Question 1

Of the following,which differs in meaning from the other three?

Accepted Answer

A)  Systematic Risk 
B)  Market Risk 
C)  Undiversifiable Risk 
D)  Asset-unique Risk 
A)  Systematic Risk 
B)  Market Risk 
C)  Undiversifiable Risk 
D)  Asset-unique Risk

Question 2

Beta is a measurement of the relationship between a security's returns and the general market's returns.

Accepted Answer

A) True 
 B)False

Question 3

Stock A has a beta of 1.2 and a standard deviation of returns of 18%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the market risk premium increases,then

Accepted Answer

A)  the required return on stock B will increase more than the required return on stock A. 
B)  the required returns on stocks A and B will both increase by the same amount. 
C)  the required returns on stocks A and B will remain the same. 
D)  the required return on stock A will increase more than the required return on stock B. 
A)  the required return on stock B will increase more than the required return on stock A. 
B)  the required returns on stocks A and B will both increase by the same amount. 
C)  the required returns on stocks A and B will remain the same. 
D)  the required return on stock A will increase more than the required return on stock B.

Question 4

Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.

Accepted Answer

A) True 
 B)False

Question 5

Based on the security market line,Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%.Robo-Tech has a standard deviation of returns of 18%.Therefore

Accepted Answer

A)  Friendly must have a standard deviation of returns of less than 18% because Friendly is less risky than Robo-Tech. 
B)  all rational investors will prefer Friendly over Robo-Tech. 
C)  for a well-diversified investor, Friendly is less risky than Robo-Tech. 
D)  the beta for Friendly must be greater than the beta for Robo-Tech because Friendly is the better buy for a risk-averse investor. 
A)  Friendly must have a standard deviation of returns of less than 18% because Friendly is less risky than Robo-Tech. 
B)  all rational investors will prefer Friendly over Robo-Tech. 
C)  for a well-diversified investor, Friendly is less risky than Robo-Tech. 
D)  the beta for Friendly must be greater than the beta for Robo-Tech because Friendly is the better buy for a risk-averse investor.

Question 6

You determine that XYZ common stock has an expected return of 24%.XYZ 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?

Accepted Answer

A)  You and other investors will buy up XYZ stock and its price will rise. 
B)  You and other investors will sell XYZ stock and its return will fall. 
C)  You and other investors will buy up XYZ stock and its return will rise. 
D)  You and other investors will sell XYZ stock and its price will fall. 
A)  You and other investors will buy up XYZ stock and its price will rise. 
B)  You and other investors will sell XYZ stock and its return will fall. 
C)  You and other investors will buy up XYZ stock and its return will rise. 
D)  You and other investors will sell XYZ stock and its price will fall.

Question 7

As the required rate of return of an investment decreases,the market price of the investment decreases.

Accepted Answer

A) True 
 B)False

Question 8

Hole Con Shooz,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 5%,while Ed Allenmunds Shooz,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 15%.Which of the following is true?

Accepted Answer

A)  Ed Allenmunds' investors are not being adequately compensated for relevant risk. 
B)  Hole Con is likely to experience returns larger than those of Ed Allenmunds. 
C)  Ed Allenmunds is more likely to have negative returns than Hole Con. 
D)  Rational investors will prefer Ed Allenmunds, Inc. over Hole Con Shooz, Inc. 
A)  Ed Allenmunds' investors are not being adequately compensated for relevant risk. 
B)  Hole Con is likely to experience returns larger than those of Ed Allenmunds. 
C)  Ed Allenmunds is more likely to have negative returns than Hole Con. 
D)  Rational investors will prefer Ed Allenmunds, Inc. over Hole Con Shooz, Inc.

Question 9

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

Accepted Answer

A) True 
 B)False

Question 10

Collectibles Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk free rate is 4%.According to CAPM,what is the required rate of return on Collectible's stock?

Accepted Answer

A)  37.5% 
B)  31.5% 
C)  26.5% 
D)  23.5% 
A)  37.5% 
B)  31.5% 
C)  26.5% 
D)  23.5%

Question 11

In general,the required rate of return is a function of (1)the time value of money,(2)the risk of an asset,and (3)the investor's attitude toward risk.

Accepted Answer

A) True 
 B)False

Question 12

Historically,investments with the highest returns have the lowest standard deviations because investors do not like risk.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is most correct concerning diversification and risk?

Accepted Answer

A)  Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio. 
B)  Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category. 
C)  Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated. 
D)  Asset allocation is important for pension funds but not for individual investors. 
A)  Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio. 
B)  Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category. 
C)  Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated. 
D)  Asset allocation is important for pension funds but not for individual investors.

