Question 1

A portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

Accepted Answer

A) True 
 B)False  True

Question 2

Greater the range of an asset, more the variability, or risk, the asset is said to possess.

Accepted Answer

A) True 
 B)False  True

Question 3

On average in U.S., during the past 75 years, the return on large-company stocks has exceeded the return on long-term corporate bonds.

Accepted Answer

A) True 
 B)False  True

Question 4

Perry purchased 100 shares of Ferro, Inc. common stock for $25 per share one year ago. During the year, Ferro, Inc. paid cash dividends of $2 per share. The stock is currently selling for $30 per share. If Perry sells all of his shares of Ferro, Inc. today, what rate of return would he realize?

Accepted Answer

Realized r

Question 5

An example of an external factor that affects a corporation's risk or beta, is ________.

Accepted Answer

A)  a change in the financing mix used 
B)  toxic spills used during takeovers 
C)  a change in the asset mix 
D)  a change in top management 
A)  a change in the financing mix used 
B)  toxic spills used during takeovers 
C)  a change in the asset mix 
D)  a change in top management

Question 6

Standard deviation measures the dispersion of an investment's return around the expected return.

Accepted Answer

A) True 
 B)False

Question 7

The CAPM uses standard deviation to relate an asset's risk relative to the market to the asset's required return.

Accepted Answer

A) True 
 B)False

Question 8

Table 8.3
Consider the following two securities X and Y.  
-Using the data from Table 8.3, what is the portfolio expected return and the portfolio beta if you invest 35 percent in X, 45 percent in Y, and 20 percent in the risk-free asset?

Accepted Answer

A)  12.5%, 0.975 
B)  12.5%, 1.975 
C)  15.0%, 0.975 
D)  15.0%, 1.975 
A)  12.5%, 0.975 
B)  12.5%, 1.975 
C)  15.0%, 0.975 
D)  15.0%, 1.975

Question 9

The standard deviation of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.

Accepted Answer

A) True 
 B)False

Question 10

An efficient portfolio is one that ________.

Accepted Answer

A)  guarantees a predetermined rate of return 
B)  maximizes return for a given level of risk 
C)  consists of a single asset, which gives maximum return 
D)  maximizes return at all risk levels 
A)  guarantees a predetermined rate of return 
B)  maximizes return for a given level of risk 
C)  consists of a single asset, which gives maximum return 
D)  maximizes return at all risk levels

Question 11

Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all of her investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will be ________.

Accepted Answer

A)  0.60 
B)  0.88 
C)  1.00 
D)  1.25 
A)  0.60 
B)  0.88 
C)  1.00 
D)  1.25

Question 12

The widely shared expectations of hard times ahead tend to cause investors to become less risk-averse.

Accepted Answer

A) True 
 B)False

Question 13

The purpose of adding an asset with a negative or low positive beta is to ________.

Accepted Answer

A)  reduce profit 
B)  reduce risk 
C)  increase profit 
D)  increase risk 
A)  reduce profit 
B)  reduce risk 
C)  increase profit 
D)  increase risk

Question 14

The goal of an efficient portfolio is to ________.

Accepted Answer

A)  achieve a predetermined rate of return for a given level of risk 
B)  maximize risk in order to maximize profit 
C)  minimize profit in order to minimize risk 
D)  minimize risk for a given level of return 
A)  achieve a predetermined rate of return for a given level of risk 
B)  maximize risk in order to maximize profit 
C)  minimize profit in order to minimize risk 
D)  minimize risk for a given level of return

Question 15

An increase in nondiversifiable risk would ________.

Accepted Answer

A)  cause an increase in the beta and would lower the required return 
B)  have no effect on the beta and would, therefore, cause no change in the required return 
C)  cause an increase in the beta and would increase the required return 
D)  cause a decrease in the beta and would, therefore, lower the required rate of return 
A)  cause an increase in the beta and would lower the required return 
B)  have no effect on the beta and would, therefore, cause no change in the required return 
C)  cause an increase in the beta and would increase the required return 
D)  cause a decrease in the beta and would, therefore, lower the required rate of return

Question 16

A given change in inflationary expectations will be fully reflected in a corresponding change in the returns of all assets and will be reflected graphically in a parallel shift of the SML.

Accepted Answer

A) True 
 B)False

Question 17

What is the expected risk-free rate of return if Asset X, with a beta of 1.5, has an expected return of 20 percent, and the expected market return is 15 percent?

Accepted Answer

A)  5.0% 
B)  7.5% 
C)  15.0% 
D)  22.5% 
A)  5.0% 
B)  7.5% 
C)  15.0% 
D)  22.5%

Question 18

A portfolio that combines two assets having perfectly positive correlation returns cannot reduce the portfolio's overall risk below the risk of the least risky asset.

Accepted Answer

A) True 
 B)False

Question 19

The CAPM can be divided into ________.

Accepted Answer

A)  risk-free rate and risk premium 
B)  risk premium and inflation rate 
C)  inflation rate and market rate 
D)  market rate and inflation premium 
A)  risk-free rate and risk premium 
B)  risk premium and inflation rate 
C)  inflation rate and market rate 
D)  market rate and inflation premium

Question 20

Perfectly ________ correlated series move exactly together and have a correlation coefficient of ________, while perfectly ________ correlated series move exactly in opposite directions and have a correlation coefficient of ________.

Accepted Answer

A)  negatively; -1; positively; +1 
B)  negatively; +1; positively; -1 
C)  positively; -1; negatively; +1 
D)  positively; +1; negatively; -1 
A)  negatively; -1; positively; +1 
B)  negatively; +1; positively; -1 
C)  positively; -1; negatively; +1 
D)  positively; +1; negatively; -1

A portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

Greater the range of an asset, more the variability, or risk, the asset is said to possess.

On average in U.S., during the past 75 years, the return on large-company stocks has exceeded the return on long-term corporate bonds.

Perry purchased 100 shares of Ferro, Inc. common stock for $25 per share one year ago. During the year, Ferro, Inc. paid cash dividends of $2 per share. The stock is currently selling for $30 per share. If Perry sells all of his shares of Ferro, Inc. today, what rate of return would he realize?

An example of an external factor that affects a corporation's risk or beta, is ________.

Standard deviation measures the dispersion of an investment's return around the expected return.

The CAPM uses standard deviation to relate an asset's risk relative to the market to the asset's required return.

Table 8.3 Consider the following two securities X and Y. -Using the data from Table 8.3, what is the portfolio expected return and the portfolio beta if you invest 35 percent in X, 45 percent in Y, and 20 percent in the risk-free asset?

The standard deviation of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.

An efficient portfolio is one that ________.

The widely shared expectations of hard times ahead tend to cause investors to become less risk-averse.

The purpose of adding an asset with a negative or low positive beta is to ________.

The goal of an efficient portfolio is to ________.

An increase in nondiversifiable risk would ________.

A given change in inflationary expectations will be fully reflected in a corresponding change in the returns of all assets and will be reflected graphically in a parallel shift of the SML.

What is the expected risk-free rate of return if Asset X, with a beta of 1.5, has an expected return of 20 percent, and the expected market return is 15 percent?

A portfolio that combines two assets having perfectly positive correlation returns cannot reduce the portfolio's overall risk below the risk of the least risky asset.

The CAPM can be divided into ________.

Perfectly correlated series move exactly together and have a correlation coefficient of , while perfectly correlated series move exactly in opposite directions and have a correlation coefficient of .

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

Exam 8: Risk and Return

A portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

Greater the range of an asset, more the variability, or risk, the asset is said to possess.

On average in U.S., during the past 75 years, the return on large-company stocks has exceeded the return on long-term corporate bonds.

Perry purchased 100 shares of Ferro, Inc. common stock for $25 per share one year ago. During the year, Ferro, Inc. paid cash dividends of $2 per share. The stock is currently selling for $30 per share. If Perry sells all of his shares of Ferro, Inc. today, what rate of return would he realize?

An example of an external factor that affects a corporation's risk or beta, is ________.

Standard deviation measures the dispersion of an investment's return around the expected return.

The CAPM uses standard deviation to relate an asset's risk relative to the market to the asset's required return.

Table 8.3 Consider the following two securities X and Y. -Using the data from Table 8.3, what is the portfolio expected return and the portfolio beta if you invest 35 percent in X, 45 percent in Y, and 20 percent in the risk-free asset?

The standard deviation of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.

An efficient portfolio is one that ________.

The widely shared expectations of hard times ahead tend to cause investors to become less risk-averse.

The purpose of adding an asset with a negative or low positive beta is to ________.

The goal of an efficient portfolio is to ________.

An increase in nondiversifiable risk would ________.

A given change in inflationary expectations will be fully reflected in a corresponding change in the returns of all assets and will be reflected graphically in a parallel shift of the SML.

What is the expected risk-free rate of return if Asset X, with a beta of 1.5, has an expected return of 20 percent, and the expected market return is 15 percent?

A portfolio that combines two assets having perfectly positive correlation returns cannot reduce the portfolio's overall risk below the risk of the least risky asset.

The CAPM can be divided into ________.

Perfectly ________ correlated series move exactly together and have a correlation coefficient of ________, while perfectly ________ correlated series move exactly in opposite directions and have a correlation coefficient of ________.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

Perfectly correlated series move exactly together and have a correlation coefficient of , while perfectly correlated series move exactly in opposite directions and have a correlation coefficient of .