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Commerce and BusinessbackBusinessbackCorporate Finance/Financial ManagementbackFundamentals of Corporate FinancebackPractice Set 2492back

Return,risk,and The Security Market Line

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Question 1
Free
Multiple Choice

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy.Given the probabilities of each state of the economy occurring,you anticipate that your stock will earn 6.5 percent next year.Which one of the following terms applies to this 6.5 percent?

Choose correct answer/s
A

arithmetic return

B

historical return

C

expected return

D

geometric return

E

required return

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Question 2
Free
Multiple Choice

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total.Which one of the following terms most applies to Suzie's investments?

Choose correct answer/s
A

index

B

portfolio

C

collection

D

grouping

E

risk-free

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Question 3
Free
Multiple Choice

Steve has invested in twelve different stocks that have a combined value today of $121,300.Fifteen percent of that total is invested in Wise Man Foods.The 15 percent is a measure of which one of the following?

Choose correct answer/s
A

portfolio return

B

portfolio weight

C

degree of risk

D

price-earnings ratio

E

index value

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Question 4
Free
Multiple Choice

Which one of the following is a risk that applies to most securities?

Choose correct answer/s
A

unsystematic

B

diversifiable

C

systematic

D

asset-specific

E

total

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Question 5
Free
Multiple Choice

A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent.What type of risk does this news flash represent?

Choose correct answer/s
A

portfolio

B

nondiversifiable

C

market

D

unsystematic

E

total

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Question 6
Multiple Choice

The principle of diversification tells us that:

Choose correct answer/s
A
concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.
B
concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.
C
spreading an investment across five diverse companies will not lower the total risk.
D
spreading an investment across many diverse assets will eliminate all of the systematic risk.
E
spreading an investment across many diverse assets will eliminate some of the total risk.
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Question 7
Multiple Choice

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

Choose correct answer/s
A
efficient markets hypothesis
B
systematic risk principle
C
open markets theorem
D
law of one price
E
principle of diversification
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Question 8
Multiple Choice

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?

Choose correct answer/s
A
beta
B
reward-to-risk ratio
C
risk ratio
D
standard deviation
E
price-earnings ratio
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Question 9
Multiple Choice

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?

Choose correct answer/s
A
reward-to-risk matrix
B
portfolio weight graph
C
normal distribution
D
security market line
E
market real returns
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Question 10
Multiple Choice

Which one of the following is represented by the slope of the security market line?

Choose correct answer/s
A
reward-to-risk ratio
B
market standard deviation
C
beta coefficient
D
risk-free interest rate
E
market risk premium
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Question 11
Multiple Choice

Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?

Choose correct answer/s
A
capital asset pricing model
B
time value of money equation
C
unsystematic risk equation
D
market performance equation
E
expected risk formula
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Question 12
Multiple Choice

Treynor Industries is investing in a new project.The minimum rate of return the firm requires on this project is referred to as the:

Choose correct answer/s
A
average arithmetic return.
B
expected return.
C
market rate of return.
D
internal rate of return.
E
cost of capital.
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Question 13
Multiple Choice

The expected return on a stock given various states of the economy is equal to the:

Choose correct answer/s
A
highest expected return given any economic state.
B
arithmetic average of the returns for each economic state.
C
summation of the individual expected rates of return.
D
weighted average of the returns for each economic state.
E
return for the economic state with the highest probability of occurrence.
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Question 14
Multiple Choice

The expected return on a stock computed using economic probabilities is:

Choose correct answer/s
A
guaranteed to equal the actual average return on the stock for the next five years.
B
guaranteed to be the minimal rate of return on the stock over the next two years.
C
guaranteed to equal the actual return for the immediate twelve month period.
D
a mathematical expectation based on a weighted average and not an actual anticipated outcome.
E
the actual return you should anticipate as long as the economic forecast remains constant.
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Question 15
Multiple Choice

The expected risk premium on a stock is equal to the expected return on the stock minus the:

Choose correct answer/s
A
expected market rate of return.
B
risk-free rate.
C
inflation rate.
D
standard deviation.
E
variance.
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Question 16
Multiple Choice

Standard deviation measures which type of risk?

Choose correct answer/s
A
total
B
nondiversifiable
C
unsystematic
D
systematic
E
economic
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Question 17
Multiple Choice

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

Choose correct answer/s
A
number of shares owned of each stock.
B
market price per share of each stock.
C
market value of the investment in each stock.
D
original amount invested in each stock.
E
cost per share of each stock held.
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Question 18
Multiple Choice

The expected return on a portfolio considers which of the following factors?
I)percentage of the portfolio invested in each individual security
II)projected states of the economy
III)the performance of each security given various economic states
IV)probability of occurrence for each state of the economy

Choose correct answer/s
A
I and III only
B
II and IV only
C
I, III, and IV only
D
II, III, and IV only
E
I, II, III, and IV
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Question 19
Multiple Choice

The expected return on a portfolio:
I)can never exceed the expected return of the best performing security in the portfolio.
II)must be equal to or greater than the expected return of the worst performing security in the portfolio.
III)is independent of the unsystematic risks of the individual securities held in the portfolio.
IV)is independent of the allocation of the portfolio amongst individual securities.

Choose correct answer/s
A
I and III only
B
II and IV only
C
I and II only
D
I, II, and III only
E
I, II, III, and IV
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Question 20
Multiple Choice

If a stock portfolio is well diversified,then the portfolio variance:

Choose correct answer/s
A
will equal the variance of the most volatile stock in the portfolio.
B
may be less than the variance of the least risky stock in the portfolio.
C
must be equal to or greater than the variance of the least risky stock in the portfolio.
D
will be a weighted average of the variances of the individual securities in the portfolio.
E
will be an arithmetic average of the variances of the individual securities in the portfolio.
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