Question 1

The portion of an asset's risk that is attributable to firm-specific, random causes is called

Accepted Answer

A)  unsystematic risk. 
B)  nondiversifiable risk. 
C)  systematic risk. 
D)  none of the above. 
A)  unsystematic risk. 
B)  nondiversifiable risk. 
C)  systematic risk. 
D)  none of the above.

Question 2

Market risk is the chance that the value of an investment will decline because of market factors (such as economic, political, and social events) that are independent of the investment.

Accepted Answer

A) True 
 B)False

Question 3

The empirical measurement of beta can be approached by using least-squares regression analysis to find the regression coefficient (bj) in the equation for the slope of the "characteristic line."

Accepted Answer

A) True 
 B)False

Question 4

An abnormal probability distribution is a symmetrical distribution whose shape resembles a bell-shaped curve.

Accepted Answer

A) True 
 B)False

Question 5

The risk of a portfolio containing international stocks generally does not contain less nondiversifiable risk than one that contains only American stocks.

Accepted Answer

A) True 
 B)False

Question 6

Financial risk is the chance that the firm will be unable to cover its operating costs and is affected by a firm's revenue stability and the structure of its operating costs (fixed vs. variable).

Accepted Answer

A) True 
 B)False

Question 7

Nico bought 100 shares of Cisco Systems stock for $24.00 per share on January 1, 2002. He received a dividend of $2.00 per share at the end of 2002 and $3.00 per share at the end of 2003. At the end of 2004, Nico collected a dividend of $4.00 per share and sold his stock for $18.00 per share. What was Nico's realized holding period return?

Accepted Answer

A)  -12.5% 
B)  +12.5% 
C)  -16.7% 
D)  +16.7% 
A)  -12.5% 
B)  +12.5% 
C)  -16.7% 
D)  +16.7%

Question 8

Because any investor can create a portfolio of assets that will eliminate all, or virtually all, nondiversifiable risk, the only relevant risk is diversifiable risk.

Accepted Answer

A) True 
 B)False

Question 9

The capital asset pricing model (CAPM) links together unsystematic risk and return for all assets.

Accepted Answer

A) True 
 B)False

Question 10

An increase in the Treasury Bill rate ________ the required rate of return of a common stock.

Accepted Answer

A)  has no effect on 
B)  increases 
C)  decreases 
D)  cannot be determined by 
A)  has no effect on 
B)  increases 
C)  decreases 
D)  cannot be determined by

Question 11

The standard deviation of a portfolio is a function only of the standard deviations of the individual securities in the portfolio and the proportion of the portfolio invested in those securities.

Accepted Answer

A) True 
 B)False

Question 12

Tangshan Antiques has a beta of 1.40, the annual risk-free rate of interest is currently 10 percent, and the required return on the market portfolio is 16 percent. The firm estimates that its future dividends will continue to increase at an annual compound rate consistent with that experienced over the 2000-2003 period.   (a) Estimate the value of Tangshan Antiques stock.
(b) A lawsuit has been filed against the company by a competitor, and the potential loss has increased risk, which is reflected in the company's beta, increasing it to 1.6. What is the estimated price of the stock following the filing of the lawsuit.

Accepted Answer

(a) r_s = 0.10 + 1.4(0.16 - 0.10) = 0.184

Question 13

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are each very risky assets.

Accepted Answer

A) True 
 B)False

Question 14

Table 8.1  
-The correlation of returns between Asset A and Asset B can be characterized as ________. (See Table 8.1)

Accepted Answer

A)  perfectly positively correlated 
B)  perfectly negatively correlated 
C)  uncorrelated 
D)  cannot be determined 
A)  perfectly positively correlated 
B)  perfectly negatively correlated 
C)  uncorrelated 
D)  cannot be determined

Question 15

Systematic risk is also referred to as

Accepted Answer

A)  diversifiable risk. 
B)  economic risk. 
C)  nondiversifiable risk. 
D)  not relevant. 
A)  diversifiable risk. 
B)  economic risk. 
C)  nondiversifiable risk. 
D)  not relevant.

Question 16

Table 8.1  
-If you were to create a portfolio designed to reduce risk by investing equal proportions in each of two different assets, which portfolio would you recommend? (See Table 8.1)

Accepted Answer

A)  Assets A and B 
B)  Assets A and C 
C)  none of the available combinations 
D)  cannot be determined 
A)  Assets A and B 
B)  Assets A and C 
C)  none of the available combinations 
D)  cannot be determined

Question 17

A beta coefficient of 0 represents an asset that

Accepted Answer

A)  is more responsive than the market portfolio. 
B)  has the same response as the market portfolio. 
C)  is less responsive than the market portfolio. 
D)  is unrelated to the market portfolio. 
A)  is more responsive than the market portfolio. 
B)  has the same response as the market portfolio. 
C)  is less responsive than the market portfolio. 
D)  is unrelated to the market portfolio.

