Question 1

You are considering a portfolio consisting of equal investments in the shares of Northbank Inc.and Tropical Escapes Inc.Returns on the 2 securities under various conditions are shown below.
Scenario Return (%)Return % Return %
Probability Northbank Tropical Portfolio
0.20 4% 16%
0.50 10% 10%
0.30 20% -10%
Calculate the expected rate of and the standard deviation return of the portfolio.

Accepted Answer

The answer of You are considering a portfolio consisting of...

Question 2

The market (systematic)risk associated with an individual shares is most closely identified with the
A)variance of the returns of the shares.
B)variance of the returns of the market.
C)beta of the shares.
D)standard deviation of the shares.

Accepted Answer

The beta of a stock measures its systematic risk relative to the market. A stock with a beta greater than 1 indicates that it is more volatile than the market, while a beta less than 1 suggests it is less volatile than the market. Therefore, the market risk associated with an individual share is most closely identified with its beta. Variance of returns or standard deviation of returns measure total risk, which includes both systematic and unsystematic risk. The variance of the market returns is not specific to an individual share.

Question 3

Beta is a statistical measure of
A)weighted average performance.
B)total risk.
C)the standard deviation.
D)the relationship between an investment's returns and the market return.

Accepted Answer

Beta measures the relationship between an investment's returns and the market return. It is used to determine an investment's volatility and risk in relation to the overall market. A beta of 1 indicates that the investment's price will move in line with the market, while a beta greater than 1 indicates higher volatility and risk, and a beta less than 1 indicates lower volatility and risk.

Question 4

Which of the following has a beta of zero?
A)A risk-free asset
B)The market
C)A high-risk asset
D)Both A and B

Accepted Answer

A risk-free asset has a beta of zero as it is not affected by the fluctuations in the market.

Question 5

The greater the dispersion of possible returns,the riskier the investment.

Accepted Answer

The greater the dispersion of possible returns, the higher the variability of potential outcomes, which increases the riskiness of the investment.

Question 6

The beta of ABC Co.shares is the slope of
A)the security market line.
B)the characteristic line for a plot of returns on the S&P/ASX 200 versus returns on short-term Treasury notes.
C)Expected return over time.
D)the line of best fit for a plot of ABC Co.returns against the returns of the market portfolio for the same period.

Accepted Answer

The beta of a stock represents its sensitivity to movements in the overall market. To calculate beta, the returns of the stock are plotted against the returns of the market portfolio for the same period, and the slope of the line of best fit is determined. Therefore, the beta is the slope of the line of best fit for a plot of ABC Co. returns against the returns of the market portfolio for the same period.

Question 7

You are thinking of adding one of two investments to an already well-diversified portfolio. Security A Security B
Expected return = 12% Expected return = 12%
Standard deviation of returns = 20.9% Standard deviation of returns = 10.1%
Beta = .8 Beta = 2
If you are a risk-averse investor
A)security A is the better choice.
B)security B is the better choice.
C)either security would be acceptable.
D)cannot be determined with information given.

Accepted Answer

As a risk-averse investor, you would want to choose the investment with the lower standard deviation, as it represents lower risk. Security A has a higher standard deviation, making it riskier than Security B. Even though Security B has a higher beta, indicating higher volatility compared to the overall market, its lower standard deviation still makes it the better choice for a risk-averse investor. Therefore, Security A is not the better choice, and the correct answer is B.

Question 8

For the most part,there has been a positive relation between risk and return historically.

Accepted Answer

This is known as the risk-return tradeoff and is a fundamental principle of finance. Generally, investments that carry more risk tend to offer higher potential returns. However, this is not always the case and there are exceptions. It is important to remember that past performance is not a guarantee for future results.

Question 9

On average,when the overall market changes by 10%,the shares of the CBA changes 12%.What is the CBA's beta?
A)1.2
B)8.33%
C)12%
D)Insufficient information is provided

Accepted Answer

The answer of On average,when the overall market changes by...

Question 10

The benefit from diversification is far greater when the diversification occurs across asset types.

Accepted Answer

Diversification across asset types, such as stocks, bonds, and real estate, can help to reduce the overall risk of a portfolio and maximize returns. This is because different asset types tend to perform differently under various market conditions. By diversifying across asset types, investors can potentially achieve a more consistent return while reducing their exposure to any one specific asset class.

Question 11

A share with a beta greater than 1.0 has returns that are ________ volatile than the market,and a share with a beta of less than 1.0 exhibits returns which are ________ volatile than those of the market portfolio.
A)more,more
B)more,less
C)less,more
D)less,less

Accepted Answer

A share with a beta greater than 1.0 is more volatile than the market, while a share with a beta less than 1.0 is less volatile than the market.

Question 12

You hold a portfolio with the following securities: Percent
Security of Portfolio Beta Return
X Corporation 20% 1.35 14%
Y Corporation 35% .95 10%
Z Corporation 45% .75 8%
Compute the expected return and beta for the portfolio.
A)10.67%,1.02
B)9.9%,1.02
C)34.4%,.94
D)9.9%,.94

Accepted Answer

The answer of You hold a portfolio with the following...

Question 13

The Capital Asset Pricing Model
A)provides a risk-return trade-off in which risk is measured in terms of the market returns.
B)provides a risk-return trade-off in which risk is measured in terms of beta.
C)measures risk as the correlation coefficient between a security and market rates of return.
D)depicts the total risk of a security.

