Risk and Return

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I.DEFINITIONS

PORTFOLIOS
1.A portfolio is:
a.a group of assets, such as stocks and bonds, held as a collective unit by an investor.
b.the expected return on a risky asset.
c.the expected return on a collection of risky assets.
d.the variance of returns for a risky asset.
e.the standard deviation of returns for a collection of risky assets.

PORTFOLIO WEIGHTS
2.The percentage of a portfolio’s total value invested in a particular asset is called that asset’s:
a.portfolio return.
b.portfolio weight.
c.portfolio risk.
d.rate of return.
e.investment value.

SYSTEMATIC RISK
3.Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk.
a.idiosyncratic
b.diversifiable
c.systematic
d.asset-specific
e.total

UNSYSTEMATIC RISK
4.Risk that affects at most a small number of assets is called _____ risk.
a.portfolio
b.undiversifiable
c.market
d.unsystematic
e.total

PRINCIPLE OF DIVERSIFICATION
5.The principle of diversification tells us that:
a.concentrating an investment in two or three large stocks will eliminate all of your risk.
b.concentrating an investment in three companies all within the same industry will greatly reduce your overall risk.
c.spreading an investment across five diverse companies will not lower your overall risk at all.
d.spreading an investment across many diverse assets will eliminate all of the risk.
e.spreading an investment across many diverse assets will eliminate some of the risk.

SYSTEMATIC RISK PRINCIPLE
6.The _____ tells us that the expected return on a risky asset depends only on that asset’s nondiversifiable risk.
a.Efficient Markets Hypothesis (EMH)
b.systematic risk principle
c.Open Markets Theorem
d.Law of One Price
e.principle of diversification

BETA COEFFICIENT
7.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.beta coefficient.
b.reward-to-risk ratio.
c.total risk.
d.diversifiable risk.
e.Treynor index.

REWARD-TO-RISK RATIO
8.A particular risky asset’s risk premium, measured relative to its beta coefficient, is its:
a.diversifiable risk.
b.systematic risk.
c.reward-to-risk ratio.
d.security market line.
e.market risk premium.

SECURITY MARKET LINE
9.The linear relation between an asset’s expected return and its beta coefficient is the:
a.reward-to-risk ratio.
b.portfolio weight.
c.portfolio risk.
d.security market line.
e.market risk premium.

MARKET RISK PREMIUM
10.The slope of an asset’s security market line is the:
a.reward-to-risk ratio.
b.portfolio weight.
c.beta coefficient.
d.risk-free interest rate.
e.market risk premium.

II.CONCEPTS

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

a.be equal to one-half of 8 percent if there is a 50 percent chance of an economic boom.
b.vary inversely with the growth of the economy.
c.increase as the probability of a recession increases.
d.be equal to 75 percent of 8 percent if there is a 75 percent chance of a boom economy.
e.increase as the probability of a boom economy increases.

EXPECTED RETURN
12.Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?
a.The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers.
b.The...
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