Question 18

Table 8.2
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows:  
-The beta of the portfolio in Table 8.2 indicates this portfolio

Accepted Answer

A)  has more risk than the market. 
B)  has less risk than the market. 
C)  has an undetermined amount of risk compared to the market. 
D)  has the same risk as the market. 
A)  has more risk than the market. 
B)  has less risk than the market. 
C)  has an undetermined amount of risk compared to the market. 
D)  has the same risk as the market.

Question 19

A portfolio of two negatively correlated assets has less risk than either of the individual assets.

Accepted Answer

A) True 
 B)False

Question 20

For the risk-averse manager, the required return decreases for an increase in risk.

Accepted Answer

A) True 
 B)False

The portion of an asset's risk that is attributable to firm-specific, random causes is called

Market risk is the chance that the value of an investment will decline because of market factors (such as economic, political, and social events) that are independent of the investment.

The empirical measurement of beta can be approached by using least-squares regression analysis to find the regression coefficient (bj) in the equation for the slope of the "characteristic line."

An abnormal probability distribution is a symmetrical distribution whose shape resembles a bell-shaped curve.

The risk of a portfolio containing international stocks generally does not contain less nondiversifiable risk than one that contains only American stocks.

Financial risk is the chance that the firm will be unable to cover its operating costs and is affected by a firm's revenue stability and the structure of its operating costs (fixed vs. variable).

Because any investor can create a portfolio of assets that will eliminate all, or virtually all, nondiversifiable risk, the only relevant risk is diversifiable risk.

The capital asset pricing model (CAPM) links together unsystematic risk and return for all assets.

An increase in the Treasury Bill rate ________ the required rate of return of a common stock.

The standard deviation of a portfolio is a function only of the standard deviations of the individual securities in the portfolio and the proportion of the portfolio invested in those securities.

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are each very risky assets.

Table 8.1 -The correlation of returns between Asset A and Asset B can be characterized as ________. (See Table 8.1)

Systematic risk is also referred to as

Table 8.1 -If you were to create a portfolio designed to reduce risk by investing equal proportions in each of two different assets, which portfolio would you recommend? (See Table 8.1)

A beta coefficient of 0 represents an asset that

Table 8.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: -The beta of the portfolio in Table 8.2 indicates this portfolio

A portfolio of two negatively correlated assets has less risk than either of the individual assets.

For the risk-averse manager, the required return decreases for an increase in risk.

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

The portion of an asset's risk that is attributable to firm-specific, random causes is called

Market risk is the chance that the value of an investment will decline because of market factors (such as economic, political, and social events) that are independent of the investment.

The empirical measurement of beta can be approached by using least-squares regression analysis to find the regression coefficient (bj) in the equation for the slope of the "characteristic line."

An abnormal probability distribution is a symmetrical distribution whose shape resembles a bell-shaped curve.

The risk of a portfolio containing international stocks generally does not contain less nondiversifiable risk than one that contains only American stocks.

Financial risk is the chance that the firm will be unable to cover its operating costs and is affected by a firm's revenue stability and the structure of its operating costs (fixed vs. variable).

Because any investor can create a portfolio of assets that will eliminate all, or virtually all, nondiversifiable risk, the only relevant risk is diversifiable risk.

The capital asset pricing model (CAPM) links together unsystematic risk and return for all assets.

An increase in the Treasury Bill rate ________ the required rate of return of a common stock.

The standard deviation of a portfolio is a function only of the standard deviations of the individual securities in the portfolio and the proportion of the portfolio invested in those securities.

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are each very risky assets.

Table 8.1 -The correlation of returns between Asset A and Asset B can be characterized as ________. (See Table 8.1)

Systematic risk is also referred to as

Table 8.1 -If you were to create a portfolio designed to reduce risk by investing equal proportions in each of two different assets, which portfolio would you recommend? (See Table 8.1)

A beta coefficient of 0 represents an asset that

Table 8.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: -The beta of the portfolio in Table 8.2 indicates this portfolio

A portfolio of two negatively correlated assets has less risk than either of the individual assets.

For the risk-averse manager, the required return decreases for an increase in risk.

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