1)Most manager are risk-averse, since for a given increase in risk they require an increase in return

True

2) IF a person required return decreases for an increase in risk that person is said to be

Risk-Seeking

3.) Risk aversion is the behavior exhibited by managers who require a greater than proportional _________

(a) increase in return, for a given decrease in risk.

(b) increase in return, for a given increase in risk.

(c) decrease in return, for a given increase in risk.

(d) decrease in return, for a given decrease in risk.

4.)On Average, during the past 75 years, the return on the U.S. Treasury bills has exceeded the return on long term government bonds

False

5.) The higher the coefficient of variation, the greater the risk and therefore the higher the expected return.

True

6.) The expected value and the standard deviation of returns for asset A is (See below.)

Asset A

PossibleOutcomes Probability Returns(%)

Pessimistic 0.25 10

Most likely 0.45 12

Optimistic 0.30 16

(a) 12 percent and 4 percent.

(b) 12.7 percent and 2.3 percent.

(c) 12.7 percent and 4 percent.

(d) 12 percent and 2.3 percent.

7.) An Efficient portfolio maximizes return for a given level of risk or minimizes risk for a given level of return. 8.)The goal of an efficient portfolio is to

minimize risk for a given level of return

9.)In general the lower the correlation between asset returns the greater the potential diversification of risk True

10.) A porfolio combining two assets with less than perfectly postive correlation can reduce total risk to a level below that of either of the components

True

11.) The risk of a portfolio containing international stocks generally does not contain less nondiversifiable risk than one that contains only American stocks.

False

12) Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that (a) remains unchanged.

(b) decreases to a level below that of either asset.

(c) increases to a level above that of either asset.

(d) stabilizes to a level between the asset with the higher risk and the asset with the lower risk.

13)Systematic risk is that portion of an assets risk that is attributable to firm specific random causes.

False

14)The beta 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 return of those securities

False

15War, inflation and the condion of the foreign markets are all example of

Nondiversifiable risk

16A beta coefficient of 1 represents an asset that

(a) is more responsive than the market portfolio.

(b) has the same response as the market portfolio.

(c) is less responsive than the market portfolio.

(d) is unaffected by market movement.

17)The beta of a portfolio

is the weighted average of the betas of the individual assets in the portfolio

18What is Nico’s portfolio beta if he invests an equal amount in asset X with a beta of 0.60, asset Y with a beta of 1.60, the risk-free asset, and the market portfolio? (a) 1.20

(b) 1.00

(c) 0.80

(d) 0.60

19)The security market line is not stable over time and shift in it can result in a change in required return

True

20) What is the expected risk-free rate of return if asset X, with a beta of 1.5, has an expected return of 20 percent, and the expected market return is 15 percent? -5.0%

Chapter TEST

1.)For the risk – seeking manager, no change in return would be required for an increase in risk.

False

2.)For the risk – indifferent manager, no change in return would be required for an increase in risk

True

3.) 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...