Accepted Answer

The Capital Asset Pricing Model (CAPM) provides a risk-return trade-off in which risk is measured in terms of beta, which is the sensitivity of a security's returns to market returns. Beta is used to estimate the expected return of a security based on the risk-free rate, market risk premium, and the security's beta. Therefore, B is the correct choice. Choice A is incorrect because risk is not measured in terms of market returns, but rather beta. Choice C is incorrect because the correlation coefficient is not used to measure overall risk in the CAPM. Choice D is incorrect because the CAPM uses beta to measure systematic risk, not total risk.

Question 14

A share's beta is a measure of its
A)systematic risk.
B)unsystematic risk.
C)company-specific risk.
D)diversifiable risk.

Accepted Answer

A share's beta measures its systematic risk, which is the risk inherent to the entire market or a particular market segment. Beta is used to determine how much an individual stock's price is expected to move in relation to changes in the broader market. Beta is not a measure of unsystematic or diversifiable risks, which are unique to individual companies and can be mitigated through diversification.

Question 15

You are considering investing in Ford Motor Company.Which of the following is an example of diversifiable risk?
A)Risk resulting from the possibility of a stock market crash
B)Risk resulting from uncertainty regarding a possible strike against Ford
C)Risk resulting from an expected recession
D)Risk resulting from interest rates decreasing

Accepted Answer

The risk of a possible strike against Ford is specific to that company and not necessarily applicable to other companies or the market as a whole. This is an example of diversifiable risk, as it can be mitigated by investing in a variety of companies and industries. The other options (A, C, and D) are examples of systematic or market risk, which affect the overall market and cannot be diversified away.

Question 16

If you hold a portfolio made up of the following shares: Investment Value Beta
Share A $2,000 1.5
Share B $5,000 1.2
Share C $3,000 .8
What is the beta of the portfolio?
A)1.17
B)1.14
C)1.32
D)Can't be determined from information given

Accepted Answer

The portfolio beta is calculated as the weighted average of the individual betas. The weights are the proportion of each investment in the total portfolio. The total portfolio value is $10,000. The portfolio beta is (2000/10000)*1.5 + (5000/10000)*1.2 + (3000/10000)*0.8 = 1.14.

Question 17

Which of the following is NOT an example of systematic risk?
A)Inflation
B)Recession
C)Management risk
D)Interest rate risk

Accepted Answer

Systematic risk, also known as market risk, refers to the risk that is inherent in the entire market or a particular segment of the market. Inflation, recession, and interest rate risk are all examples of systematic risk as they affect the overall market and cannot be diversified away. Management risk, on the other hand, is specific to a particular company and therefore can be mitigated through diversification.

Question 18

The appropriate measure for risk according to the capital asset pricing model is
A)the standard deviation of a firm's cash flows.
B)alpha.
C)beta.
D)probability of correlation.

Accepted Answer

The capital asset pricing model (CAPM) measures the risk of an investment in terms of beta, which measures the volatility of an asset's returns in relation to the market as a whole. Therefore, the appropriate measure for risk according to the CAPM is beta (Option C). The standard deviation of a firm's cash flows (Option A) is a measure of a firm's business risk, which is different from market risk measured by beta. Alpha (Option B) is a measure of an asset's excess return compared to the expected return based on its beta, and is not a direct measure of risk. Probability of correlation (Option D) is not a relevant measure of risk according to the CAPM.

Question 19

Investing in foreign shares is one way to improve diversification of a portfolio.

Accepted Answer

Investing in foreign shares can help to reduce the concentration risk of a portfolio that is heavily invested in domestic stocks. It provides exposure to different markets and sectors, which may perform differently than the domestic market and provide a hedge against domestic economic risks. However, investors should conduct thorough research and understand the risks associated with investing in foreign markets, including currency fluctuations and geopolitical instability.

Question 20

Changes in the general economy,such as changes in interest rates or tax laws,represent what type of risk?
A)Firm-specific risk
B)Market risk
C)Unsystematic risk
D)Diversifiable risk

Accepted Answer

Changes in the general economy, such as changes in interest rates or tax laws, affect the overall market and represent market risk, which cannot be diversified away. Firm-specific risks are specific to a particular company, unsystematic risks can be diversified away, and diversifiable risks are also known as unsystematic risks.

Quiz 8: Risk and Return - Capital Market Theory

The market (systematic) risk associated with an individual shares is most closely identified with the

Beta is a statistical measure of

Which of the following has a beta of zero?

The greater the dispersion of possible returns,the riskier the investment.

The beta of ABC Co.shares is the slope of

You are thinking of adding one of two investments to an already well-diversified portfolio. Security A Security B Expected return = 12% Expected return = 12% Standard deviation of returns = 20.9% Standard deviation of returns = 10.1% Beta = .8 Beta = 2 If you are a risk-averse investor

For the most part,there has been a positive relation between risk and return historically.

On average,when the overall market changes by 10%,the shares of the CBA changes 12%.What is the CBA's beta?

The benefit from diversification is far greater when the diversification occurs across asset types.

A share with a beta greater than 1.0 has returns that are volatile than the market,and a share with a beta of less than 1.0 exhibits returns which are volatile than those of the market portfolio.

You hold a portfolio with the following securities: Percent Security of Portfolio Beta Return X Corporation 20% 1.35 14% Y Corporation 35% .95 10% Z Corporation 45% .75 8% Compute the expected return and beta for the portfolio.

The Capital Asset Pricing Model

A share's beta is a measure of its

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

If you hold a portfolio made up of the following shares: Investment Value Beta Share A $2,000 1.5 Share B $5,000 1.2 Share C $3,000 .8 What is the beta of the portfolio?

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

The appropriate measure for risk according to the capital asset pricing model is

Investing in foreign shares is one way to improve diversification of a portfolio.

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