QUESTION 5

1. Systematic risk is:

   		a risk that affects a large number of assets.
   		the total risk inherent in an individual security.
   		also called diversifiable risk.
   		also called asset-specific risk.
   		unique to an individual firm.

5 points

QUESTION 6

1. Diversifying a portfolio across various sectors and industries will tend to:

   		increase the required risk premium.
   		reduce the beta of the portfolio to zero.
   		increase the security's risk premium.
   		eliminate the market risk.
   		reduce the firm-specific risk.

5 points

QUESTION 7

1. The stock of Uptown Men's Wear is expected to produce the following returns given the various states of the economy. What is the expected return on this stock?

   Probabilities: Recession:0.4 Normal:0.4 Boom:0.2

   Returns: Recession:-11% Normal:12% Boom:23%

   		6.75%
   		5%
   		11.2%
   		3.85%
   		14%

5 points

QUESTION 8

1. You own a portfolio that is invested 20 percent in stock A, 50 percent in stock B, and the remainder in stock C. The expected returns on these stocks are 14.55 percent, 12.66 percent, and 6.27 percent, respectively. What is the expected return on the portfolio?

   		11.12%
   		10.24%
   		12.94%
   		13.07%

5 points

QUESTION 9

1. The goal of diversification is to eliminate:

   		all investment risk.
   		the market risk premium.
   		systematic risk.
   		unsystematic risk.
   		the effects of beta.

5 points

QUESTION 10

1. A company you are researching has common stock with a beta of 1.8. Currently, Treasury bills yield 2.5%, and the market portfolio offers an expected return of 10%. What is the required return on this common stock?

   		21.44%
   		29.38%
   		16.00%
   		14.05%

5 points

QUESTION 11

1. Which one of the following portfolios has the least amount of systematic risk?

   		a portfolio that duplicates the overall market
   		a portfolio comprised of 50 percent cash and 50 percent large-company stocks
   		a portfolio consisting of various U.S. Treasury bills
   		a stock portfolio with a portfolio beta of 1.8
   		a diversified portfolio with a portfolio beta of 0.7

5 points

QUESTION 12

1. The difference between beta and standard deviation is best described as:

   		Beta measures the risk of the market as a whole, while standard deviation measures the risk of individual stocks.
   		Beta measures total volatility, while standard deviation measures total risk.
   		Beta measures the market risk premium, while standard deviation measures risk.
   		Beta measures the risk investors are compensated for, while standard deviation measures both systematic and unsystematic risk.

5 points

QUESTION 13

1. Which one of the following best exemplifies unsystematic risk?

   		an unexpected economic boom
   		an unexpected decrease in interest rates
   		an unexpected increase in the sales of a firm
   		a sudden increase in the inflation rate
   		an expected increase in tax rates

5 points

QUESTION 14

1. Given the following information, what is the standard deviation for this stock? (Hint: you'll need to find the expected return first) Probabilities: Recession: 0.3 Normal: 0.55 Boom: 0.15 Returns: Recession: -11% Normal: 9% Boom: 13%

   		11.19%
   		10.47%
   		12.05%
   		9.66%
   		8.39%

10 points

QUESTION 15

1. Sibling Incorporated has a beta of 1. If the expected return on the market is 13%, what is the expected return on Sibling Incorporated's stock?

   		1%
   		6.5%
   		cannot be determined without the risk free rate
   		13%

5 points

QUESTION 16

1. The concept of investing in a variety of diverse assets to reduce risk is referred to as:

   		beta measuring.
   		split investing.
   		the principle of diversification.
   		the principle of elimination.
   		the systematic risk principle.

5 points

QUESTION 17

1. The amount of systematic risk present in a particular risky asset relative to that in an average risky asset (or the market in general) is called the:

   		risk premium.
   		beta coefficient.
   		standard deviation.
   		mean.
   		variance.

5 points

QUESTION 18

1. Which one of the following is the best example of systematic risk?

   		inflation exceeding market expectations
   		a fire destroying an industrial plant
   		a firm's CEO suddenly resigning
   		growth in the plastics industry slowing
   		individuals spending less on footwear

5 points

QUESTION 19

1. A typical measure for the risk-free rate of return is the:

   		U.S. Treasury Bill rate.
   		prime lending rate.
   		money market rate.
   		short-term AAA-rated bond rate.