Finance Test bank
Short Description
Finance Test bank chapter...
Description
Pr i nci pl es ofan M ageri alFi nan ce, 12eGi ( t man ) Chap t er5
Ri s k and Ret ur n
Lear ni ng Goa l 1:
Under s t an dt he m ean i ng an df undam en t al s of r i s k,r et ur n, an dr i sk r ef per en ces . 1) For h t e -ri sk seeki ng m an ag e, rno ch an ge nir et urn o w ul d be eq rui redorfani ncr ease nr i i sk. Answ er :
F ALSE Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
2) For h t e -ri sk avers e m an ag e, rr eq ui r edr et urn ou wl d decr ease or fan i ncr ease nr i sk. Answ er :
F ALSE Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
3) For h t e -ri sk i ndi fferent man ag e, rno ch an gei nr et urn o w ul d be eq rui redorfani ncr ease nr i sk. Answ er :
1
TRUE Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
4) Most man ager s ar e -i r av s k erse, si nce or f ai v g eni ncrease n ri sk it heyreq ui re an i ncrease n ret u i rn . Answ er :
TRUE Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
5) The ret urnonanass eti s h t e ch an gei ni t s val ue p l us any cash di s t r i but i onov er ai ven g peri od ofi me, t exp r ess edas aer cen p t ag e o fi t s en di ng va l ue. Answ er :
F ALSE Topic:
Me a s ur i ngSi ng l eAs s e tRe t ur n Ques t i onStat us:
Pre viou s Edit i on
6) For h t e -ri sk ave rs e m an ag e, rt he requ i red ret urn ecreases d f or ani ncr ease n ri i sk. Answ er :
F ALSE Topic: 2
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
7) I nv et s men t A guar an t ees t siho l der $100 urn. ret Invest men t B earns r $0 $200 owi t h eq ualch an ces i . e. , (an average f $100 ) o ov ert he sam e p ei r od . B oh ti nv est men t s hav e eq ualr i sk. Answ er :
F ALSE Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
8) Busi nessi sk r sih t e ch an ce hat t t he fi r m wi l l beunab l e o t cover t s op i er at i ng cost s an di s aff ect edbya firm ' s ev ren ue st ab i l i t y an d t he st ru cu t re foi t s p oerat i ng co ss tfi ( xed vs. vari ab l e) . Answ er :
TRUE Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre vi ou s E dt i on
9) Fi nan cal i ri sk sih t e ch an ce hat t t he fi rm wi l l be u nab l e o t co ve ri t s op erat i ng co st s an di s aff ect edbya firm ' s ev ren ue st ab i l i t y an d t he st ru cu t re foi t s p oerat i ng co ss tfi ( xed vs. vari ab l e) . Answ er :
F ALSE Topic:
3
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
10) I nt erest rat e ri sk sih t e ch an ce hat t han cgesnii nt erest rat es i w l l ad versel y aff ect t he v au l e o f an i nv est men t ; mos ti nv est men t s d ecl i ne n i va l ue w hent he n i t eres tr at es i se r d an i ncr ease n va il ue w hen i ntere st rates fall . Answ er :
TRUE Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
11) Li qui di t y ri ski s h t e ch an ce tha t ch an gesnii nt eres tr at es i w l l ad ve rel sy aff ect t he v au l e o f ani nve smen t t ; mosti nve smen t t s d ecl i ne n i va l ue w hent he n i t eres tr at es i se r d an i ncr ease n va il ue w heni nt eres tr at es fa ll. Answ er :
F ALSE Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
12) Mar ketr i sk sih t e ch an ce hat t t he v au l e o f ani nv est men t wi l l decl i ne b ecau se of ar ket m act ors f such ( as eco nomi c,pol i t i cal , an d soci aleve nt s)t hatare ndep ien den t of t he n i ve smen t t . Answ er :
TRUE Topic: 4
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
13) I nt eres tr at e ri sk sih t e ch an ce hat t he t v au l e o f ani nve smen t t wi l l decl i ne b ecau se fomarket act ors f( su ch as eco nomi c,pol i t i cal , an d soci aleve nt s)t hatare ndep ien den t of t he n i ve smen t t . Answ er :
F ALSE Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
14) Even tr i sk sih t e ch an ce hat t a ot tal l y unexp ect edeven t wi l l have a si gni fican t eff ect ont he v au l e o ft he fir m or apeci sfic nv iet s men t . Answ er :
TRUE Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
15) Mar ketr i sk sih t e ch an ce hat t a ot tal l y unexp ect edeven t wi l l have si a gni fican t eff ect on t he v au l e o ft he fir m or apeci sfic nv iet s men t . Answ er :
F ALSE Topic:
5
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
6
16) -p Purchasing ow er i sk r sih t e ch an ce hat t ch an gesnii nt eres tr at es i w l l ad ve rel sy aff ect t he v au l e o f an i nv est men t ; mos ti nv est men t s d ecl i ne n i va l ue w hent he n i t eres tr at es i se r d an i ncr ease n va il ue w hen i ntere st rates fall . Answ er :
F ALSE
Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre vi ou s E dt i on
17) I fa p ers on ' s eq rui r edr et urn o d es ot n han cgewhenr i sk ncr ieases ,t hatpers oni s ai sd t o be A)
risk -seek i ng. B) risk -i ndi fferen t . C)
risk -averse. D)
risk -aw are . Answ er :
B Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
18) 7
I fa p erson ' s eq rui red ret urn ecreases d or an i n f crease n ri sk, it hatperson i s sai d t o be A)
risk -seek i ng. B) risk -i ndi fferen t . C) risk -averse. D)
-aw risk are . Answ er :
A Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
19) __ ___ __ _ s ih t e ch an ce fol oss or he tv ari ab i l i t y of et r urnsss o a ci at edwi t h a gi ve n asset . A)
Ret ur n B) Value C)
Ri sk D)
Prob ab i l i t y Answ er :
8
C Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
20) The ___ ____ _ o f anass eti s h t e ch an ge niva l ue p l us any cash i st r i d bu t i on s exp res sed as aerc p en t ag e o f t he n i i t i alpri ce roam ount i nvest ed . A)
ret urn B) value C)
ri sk D)
prob ab i l i t y Answ er :
A Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
9
21) Ri sk avers i oni s h t e b eh avi or exh i bi t edbyman agers ho w r equ i r e a( n) _______ _. A)
i ncrease n ret u i rn ,f or a i ve gn decrease n ri sk i B) i ncrease n ret u i rn ,f or a i ve gn i ncrease n ri sk i C)
decrease n ret urn i, f or a i v g eni ncrease n ri sk i D)
decrease n ret urn, i f or a i ve gn decrease n ri sk i Answ er :
B Topic: Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre vi ou s E dt i on
22) I fa p ers on requ i res great er et r urnwhenri sk ncr ieases, t hatpers on i s sai dt o be A)
-seek risk i ng. B)
risk -i ndi fferen t . C)
risk -averse. D)
risk -aw are . 10
C Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
23) Las t year Mi ke ou bgh t 100 shares ofDal l as orp C orat i oncom mons t ockor f $53 per har e.Du sr i ng h t e year he recei ve d di vi den ds of $1 . 45 er p hare. s The st ocki s cu r ren t l y sel l i ng f or $60 erphare. s Whatr at e o f r et ur n di d Mi ke earn verh oet year? A)
11 . 7 percen t . B) 13 . 2 percen t . C)
14 . 1 percen t . D)
15 . 9 percen t . Answ er :
D Topic:
Ho l di ngPe r i o dRe t ur n( Eq ua t i o n5. 1) Ques t i onStat us:
Pre viou s Edit i on
24) Pr i me-gr ad e com mer ci alpap erwi l l most l i kel y h ave a i gh er h an nualr et ur nt han A)
a T reasu rybi l l . 11
B) a p ref err edst ock . C)
a o cm mon ock. st D)
an nvest i ment -gr ad e bo nd . Answ er :
A Topic:
Ri s k and Re t urn Fu nd am e nt al s Ques t i onStat us:
Pre viou s Edit i on
25) Perr y pur chased 100 ar sh es of Ferr o,I nc. com mons t ock f or $25 ershare p e on year.ago Dur i ng t he year , Fe ro r ,I nc.pai d cash di vi den ds o f $2per sha re. The st ocki s cu rr en t l y sel l i ng f or $30 per sha re. I f Perr y sel l s al l of hi s sh ares f Ferro, o I nc.t oday, whatate r of et urn rwoul d he rea l i ze ? Answ er :