Question 14

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?

Accepted Answer

a.Stock A: 3% + (12% - 3%)(1.8)= 19.2%
S

Question 15

The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the

Accepted Answer

A)  stock's beta. 
B)  investor's risk premium. 
C)  investor's required rate of return. 
D)  risk-free rate. 
A)  stock's beta. 
B)  investor's risk premium. 
C)  investor's required rate of return. 
D)  risk-free rate.

Question 16

An investor currently holds the following portfolio:
  The beta for the portfolio is

Accepted Answer

A)  1.99. 
B)  1.77. 
C)  1.45. 
D)  1.27. 
A)  1.99. 
B)  1.77. 
C)  1.45. 
D)  1.27.

Question 17

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

Accepted Answer

A) True 
 B)False

Question 18

If you hold a portfolio made up of the following stocks:
  What is the beta of the portfolio?

Accepted Answer

A)  1.33 
B)  1.24 
C)  1.15 
D)  1.00 
A)  1.33 
B)  1.24 
C)  1.15 
D)  1.00

Question 19

The capital asset pricing model

Accepted Answer

A)  provides a risk-return trade off in which risk is measured in terms of the market volatility. 
B)  provides a risk-return trade off in which risk is measured in terms of beta. 
C)  measures risk as the coefficient of variation between security and market rates of return. 
D)  depicts the total risk of a security. 
A)  provides a risk-return trade off in which risk is measured in terms of the market volatility. 
B)  provides a risk-return trade off in which risk is measured in terms of beta. 
C)  measures risk as the coefficient of variation between security and market rates of return. 
D)  depicts the total risk of a security.

Question 20

If the Beta for stock A equals zero,then

Accepted Answer

A)  stock A's required return is equal to the required return on the market portfolio. 
B)  stock A's required return is equal to the risk-free rate of return. 
C)  stock A has a guaranteed return. 
D)  stock A's required return is greater than the required return on the market portfolio. 
A)  stock A's required return is equal to the required return on the market portfolio. 
B)  stock A's required return is equal to the risk-free rate of return. 
C)  stock A has a guaranteed return. 
D)  stock A's required return is greater than the required return on the market portfolio.

Of the following,which differs in meaning from the other three?

Beta is a measurement of the relationship between a security's returns and the general market's returns.

Stock A has a beta of 1.2 and a standard deviation of returns of 18%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the market risk premium increases,then

Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.

Based on the security market line,Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%.Robo-Tech has a standard deviation of returns of 18%.Therefore

You determine that XYZ common stock has an expected return of 24%.XYZ 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?

As the required rate of return of an investment decreases,the market price of the investment decreases.

Hole Con Shooz,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 5%,while Ed Allenmunds Shooz,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 15%.Which of the following is true?

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

Collectibles Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk free rate is 4%.According to CAPM,what is the required rate of return on Collectible's stock?

In general,the required rate of return is a function of (1)the time value of money,(2)the risk of an asset,and (3)the investor's attitude toward risk.

Historically,investments with the highest returns have the lowest standard deviations because investors do not like risk.

Which of the following statements is most correct concerning diversification and risk?

The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the

An investor currently holds the following portfolio: The beta for the portfolio is

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

If you hold a portfolio made up of the following stocks: What is the beta of the portfolio?

The capital asset pricing model

If the Beta for stock A equals zero,then

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

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Exam 6: The Meaning and Measurement of Risk and Return

Of the following,which differs in meaning from the other three?

Beta is a measurement of the relationship between a security's returns and the general market's returns.

Stock A has a beta of 1.2 and a standard deviation of returns of 18%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the market risk premium increases,then

Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.

Based on the security market line,Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%.Robo-Tech has a standard deviation of returns of 18%.Therefore

You determine that XYZ common stock has an expected return of 24%.XYZ 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?

As the required rate of return of an investment decreases,the market price of the investment decreases.

Hole Con Shooz,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 5%,while Ed Allenmunds Shooz,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 15%.Which of the following is true?

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

Collectibles Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk free rate is 4%.According to CAPM,what is the required rate of return on Collectible's stock?

In general,the required rate of return is a function of (1)the time value of money,(2)the risk of an asset,and (3)the investor's attitude toward risk.

Historically,investments with the highest returns have the lowest standard deviations because investors do not like risk.

Which of the following statements is most correct concerning diversification and risk?

The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the

An investor currently holds the following portfolio: The beta for the portfolio is

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

If you hold a portfolio made up of the following stocks: What is the beta of the portfolio?

The capital asset pricing model

If the Beta for stock A equals zero,then

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

Filters