Question 1

What relationship are the volatilities of stock A and B exhibiting?

Accepted Answer

The answer of What relationship are the volatilities of stock...

Question 2

What relationship are the volatilities of stock A and B exhibiting?

Accepted Answer

The answer of What relationship are the volatilities of stock...

Question 3

You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period. The overall expected rate of return
On this stock will:

Accepted Answer

The overall expected rate of return on the stock will increase as the probability of a boom economy increases. This is because the expected return in a boom economy (8%) is higher than the expected return in a recessionary period (3%), and as the probability of a boom economy increases, the weighted average of the expected returns will shift towards the higher return of 8%. Therefore, the overall expected rate of return on the stock will increase.

Question 4

Risk that affects at most a small number of assets is called:

Accepted Answer

Unsystematic risk is specific to a small number of assets and can be reduced through diversification.

Question 5

The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the particular asset's:

Accepted Answer

The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is measured by the beta coefficient. Beta measures the asset's sensitivity to movements in the overall market. An asset with a beta of 1 is considered to have the same systematic risk as the overall market, while an asset with a beta greater than 1 is considered to have higher systematic risk and an asset with a beta less than 1 is considered to have lower systematic risk.

Question 6

A portfolio is comprised of ﬁve risky stocks. The standard deviations of these stocks are 5.6%, 12.8%, 2.3%, 8.9%, and 10.2%. The standard deviation of the portfolio:

Accepted Answer

The answer of A portfolio is comprised of ﬁve risky...

Question 7

All else the same, actions or events that cause ﬁrm returns to be less correlated with changes in the economy will _______ the ﬁrm's systematic risk.

Accepted Answer

Actions or events that cause firm returns to be less correlated with changes in the economy will decrease the firm's systematic risk. This is because systematic risk is the risk that cannot be diversified away and is related to the overall market or economy. By reducing the correlation between the firm's returns and changes in the economy, the firm becomes less exposed to systematic risk.

Question 8

In a highly competitive market, all stocks should:

Accepted Answer

In a highly competitive market, all stocks should plot on the same security market line because investors will demand a higher return for higher risk. Therefore, stocks that have higher risk will need to have a higher expected return. The security market line helps investors determine whether a stock is correctly priced based on its risk and expected return.

Question 9

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

Accepted Answer

In a well-diversified portfolio, unsystematic risk is minimized, and the portfolio variance can be less than the variance of the least risky stock due to the benefits of diversification.

Question 10

Which of the following does NOT describe the risk that exists in a well-diversiﬁed portfolio?

Accepted Answer

Asset-specific risk, also known as unsystematic risk, can be eliminated through diversification, so it does not exist in a well-diversified portfolio.

Question 11

An asset that has an expected rate of return above the security market line:

Accepted Answer

An asset that has an expected rate of return above the security market line is considered underpriced, meaning it is expected to provide a return greater than what the market is currently pricing it at. This could be due to a variety of factors, such as market inefficiencies or the asset being undervalued by investors.

Question 12

The steeper the slope of the security market line, the:

Accepted Answer

The steeper the slope of the security market line (SML), the higher the risk premium. The slope of the SML represents the market risk premium, which is the additional return over the risk-free rate that investors demand for taking on higher risk. A steeper slope indicates a higher risk premium.

Question 13

The expected return on a portfolio:

Accepted Answer

The answer of The expected return on a portfolio:
...

Question 14

Which of the following statements is false?

Accepted Answer

Market risk is composed of systematic (non-diversifiable) risk and unsystematic (asset-specific) risk. However, non-diversifiable risk and asset-specific risk are not part of market risk.

Question 15

Which of the following is true about the market portfolio?

Accepted Answer

The expected return of the market portfolio is used as the benchmark for the security market line, which represents the risk-return tradeoff for all assets in the market. The slope of the security market line is determined by the market risk premium, which is the difference between the expected return of the market portfolio and the risk-free rate of return.

Question 16

What relationship are the volatilities of stock A and B exhibiting?

Accepted Answer

The question is asking about the relationship between the volatilities of two stocks, A and B. Volatility is a measure of how much a stock’s price fluctuates, so the question is asking about the relationship between how much stock A’s price fluctuates compared to how much stock B’s price fluctuates. A negative correlation means that when one stock’s volatility goes up, the other stock’s volatility goes down. Therefore, the best choice is B, negative correlation.

Question 17

When computing the expected return on a share of common stock (or other asset) where you have projected returns for each state of the economy along with associated probabilities of occurrence:

Accepted Answer

The probabilities for the states must sum to 1, as they represent the likelihood of each state occurring. The expected return can then be computed by multiplying each state return by its probability of occurrence, adding up these products across all states, and then dividing by 1 (which is equivalent to summing the probabilities). None of the other answer choices are true or necessary when computing expected return.

Question 18

When computing the expected return on a portfolio of stocks the portfolio weights are based on the:

Accepted Answer

When computing the expected return on a portfolio of stocks, the portfolio weights are based on the market value of the total shares held in each stock. This means that the weight of each stock in a portfolio is determined by the proportion of the portfolio's total value that is invested in that stock. The market value takes into account both the number of shares owned and the price per share of each stock, and therefore provides a more accurate representation of the portfolio's weightings.

Question 19

Which one of the following statements concerning beta is correct?

Accepted Answer

The beta of a portfolio measures the systematic risk of the portfolio and cannot exceed the beta of the security with the highest beta in the portfolio. The other statements are incorrect.

Question 20

Unsystematic risk:

Accepted Answer

Unsystematic risk can be effectively eliminated through portfolio diversification, as it is specific to individual stocks or assets and can be offset by including a variety of investments in a portfolio.

Quiz 13: Return, Risk, and the Security Market Line

What relationship are the volatilities of stock A and B exhibiting?

What relationship are the volatilities of stock A and B exhibiting?

You are considering purchasing stock S. This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period. The overall expected rate of return On this stock will:

Risk that affects at most a small number of assets is called:

The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the particular asset's:

A portfolio is comprised of ﬁve risky stocks. The standard deviations of these stocks are 5.6%, 12.8%, 2.3%, 8.9%, and 10.2%. The standard deviation of the portfolio:

All else the same, actions or events that cause ﬁrm returns to be less correlated with changes in the economy will _______ the ﬁrm's systematic risk.

In a highly competitive market, all stocks should:

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

Which of the following does NOT describe the risk that exists in a well-diversiﬁed portfolio?

An asset that has an expected rate of return above the security market line:

The steeper the slope of the security market line, the:

The expected return on a portfolio:

Which of the following statements is false?

Which of the following is true about the market portfolio?

What relationship are the volatilities of stock A and B exhibiting?

When computing the expected return on a share of common stock (or other asset) where you have projected returns for each state of the economy along with associated probabilities of occurrence:

When computing the expected return on a portfolio of stocks the portfolio weights are based on the:

Which one of the following statements concerning beta is correct?

Unsystematic risk: