Exam 6: The Meaning and Measurement of Risk and Return

You are considering buying some stock in Continental Grain.Which of the following are examples of non-diversifiable risks? I.Risk resulting from a general decline in the stock market. II.Risk resulting from a possible increase in income taxes. III.Risk resulting from an explosion in a grain elevator owned by Continental. IV.Risk resulting from a pending lawsuit against Continental.

The CAPM designates the risk-return trade-off existing in the market,where risk is defined in terms of beta.

Beta represents the average movement of a company's stock returns in response to a movement in the market's returns.

What are the two components of the investor's required rate of return?

The market rewards the patient investor,for between 1926 and 2008,there has never been a time when an investor lost money if she held an all-stock portfolio for ten years.

The category of securities with the highest historical risk premium is

A stock's beta is a measure of its

What is diversifying among different kinds of assets known as?

Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds.

You determine that LMN common stock has an expected return of 24%.LMN has a Beta of 1.5.The risk-free rate is 5%,and the market expected return is 15%.Which of the following is most likely to happen?

Answer the questions below using the following information on stocks A,B,and C. Assume the risk-free rate of return is 3% and the expected market return is 12% a.Calculate the required return for stocks A,B,and C. b.Assuming an investor with a well-diversified portfolio,which stock would the investor want to add to his portfolio? c.Assuming an investor who will invest all of his money into one security,which stock will the investor choose?

You must add one of two investments to an already well- diversified portfolio. If you are a risk-averse investor,which one is the better choice?

Assume that an investment is forecasted to produce the following returns: a 30% probability of a 12% return; a 50% probability of a 16% return; and a 20% probability of a 19% return.What is the expected percentage return this investment will produce?

According to the CAPM,for each unit of beta,an asset's required rate of return increases by the market's return.

The return on the market portfolio is currently 12%.Mobile Phone Corporation stockholders require a rate of return of 30% and the stock has a beta of 3.2.According to CAPM,determine the risk-free rate.

The relevant risk to an investor is that portion of the variability of returns that cannot be diversified away.

The beta of a T-bill is zero.

Which of the following investments is clearly preferred to the others for a risk-averse investor?

The capital asset pricing model

Discuss whether the standard deviation of a portfolio is,or is not,a weighted average of the standard deviations of the assets in the portfolio.Fully explain your answer.