= Real i zed re t urn
$ 3 0$ 2 5+ $ 2 $ 2 5
=
2 8%
Topic:
Ho l di ngPe r i o dRe t ur n( Eq ua t i o n5. 1) Ques t i onStat us:
Pre viou s Edit i on
12
26) Ti m pur chased a b ou nce ho us e on e year f ago or $6, 500. Dur i ng h t e year t gen i er at ed$4, 000n i cas h flow .I f Ti me sel l s h t e bo unce ho useod t ay, he cou l d r ecei ve , $6 100orfi t .Whatwou l d be i s h at re o f re t urn n u der t hese d con i t i ons? Answ er :
$6 , 10 0$6 , 20 0+ $4 , 00 0 = Real i zed re t urn
$6 , 50 0
=
5 5%
Topic:
Ho l di ngPe r i o dRe t ur n( Eq ua t i o n5. 1) Ques t i onStat us:
Pre vi ou s E dt i on
27) As s etA was pu r chase ds i x m on t hs g aof or $25, 000 d an has gener at ed$1, 500 h cas flow dur i ngt hatper i od . Whatsih t e asset' s ate r of et urn ri fi t can be so l d f or $26 , 75 0 o t day ? Answ er :
Real i zed re t urn =
$2 675 ,0$2 500 ,0+ $1 , 50 0 $2 500 ,0
=
13%
= Annualr at e o fr et u r n1 3%× 2= 2 6%
Topic:
Ho l di ngPe r i o dRe t ur n( Eq ua t i o n5. 1) Ques t i onStat us:
Pre viou s Edit i on
Lear ni ng Goa l 2:
Desc r i be p r oced ur esor fass ess i ng an d measu r i ng t he ri sk f oa si ngl e asset . 1) The real ut i l i t y of t he co effi ci en t of vari at i on i s n i com pari ng asset s h t athave eq ualex pect edr et urns. Answ er :
F ALSE 13
Topic:
Coeffi ci ent V of ari at i on Ques t i onStat us:
Pre viou s Edit i on
2) One m eas ur e of t he s ri k o f anas s etmay e b ou fnd bys ubt r act i ng t he w ors t ou t com e r f om t he bes t ou t c om e. Answ er :
TRUE Topic:
Me a s ur i ngSi ng l eAs s e tRi s k Ques t i onStat us:
Pre viou s Edit i on
3) The arger l t he d i fference et ween b anass et ' s w ors t ou t com e r f om i t s best out com e,t he h i ghert he i r sk fo t he s aset. Answ er :
TRUE Topic:
Me a s ur i ngSi ng l eAs s e tRi s k Ques t i onStat us:
Pre viou s Edit i on
4) The i r sk f oanass etcan bemeasured byi t s var i an ce, whi ch siou fnd bysub t r act i ng t he w ors t ou t com e f r om t he bes t ou t com e. Answ er :
F ALSE 14
Topic:
Vari an cean d S t an dard evi at Di on Ques t i onStat us:
Pre viou s Edit i on
5) Coeffi ci en t ofva rat ii on i s a easu m re of r el at i ve i sp desi ronused i n com pari ng t he exp ect edr et urns of asset s w i t h di fferi ng ri sk s. Answ er :
F ALSE Topic:
Coeffi ci ent V of ari at i on Ques t i onStat us:
Pre viou s Edit i on
15
6) The m ore cer t ai nt he ret urnf romanasset ,t he ess l ri va ab i l i t y an d t heref orehe t ess l sk. ri Answ er :
TRUE Topic:
Me a s ur i ngSi ng l eAs s e tRi s k Ques t i onStat us:
Pre viou s Edit i on
7) An ap pr oach f or ass ess i ng r i sk hat t uses a n umbe r of possi bl e ret urn est i mat esotob t ai n a sen se of t he vari ab i l i t y am ong o ut co messical l edsen si t i vi t y a nal ysi s. Answ er :
TRUE
Topic:
Me a s ur i ngSi ng l eAs s e tRi s k Ques t i onStat us:
Pre vi ou s E dt i on
8) On average, dur i ng t he p ast 75 ears y ,t he re t urn -com n o pany l arge s t ocks has eeded exc t he et rur n o n s mal l -com pany s t ocks. Answ er :
F ALSE Topic:
Hi s t o r i c a lRe t ur ns Ques t i onStat us:
Pre viou s Edit i on
9) 16
On aver age, dur i ng t he p ast 75 ear ys, t he re t ur n-com on psm any al l s t ocks has ce ed eex dt he et rur n o n large -com pany s t ocks. Answ er :
TRUE Topic:
Hi s t o r i c a lRe t ur ns Ques t i onStat us:
Pre viou s Edit i on
10) On average, dur i ng t he p ast 75 ears y ,t he et rurn -t er m n ogover l ongnm ent bon ds has xc ee eded t he t re ur n onl on g -t er m corpo r at e bo nds. Answ er :
F ALSE Topic: Hi s t o r i c a lRe t ur ns Ques t i onStat us:
Pre viou s Edit i on
11) On average, dur i ng t he p ast 75 ears y ,t he et rurn -t er m n ocor l on p gor ae t bo nds has eeded exct he et rur n on long -t er m gover nm ent bon ds . Answ er :
