Question 1

In a given portfolio, replacing an existing investment with a lower beta investment results in _____.

Accepted Answer

A)  an increase in the expected rate of rate return of the portfolio 
B)  a decrease in the actual rate of return of the portfolio 
C)  a decrease in the required rate of return of the portfolio 
D)  an increase in the systematic risk of the portfolio 
E)  the portfolio beta moving toward 1.0 
A)  an increase in the expected rate of rate return of the portfolio 
B)  a decrease in the actual rate of return of the portfolio 
C)  a decrease in the required rate of return of the portfolio 
D)  an increase in the systematic risk of the portfolio 
E)  the portfolio beta moving toward 1.0 C

Question 2

Short-term investments have higher maturity risks as compared to long-term investments.

Accepted Answer

A) True 
 B)False  False

Question 3

The probability distribution of the payoffs on an investment refers to a _____.

Accepted Answer

A)  listing of all payoffs and then determining the chance that each payoff will occur 
B)  measure of the tightness, or variability, of a set of payoffs 
C)  standardized measure of the risk per payoff 
D)  listing of the degree of relationship between two payoffs 
E)  measure of the extent to which the payoffs move with the capital market 
A)  listing of all payoffs and then determining the chance that each payoff will occur 
B)  measure of the tightness, or variability, of a set of payoffs 
C)  standardized measure of the risk per payoff 
D)  listing of the degree of relationship between two payoffs 
E)  measure of the extent to which the payoffs move with the capital market A

Question 4

A portfolio is made up of Stocks A, B, C, and D in the proportion of 20%, 30%, 25%, and 25% respectively. The nondiversifiable risks of the stocks as measured by their betas are 0.4, 1.2, 2.5, and 1.75 for Stock A, B, C, and D respectively. The expected returns of the stocks are 12%, 24%, 30%, and 28% respectively. Measure the beta of the portfolio.

Accepted Answer

A)  1.8 
B)  1.9 
C)  1.5 
D)  1.4 
E)  1.3 
A)  1.8 
B)  1.9 
C)  1.5 
D)  1.4 
E)  1.3

Question 5

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 irrelevant risk.

Accepted Answer

A) True 
 B)False

Question 6

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)  Market risk is not rewarded with additional returns, whereas firm-specific risk is rewarded with additional returns. 
C)  Market risk is a diversifiable risk, whereas firm-specific risk is a nondiversifiable risk. 
D)  Market risk is a relevant risk, whereas firm-specific risk is an irrelevant risk. 
E)  Market risk includes default risk, whereas firm-specific risk includes maturity risk. 
A)  Market risk is an unsystematic risk, whereas firm-specific risk is systematic risk. 
B)  Market risk is not rewarded with additional returns, whereas firm-specific risk is rewarded with additional returns. 
C)  Market risk is a diversifiable risk, whereas firm-specific risk is a nondiversifiable risk. 
D)  Market risk is a relevant risk, whereas firm-specific risk is an irrelevant risk. 
E)  Market risk includes default risk, whereas firm-specific risk includes maturity risk.

Question 7

Other things held constant, if the investors become less risk averse, the new security market line (SML) would _____.

Accepted Answer

A)  not be affected 
B)  shift down 
C)  shift up 
D)  have a steeper slope 
E)  have a less steep slope 
A)  not be affected 
B)  shift down 
C)  shift up 
D)  have a steeper slope 
E)  have a less steep slope

Question 8

A stock has a beta coefficient, β, equal to 1.20.The risk premium associated with the market is 9 percent, and the risk-free rate is 5 percent. Application of the capital asset pricing model indicates that the stock's appropriate return should be _____.

Accepted Answer

A)  9.8% 
B)  5.2% 
C)  12.5% 
D)  15.8% 
E)  17.2% 
A)  9.8% 
B)  5.2% 
C)  12.5% 
D)  15.8% 
E)  17.2%

Question 9

The risk-free rate of return is 4%, and the market return is 10%. The betas of Stocks A, B, C, D, and E are 0.85, 0.75, 1.20, 1.35, and 0.5 respectively. The expected rates of return for Stocks A, B, C, D, and E are 7%, 9%, 9.5%, 12.1%, and 14% respectively. Which of the above stocks would an investor be indifferent towards buying or selling?

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  D 
E)  E 
A)  A 
B)  B 
C)  C 
D)  D 
E)  E

Question 10

The standard deviation of the returns of Stock A is 45.85%, and the standard deviation of the returns of Stock B is 52.7%. Which of the following statements about the stocks is correct?

