Exam 8: Risk and Rates of Return

Other things held constant, if the expected inflation rate decreases at the same time investors become more risk averse, the Security Market Line (SML) would shift _____. 

Which of the following statements about the various kinds of risks is correct?

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

A stock's beta coefficient measures the tendency of its returns to move with the returns on the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta greater than 1.0. 

Which of the following is the only risk that is relevant to a rational, diversified investor, because it cannot be eliminated or reduced through diversification?

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

The standard deviation of the returns of Stock A is 45.9 percent, and the standard deviation of the returns of Stock B is 52.7 percent. Which of the following statements about the stocks is correct?

According to the capital asset pricing model (CAPM), _____. 

Darren has the option of investing in either Stock A or Stock B. There is a 45 percent chance that the return on Stock A will be 25 percent, a 25 percent chance it will be 14 percent, and a 30 percent chance it will be 4 percent. There is a 45 percent chance that the return on Stock B will be 30 percent, a 25 percent chance it will be 9 percent, and a 30 percent chance it will be2 percent. What is the expected rates of return on Stock A and Stock B?

The risk-free rate of return is 5 percent, and the market return is 8 percent. The betas of Stocks A, B, C, D, and E are 0.75, 0.50, 0.25, 1.50, and 1.25, respectively. The expected rates of return for Stocks A, B, C, D, and E are 8 percent, 6.5 percent, 7 percent, 11 percent, and 7 percent, respectively. Suppose an investor holds all of these stocks in a single portfolio. Based on the information given here, if the investor wants to sell one of the stocks so that only four stocks remain in the portfolio, which stock should be sold?

The risk that is limited to a particular firm is also known as _____. 

Which of the following statements about the security market line (SML) and investor's risk aversion is correct?

The beta of Stock A is 2.1. The risk-free rate is 6 percent, and the market return is 13 percent. The expected rate of return of Stock A is 15.5 percent. Based on the above information, which of the following statements is true?

Which of the following statements about relevant risk and irrelevant risk is correct?

Which of the following statements about beta is correct?

If the standard deviation of returns from an investment is zero, then:

The standard deviation is calculated as the weighted average of all the deviations of possible returns from the expected value, and it indicates how far above or below the expected value the actual value is expected to be. 

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

An investment's possible payoffs are −10 percent, 10 percent, and 30 percent. The probabilities that these payoffs will occur are 0.30, 0.40, and 0.30, respectively. What is the expected rate of return on the investment?

Combining two stocks to form a portfolio offers maximum diversification benefits when _____.