Lessons From Capital Market History

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Dividend Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Enterprise Risk Management

Options and Corporate Securities

Behavioural Finance: Implications for Financial Management

Filters

Systematic risks are _ events and unsystematic risks are _ events.