New investments must be considered in light of their impact on the risk and return of the portfolio of assets because the risk of any single proposed asset investment is not independent of other assets. True False
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Risk that affects all firms is called ________.A.maturity riskB.reinvestment riskC.unsystematic riskD.nondiversifiable risk
The difference between the return on the market portfolio of assets and the riskdash-free rate of return represents the premium the investor must receive for taking the average amount of risk associated with holding the market portfolio of assets.TrueFalse
War, inflation, and the condition of the foreign markets are all examples of ________.A.internal riskB.unsystematic riskC.business specific riskD.nondiversifiable risk
Asset 1 has an expected return of 10% and a standard deviation of 20%. Asset 2 has an expected return of 15% and a standard deviation of 30%. The correlation between the two assets is 1.0. Portfolios of these two assets will have an expected return ________.A.below 10%B.between 10% and 15%C.above 15%D.between 0% and 15%
In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by ________.A.the level of the security market lineB.the slope of the security market lineC.the difference between the beta and the risk-free rateD.the risk-free rate
The security market line (SML) reflects the required return in the marketplace for each level of nondiversifiable risk (beta).TrueFalse
Unsystematic risk is the relevant portion of an asset”s risk attributable to market factors that affect all firms.TrueFalse
________ risk represents the portion of an asset”s risk that can be eliminated by combining assets with less than perfect positive correlation.A.SystematicB.MarketC.DiversifiableD.Economic
A beta coefficient of 0 represents an asset that ________.A.has the same expected return as the market portfolioB.has an expected return equal to the risk-free rateC.has an expected return greater than the market portfolioD.has returns that do not fluctuate at all
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.”TrueFalse
The ________ of a given outcome is its chance of occurring.A.dispersionB.standard deviationC.probabilityD.reliability
Asset 1 has an expected return of 10% and a standard deviation of 20%. Asset 2 has an expected return of 15% and a standard deviation of 30%. The correlation between the two assets is less than 1.0. You form a portfolio by investing half of your money in asset 1 and half in asset 2. Which of the following best describes the expected return and standard deviation of your portfolio?A.The expected return is 12.5% and the standard deviation is less than 25%.This is the correct answer.B.The expected return is 12.5% and the standard deviation is greater than 25%.C.The expected return is between 10% and 15% and the standard deviation is greater than 30%.D.The expected return is 12.5% and the standard deviation is 25%.
As randomly selected securities are combined to create a portfolio, the ________ risk of the portfolio decreases. The portion of the risk eliminated is ________ risk, while that remaining is ________ risk.A.total; nondiversifiable; diversifiableB.total; diversifiable; nondiversifiableC.relevant; irrelevant; totalD.diversifiable; nondiversifiable; total
A change in inflationary expectations resulting from events such as international trade embargoes or major changes in Federal Reserve policy will result in a shift in the SML.TrueFalse
A ________ is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.A.meanB.coefficient of variationThis is the correct answer.C.standard deviationD.chi square
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Risk aversion is the behavior exhibited by investors who require ________.A.an increase in return, for a given increase in risk.B.an increase in return, for a given decrease in riskC.no changes in return, for a given increase in riskD.decreases in return, for a given increase in risk
Table 8.1Expected Return (%)A- 6-7-8B- 8-7-6C- 6-7-8The portfolio with a standard deviation of zero ________. (See Table 8.1)A.is comprised of Assets A and BB.is comprised of Assets A and CC.is not possibleD.cannot be determined
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.TrueFalse
The lower the correlation between asset returns, the ________.A.lesser the potential diversification of riskB.greater the potential diversification of riskC.lower the potential profitD.lesser the assets have to be monitored
The return on an asset is the change in its value plus any cash distribution over a given period of time, expressed as a percentage of its ending value.TrueFalse
An approach for assessing risk that uses a number of possible return estimates to obtain a sense of the variability among outcomes is called scenario analysis.TrueFalse
The coefficient of variation is a measure of relative dispersion used in comparing the risks of assets with differing expected return.TrueFalse
The risk of a portfolio containing international stocks generally contains less nondiversifiable risk than one that contains only domestic stocks.TrueFalse
For normal probability distributions, 95 percent of the possible outcomes will lie between plus or minus±1 standard deviation from the expected return.TrueFalse
The beta of a portfolio ________.A.is the median of the range of B.is the product of the betas of the individual assets in the portfolioC.is the weighted average of the betas of the individual assets in the portfolioD.is the sum of the betas of all assets in the portfolio
The term “risk” is used interchangeably with “uncertainty” to refer to the unpredictability of returns associated with a given asset.TrueFalse
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