Accepted Answer

A)  Stock A has less tight probability distribution, and hence lower total risk. 
B)  Stock A has tighter probability distribution, and hence lower total risk. 
C)  Stock B has less tight probability distribution, and hence lower total risk. 
D)  Stock B has tighter probability distribution, and hence lower total risk. 
E)  Stock B has lower risk, but nothing can be said about the probability distribution. 
A)  Stock A has less tight probability distribution, and hence lower total risk. 
B)  Stock A has tighter probability distribution, and hence lower total risk. 
C)  Stock B has less tight probability distribution, and hence lower total risk. 
D)  Stock B has tighter probability distribution, and hence lower total risk. 
E)  Stock B has lower risk, but nothing can be said about the probability distribution.

Question 11

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

Accepted Answer

A)  are negatively related 
B)  are positively related 
C)  are not related 
D)  have a negative coefficient of variation 
E)  have a positive coefficient of variation 
A)  are negatively related 
B)  are positively related 
C)  are not related 
D)  have a negative coefficient of variation 
E)  have a positive coefficient of variation

Question 12

That part of a security's risk associated with random outcomes generated by events or behaviors, specific to the firm is also known as the _____.

Accepted Answer

A)  nondiversifiable risk 
B)  unsystematic risk 
C)  market risk 
D)  systematic risk 
E)  relevant risk 
A)  nondiversifiable risk 
B)  unsystematic risk 
C)  market risk 
D)  systematic risk 
E)  relevant risk

Question 13

Which of the following statements about beta is correct?

Accepted Answer

A)  Firms with greater systematic risk volatilities than the market have betas that are less than 1.0, and firms with smaller systematic risk volatilities than the market have betas that are greater than 1.0. 
B)  Firms with greater systematic risk volatilities than the market have betas that are greater than 1.0, and firms with smaller systematic risk volatilities than the market have betas that are less than 1.0. 
C)  Firms with greater systematic risk volatilities than the market have betas that are less than zero, and firms with smaller systematic risk volatilities than the market have betas that are greater than zero. 
D)  Firms with greater unsystematic risk volatilities than the market have betas that are less than 1.0, and firms with smaller unsystematic risk volatilities than the market have betas that are greater than 1.0. 
E)  Firms with greater unsystematic risk volatilities than the market have betas that are greater than 1.0, and firms with smaller unsystematic risk volatilities than the market have betas that are less than 1.0. 
A)  Firms with greater systematic risk volatilities than the market have betas that are less than 1.0, and firms with smaller systematic risk volatilities than the market have betas that are greater than 1.0. 
B)  Firms with greater systematic risk volatilities than the market have betas that are greater than 1.0, and firms with smaller systematic risk volatilities than the market have betas that are less than 1.0. 
C)  Firms with greater systematic risk volatilities than the market have betas that are less than zero, and firms with smaller systematic risk volatilities than the market have betas that are greater than zero. 
D)  Firms with greater unsystematic risk volatilities than the market have betas that are less than 1.0, and firms with smaller unsystematic risk volatilities than the market have betas that are greater than 1.0. 
E)  Firms with greater unsystematic risk volatilities than the market have betas that are greater than 1.0, and firms with smaller unsystematic risk volatilities than the market have betas that are less than 1.0.

Question 14

The total risk associated with an investment can be divided into _____.

Accepted Answer

A)  systematic and nondiversifiable risk 
B)  firm-specific and unsystematic risk 
C)  market and firm specific risk 
D)  market and nondiversifiable risk 
E)  firm-specific and diversifiable risk 
A)  systematic and nondiversifiable risk 
B)  firm-specific and unsystematic risk 
C)  market and firm specific risk 
D)  market and nondiversifiable risk 
E)  firm-specific and diversifiable risk

Question 15

Systematic risk is diversifiable, so it is an investment's relevant risk. Unsystematic risk is nondiversifiable risk and therefore not relevant.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is the only risk that is relevant to a rational, diversified investor?

Accepted Answer

A)  Diversifiable risk 
B)  Stand-alone risk 
C)  Market risk 
D)  Unsystematic risk 
E)  Firm-specific risk 
A)  Diversifiable risk 
B)  Stand-alone risk 
C)  Market risk 
D)  Unsystematic risk 
E)  Firm-specific risk

Question 17

The risk-free rate is 5%, the market risk premium is 8%, and the market return is 13%. Stock Y's beta is 1.85 and the standard deviation of its returns is 62.5%. What should be the stock's expected rate of return to make the investor indifferent toward buying or selling the stock?

