FIN 313 - Ch. 6 Quiz

You are considering buying some stock in Colony Transport. Which of the following is an example of systematic or market risk?

Risk resulting from a general decline in the stock market.

You are considering investing in Disney. Which of the following is an example of diversifiable risk?

Risk resulting from uncertainty regarding a possible strike against Disney.

The beta of a stock is the slope of:

the line of best fit for a plot of the company's returns against the returns of the market portfolio for the same period.

Which of the following is NOT an example of market risk or systematic risk?

Management risk

The security market line (SML) relates risk to return, for a given set of market conditions. If you expect inflation to increase, which of the following would expect to occur all else being held constant?

The SML line would shift up but maintain the same slope.

The market risk premium is measured by:

market return less risk-free rate.

Stock A has the following returns for various states of the economy:

Stock A's expected return is

8.2%.

You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year. Historical data suggests the following probability distribution for your commission income. Which job has the higher expected income?

The salary of $50,000 is greater than the expected commission of $49,620.

Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio?

Investment B

Assume that you have $330,000 invested in a stock that is returning 11.50%, $170,000 invested in a stock that is returning 22.75%, and $470,000 invested in a stock that is returning 10.25%. What is the expected return of your portfolio?

12.9%

Rogue Recreation, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 5%, while Lake Tours, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 15%. Which of the following is true?

Lake Tours is more likely to have negative returns than Rogue Rec.

You are considering investing in a project with the following possible outcomes:

Calculate the expected rate of return and standard deviation of returns for this investment, respectively.

8.72%, 12.99%

You are thinking of adding one of two investments to an already well-diversified portfolio.

If you are a risk-averse investor, which one is the better choice?

Security B

Investment A has an expected return of 14% with a standard deviation of 4%, while investment B has an expected return of 20% with a standard deviation of 9%. Therefore,

rational investors could pick either A or B, depending on their level of risk aversion.

The category of securities with the highest historical risk premium is

small company stocks.

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

Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.

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

Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category.

Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12. Wendy sold the shares on 12/31/12 for $3.45. Genetics stock has a beta of 1.9, the risk-free rate of return is 4%, and the market risk premium is 9%. Wendy's holding period return is

15.0%.

You are considering investing in Ford Motor Company. Which of the following are examples of diversifiable risk?

I. Risk resulting from possibility of a stock market crash.

II. Risk resulting from uncertainty regarding a possible strike against Ford.

III. Risk resulting from an expensive recall of a Ford product.

IV. Risk resulting from interest rates decreasing.

II, III

You are considering buying some stock in Continental Grain. Which of the following are examples of non-diversifiable risks?

I. Risk resulting from a general decline in the stock market.

II. Risk resulting from a possible increase in income taxes.

III. Risk resulting from an explosion in a grain elevator owned by Continental.

IV. Risk resulting from a pending lawsuit against Continental.

I and II

Most stocks have betas between

0.60 and 1.60.

If you hold a portfolio made up of the following stocks:

What is the beta of the portfolio?

1.15

Which of the following is/are true?

Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.

You hold a portfolio with the following securities:

What is the expected return for the portfolio?

17.60%

Beginning with an investment in one company's securities, as we add securities of other companies to our portfolio, which type of risk declines?

unsystematic risk

Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________.

beta; standard deviation

Which of the following types of risk is diversifiable?

unsystematic, or company-unique risk

Assume that you have $165,000 invested in a stock whose beta is 1.25, $85,000 invested in a stock whose beta is 2.35, and $235,000 invested in a stock whose beta is 1.11. What is the beta of your portfolio?

1.37

Assume that you have $165,000 invested in a stock whose beta is 1.25, $85,000 invested in a stock whose beta is 2.35, and $235,000 invested in a stock whose beta is 1.11. What is the beta of your portfolio?

1.37

Which of the following statements is MOST correct regarding beta?

Even professionals may not agree on the measurement of beta.

What is diversifying among different kinds of assets known as?

asset allocation

Changes in the general economy, like changes in interest rates or tax laws, represent what type of risk?

market risk

An investor currently holds the following portfolio:

The beta for the portfolio is

1.99

The capital asset pricing model

provides a risk-return trade-off in which risk is measured in terms of beta.

If the beta for stock A equals zero, then

stock A's required return is equal to the risk-free rate of return.

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

the required return on stock B will increase more than the required return on stock A.

Wendy purchased 800 shares of Robotics stock at $3 per share on 1/1/09. Wendy sold the shares on 12/31/09 for $3.45. Robotics stock has a beta of 1.3, the risk-free rate of return is 3%, and the market risk premium is 8%. The required return on Robotics stock is

13.4%.

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,

for a well-diversified investor, Friendly is less risky than Robo-Tech

Surf and Spray Inc. has a beta equal to 1.8 and a required return of 15% based on the CAPM. If the risk-free rate of return is 4.2%, the expected return on the market portfolio is

10.2%.

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

You and other investors will buy up LMN stock and its price will rise.

You hold a portfolio made up of the following stocks:

If the market's expected return is 14%, and the risk-free rate of return is 5%, what is the expected return of the portfolio?

15.935%

Marble 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%. What is the risk premium on the market?

11%

Marble 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?

31.5%

You are considering an investment in Citizens Bank Corp. The firm has a beta of 1.6. Currently, U.S. Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%. What rate of return should you expect for your investment in Citizens Bank?

20.75%

Stock W has the following returns for various states of the economy:

Stock W's standard deviation of returns is

37%.