Question 1

For Investment A, the probability of the return being 20 percent is 0.5, 10 percent is 0.4, and -10 percent is 0.1. Compute the standard deviation for the investment with the given information.

Accepted Answer

A)  85.0%
B)  15.0%
C)  34.0%
D)  17.0%
E)  9.0%F) A) and B)
G) A) and C)

Question 2

The Security Market Line (SML)  relates the risks of individual securities to their required rate of return. If investors conclude that the inflation rate is going to increase, which of the following change would occur?

Accepted Answer

A)  The market risk premium will increase.
B)  The beta of a stock will increase.
C)  The slope of the SML will become steeper.
D)  The standard deviation of a stock will increase.
E)  The required returns on all stocks will increase.F) B) and E)
G) A) and B)

Question 3

Diversifiable risk includes _____.

Accepted Answer

A)  reinvestment rate risk
B)  economic risk
C)  business risk
D)  political risk
E)  interest rate riskF) A) and D)
G) A) and E)

Question 4

A stock might be quite risky if held by itself, but if much of this total (stand-alone) risk can be eliminated through diversification, then its relevant risk-that is, its contribution to the portfolio's risk-is much smaller than its total risk.

Accepted Answer

A) True 
 B)False

Question 5

Risk refers to the chance that no unfavorable event will occur.

Accepted Answer

A) True 
 B)False

Question 6

The greater the variability of the possible returns on an investment, _____.

Accepted Answer

A)  the lesser the expected return
B)  the lower the standard deviation of the investment
C)  the higher the actual return on the investment
D)  the riskier the investment
E)  the lower the beta of the investmentF) A) and E)
G) C) and E)

Question 7

The beta coefficient of Zed Corporation is equal to 0.7 and the required rate of return on the stock equals 12 percent. If the expected return on the market is 12.5 percent, what is the risk-free rate of return?

Accepted Answer

A)  11.56%
B)  10.83%
C)  9.52%
D)  12.25%
E)  8.89%F) C) and D)
G) A) and B)

Question 8

A firm can affect its beta risk by changing the composition of its assets and by modifying its use of debt financing, but external factors do not have any bearing on a firm's beta.

Accepted Answer

A) True 
 B)False

Question 9

If the risk-free rate is 7 percent, the expected return on the market is 10 percent, and the expected return on Security J is 13 percent, what is the beta of Security J?

Accepted Answer

A)  1.0
B)  1.5
C)  2.0
D)  2.5
E)  3.0F) C) and E)
G) A) and B)

Question 10

Which of the following pairs of terms are names for the same risk?

Accepted Answer

A)  Market risk and unsystematic risk
B)  Market risk and relevant risk
C)  Firm-specific risk and nondiversifiable risk
D)  Firm-specific risk and systematic risk
E)  Firm-specific risk and market riskF) A) and B)
G) A) and C)

Question 11

Stock A has a beta coefficient (β)  equal to 2.1, and Stock B has a beta coefficient (β)  equal to 0.7. According to the capital asset pricing model (CAPM) , which of the following statements is correct?

Accepted Answer

A)  The required rate of return for Stock A, rA, should be 2.1 times the required rate of return for Stock B, rB.
B)  The risk premium associated with Stock A, RPA, should be 2.1 times the risk premium associated with Stock B, RPB.
C)  The required rate of return for Stock A, rA, should be three times the required rate of return for Stock B, rB.
D)  The risk premium associated with Stock A, RPA, should be three times the risk premium associated with Stock B, RPB.
E)  The required rate of return for Stock A, rA, should be three times the risk premium associated with Stock A, RPA.F) C) and D)
G) B) and E)

Question 12

The market portfolio contains only unsystematic risk, therefore the market risk premium represents the return that investors require to be compensated for taking an average amount of relevant, or unsystematic, risk.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements about the risk-return relationship observed in investing is correct?

Accepted Answer

A)  An increase in the expected inflation rate would lead to an increase in the required return on all the risky assets by the same amount, assuming all other things were held constant.
B)  A graph of the SML shows required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
C)  If investors' risk attitudes change, the required rates of return on low-beta stocks will be impacted more than the required rates of return on high-beta stocks.
D)  If investors became more averse to risk, then the slope of the SML would become less steep.
E)  The market risk premium is lower for high-beta stocks than it is for low-beta stocks.F) C) and D)
G) B) and C)

Question 14

Two stocks can be combined to form a portfolio that is risk free (i.e., has no risk) if the stocks are perfectly negatively correlated (r = −1.0) with each other.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements about market risk and firm-specific risk is true?

Accepted Answer

A)  Market risk is an unsystematic risk, whereas firm-specific risk is systematic risk.
B)  Investors are not rewarded for taking market risk, whereas they are rewarded for taking firm-specific risk.
C)  Market risk is a diversifiable risk, whereas firm-specific risk is a nondiversifiable risk.
D)  Market risk is the relevant risk, whereas firm-specific risk is an irrelevant risk.
E)  Market risk includes a firm's default risk, whereas firm-specific risk includes economic risk.F) None of the above
G) A) and D)

Question 16

A probability distribution consists of a listing of all possible outcomes, or events, with the chance of occurrence assigned to each.

Accepted Answer

A) True 
 B)False

Question 17

Economic risk is an unsystematic risk that can be diversified by the investors.