Accepted Answer

A)  11.66% 
B)  12.82% 
C)  15.54% 
D)  12.50% 
E)  19.80% 
A)  11.66% 
B)  12.82% 
C)  15.54% 
D)  12.50% 
E)  19.80%

Question 18

A measure of the tightness, or variability, of a set of returns of an investment is known as the _____.

Accepted Answer

A)  correlation coefficient of the investment 
B)  standard deviation of the returns of the investment 
C)  beta of the investment 
D)  coefficient of variation of the investment 
E)  probability distribution of the returns of the investment 
A)  correlation coefficient of the investment 
B)  standard deviation of the returns of the investment 
C)  beta of the investment 
D)  coefficient of variation of the investment 
E)  probability distribution of the returns of the investment

Question 19

The Security Market Line (SML) relates risk 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 would increase. 
B)  The beta of the stock would increase. 
C)  The slope of the SML would become steeper. 
D)  The standard deviation of the stock would increase. 
E)  The required return of an average stock would increase. 
A)  The market risk premium would increase. 
B)  The beta of the stock would increase. 
C)  The slope of the SML would become steeper. 
D)  The standard deviation of the stock would increase. 
E)  The required return of an average stock would increase.

Question 20

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. In order 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?

Accepted Answer

A)  1.6 
B)  1.8 
C)  1.9 
D)  2.0 
E)  2.1 
A)  1.6 
B)  1.8 
C)  1.9 
D)  2.0 
E)  2.1

In a given portfolio, replacing an existing investment with a lower beta investment results in _____.

Short-term investments have higher maturity risks as compared to long-term investments.

The probability distribution of the payoffs on an investment refers to a _____.

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 irrelevant risk.

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

Other things held constant, if the investors become less risk averse, the new security market line (SML) would _____.

A stock has a beta coefficient, β, equal to 1.20.The risk premium associated with the market is 9 percent, and the risk-free rate is 5 percent. Application of the capital asset pricing model indicates that the stock's appropriate return should be _____.

The standard deviation of the returns of Stock A is 45.85%, and the standard deviation of the returns of Stock B is 52.7%. Which of the following statements about the stocks is correct?

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

That part of a security's risk associated with random outcomes generated by events or behaviors, specific to the firm is also known as the _____.

Which of the following statements about beta is correct?

The total risk associated with an investment can be divided into _____.

Systematic risk is diversifiable, so it is an investment's relevant risk. Unsystematic risk is nondiversifiable risk and therefore not relevant.

Which of the following is the only risk that is relevant to a rational, diversified investor?

The risk-free rate is 5%, the market risk premium is 8%, and the market return is 13%. Stock Y's beta is 1.85 and the standard deviation of its returns is 62.5%. What should be the stock's expected rate of return to make the investor indifferent toward buying or selling the stock?

A measure of the tightness, or variability, of a set of returns of an investment is known as the _____.

The Security Market Line (SML) relates risk 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?

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 Debtcharacteristics 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

In a given portfolio, replacing an existing investment with a lower beta investment results in _____.

Short-term investments have higher maturity risks as compared to long-term investments.

The probability distribution of the payoffs on an investment refers to a _____.

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 irrelevant risk.

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

Other things held constant, if the investors become less risk averse, the new security market line (SML) would _____.

A stock has a beta coefficient, β, equal to 1.20.The risk premium associated with the market is 9 percent, and the risk-free rate is 5 percent. Application of the capital asset pricing model indicates that the stock's appropriate return should be _____.

The standard deviation of the returns of Stock A is 45.85%, and the standard deviation of the returns of Stock B is 52.7%. Which of the following statements about the stocks is correct?

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

That part of a security's risk associated with random outcomes generated by events or behaviors, specific to the firm is also known as the _____.

Which of the following statements about beta is correct?

The total risk associated with an investment can be divided into _____.

Systematic risk is diversifiable, so it is an investment's relevant risk. Unsystematic risk is nondiversifiable risk and therefore not relevant.

Which of the following is the only risk that is relevant to a rational, diversified investor?

The risk-free rate is 5%, the market risk premium is 8%, and the market return is 13%. Stock Y's beta is 1.85 and the standard deviation of its returns is 62.5%. What should be the stock's expected rate of return to make the investor indifferent toward buying or selling the stock?

A measure of the tightness, or variability, of a set of returns of an investment is known as the _____.

The Security Market Line (SML) relates risk 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?

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 Debtcharacteristics 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