Accepted Answer

A) True 
 B)False

Exam 8: Risk and Rates of Return

Risk refers to the chance that no unfavorable event will occur.

Correct Answer
verified

For Investment A, the probability of the return being 20 percent is 0.5, 10 percent is 0.4, and -10 percent is 0.1. Compute the standard deviation for the investment with the given information.

Correct Answer
verified

Which of the following pairs of terms are names for the same risk?

Correct Answer
verified

Which of the following statements about market risk and firm-specific risk is true?

Correct Answer
verified

A stock might be quite risky if held by itself, but if much of this total (stand-alone) risk can be eliminated through diversification, then its relevant risk-that is, its contribution to the portfolio's risk-is much smaller than its total risk.

Correct Answer
verified

A probability distribution consists of a listing of all possible outcomes, or events, with the chance of occurrence assigned to each.

Correct Answer
verified

The Security Market Line (SML) relates the risks of individual securities to their required rate of return. If investors conclude that the inflation rate is going to increase, which of the following change would occur?

Correct Answer
verified

Two stocks can be combined to form a portfolio that is risk free (i.e., has no risk) if the stocks are perfectly negatively correlated (r = −1.0) with each other.

Correct Answer
verified

The greater the variability of the possible returns on an investment, _____.

Correct Answer
verified

The beta coefficient of Zed Corporation is equal to 0.7 and the required rate of return on the stock equals 12 percent. If the expected return on the market is 12.5 percent, what is the risk-free rate of return?

Correct Answer
verified

If the risk-free rate is 7 percent, the expected return on the market is 10 percent, and the expected return on Security J is 13 percent, what is the beta of Security J?

Correct Answer
verified

Which of the following statements about the risk-return relationship observed in investing is correct?

Correct Answer
verified

Diversifiable risk includes _____.

Correct Answer
verified

Stock A has a beta coefficient (β) equal to 2.1, and Stock B has a beta coefficient (β) equal to 0.7. According to the capital asset pricing model (CAPM) , which of the following statements is correct?

Correct Answer
verified

A firm can affect its beta risk by changing the composition of its assets and by modifying its use of debt financing, but external factors do not have any bearing on a firm's beta.

Correct Answer
verified

The market portfolio contains only unsystematic risk, therefore the market risk premium represents the return that investors require to be compensated for taking an average amount of relevant, or unsystematic, risk.

Correct Answer
verified

Economic risk is an unsystematic risk that can be diversified by the investors.

Correct Answer
verified

Exam 8: Risk and Rates of Return

Risk refers to the chance that no unfavorable event will occur.

Correct AnswerverifiedShow Answer

For Investment A, the probability of the return being 20 percent is 0.5, 10 percent is 0.4, and -10 percent is 0.1. Compute the standard deviation for the investment with the given information.

Correct AnswerverifiedShow Answer

Which of the following pairs of terms are names for the same risk?

Correct AnswerverifiedShow Answer

Which of the following statements about market risk and firm-specific risk is true?

Correct AnswerverifiedShow Answer

A stock might be quite risky if held by itself, but if much of this total (stand-alone) risk can be eliminated through diversification, then its relevant risk-that is, its contribution to the portfolio's risk-is much smaller than its total risk.

Correct AnswerverifiedShow Answer

A probability distribution consists of a listing of all possible outcomes, or events, with the chance of occurrence assigned to each.

Correct AnswerverifiedShow Answer

The Security Market Line (SML) relates the risks of individual securities to their required rate of return. If investors conclude that the inflation rate is going to increase, which of the following change would occur?

Correct AnswerverifiedShow Answer

Two stocks can be combined to form a portfolio that is risk free (i.e., has no risk) if the stocks are perfectly negatively correlated (r = −1.0) with each other.

Correct AnswerverifiedShow Answer

The greater the variability of the possible returns on an investment, _____.

Correct AnswerverifiedShow Answer

The beta coefficient of Zed Corporation is equal to 0.7 and the required rate of return on the stock equals 12 percent. If the expected return on the market is 12.5 percent, what is the risk-free rate of return?

Correct AnswerverifiedShow Answer

If the risk-free rate is 7 percent, the expected return on the market is 10 percent, and the expected return on Security J is 13 percent, what is the beta of Security J?

Correct AnswerverifiedShow Answer

Which of the following statements about the risk-return relationship observed in investing is correct?

Correct AnswerverifiedShow Answer

Diversifiable risk includes _____.

Correct AnswerverifiedShow Answer

Stock A has a beta coefficient (β) equal to 2.1, and Stock B has a beta coefficient (β) equal to 0.7. According to the capital asset pricing model (CAPM) , which of the following statements is correct?

Correct AnswerverifiedShow Answer

A firm can affect its beta risk by changing the composition of its assets and by modifying its use of debt financing, but external factors do not have any bearing on a firm's beta.

Correct AnswerverifiedShow Answer

The market portfolio contains only unsystematic risk, therefore the market risk premium represents the return that investors require to be compensated for taking an average amount of relevant, or unsystematic, risk.

Correct AnswerverifiedShow Answer

Economic risk is an unsystematic risk that can be diversified by the investors.

Correct AnswerverifiedShow Answer

Correct Answer
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