TRUE Topic:
Hi s t o r i c a lRe t ur ns Ques t i onStat us:
Pre viou s Edit i on
12) On average, dur i ng t he p ast 75years, t he n i flat i onr at e h as exceed edt he ret urnonU. S.Treasu ry i l b l s. 17
F ALSE Topic:
Hi s t o r i c a lRe t ur ns Ques t i onStat us:
Pre viou s Edit i on
13) On average, dur i ng t he p ast 75years, t he ret urnonU. S.Treasu ry i l b l s h as exceed edt he n i flat i on r at e. Answ er :
TRUE Topic:
Hi s t o r i c a lRe t ur ns Ques t i onStat us:
Pre viou s Edit i on
14) On average, dur i ng t he p ast 75 ears y ,t he re t urn n oU. S.Treasu ry i l b l s ha s exceed edt -h e ret urn n ol on g t er m gover nm ent bon ds . Answ er :
F ALSE Topic:
Hi s t o r i c a lRe t ur ns Ques t i onStat us:
Pre viou s Edit i on
15) On average, dur i ng t he p ast 75 ears y ,t he re t urn -com n o pany l arge s t ocks has eeded exc t he et rur n o n long -t er m corpo r at e bo nds. Answ er :
TRUE 18
Topic:
Hi s t o r i c a lRe t ur ns Ques t i onStat us:
Pre vi ou s E dt i on
16) A nor malpr oba bi l i t y di s t r i but i oni s a ymmet s r i cal di s t ri but i onwhose hap se esem r -shaped bl es a l bel cu rve . Answ er :
TRUE Topic:
Norm alDi s t ri bu t i on s Ques t i onStat us:
Pre viou s Edit i on
17) An ab norm alpr oba bi l i t y di s t r i but i oni s a sym met r i cal di s t ri but i on whose p sha e esem r -shaped bl es a l bel cu rve . Answ er :
F ALSE Topic:
Norm alDi s t ri bu t i on s Ques t i onStat us:
Pre viou s Edit i on
18) A norm alpr ob ab i l i t y di s t r i bu t i oni s an asym met r i cal di s t r i bu t i onwhose shap e res em bl es ayram pi d. Answ er :
F ALSE Topic: 19
Norm alDi s t ri bu t i on s Ques t i onStat us:
Pre viou s Edit i on
19) The co effi ci en t of vari at i on i s a easu m re of rel at i ve i sp ders i on t hati s u sef ul i n com pari ng t he ri sksf o asset s w i t h di fferen t ex pect edr et urns. Answ er :
TRUE Topic:
Coeffi ci ent V of ari at i on Ques t i onStat us:
Pre viou s Edit i on
20) The h i ghert he coe ffici en t of va rat ii on, t he g reat ert he ri sk na dt heref orehe t h i ghert he exp ect edret urn. Answ er :
TRUE Topic:
Coeffi ci ent V of ari at i on Ques t i onStat us:
Pre viou s Edit i on
21) The ow l erhe t coeffi ci en t of va rat ii on, t he g reat erhe t ri sk na d t heref orehe t h i gherhe t exp ect edret urn. Answ er :
F ALSE Topic:
Coeffi ci ent V of ari at i on 20
Ques t i onStat us:
Pre viou s Edit i on
22) A com mon ap pr oach of es t i mat i ng t he v ari ab i l i t y of et r urns nv o iv l i ng f orecas t i ng t he p ess i mi s t i c,most l i kel y,an d opt i mi st i c ret urn s asso ci ated wi t ht he a sset i s cal l ed A)
margi nal al an ysi s. B) sen si t i vi t y anal ysi s. C)
br e ak-ev enan ay l si s. D)
finan cal i t at s em en t an al ysi s. Answ er :
B Topic:
Me a s ur i ngSi ng l eAs s e tRi s k Ques t i onStat us:
Pre vi ou s E dt i on
23) The __ ___ __ _ s ih t e exten t of anasset ' s i r sk. I ti s o f und bysu bt r act i ng t he p essi mi st i c ou t com e rom f t he op t i mi s t i c o ut com e. A)
ret urn B) s t an dardev d i at i on C) 21
prob ab i l i t y d i st ri but i on D)
range Answ er :
D
Topic:
Me a s ur i ngSi ng l eAs s e tRi s k Ques t i onStat us:
Pre viou s Edit i on
24) The ______ __ f oaneven t occu r r i ng i s h t e p ecent r age an ch ce of a g i ven ou t com e. A)
di sp ers i on B) s t an dardev d i at i on C)
prob ab i l i t y D)
re l i abi l i ty Answ er :
C Topic:
Me a s ur i ngSi ng l eAs s e tRi s k Ques t i onStat us:
Pre viou s Edit i on
25) 22
__ ___ __ _ p rob ab i l i t y di st ri but i on sh ow s al l poss i bl e o ut com es d an associ at edprob ab i l i t i esor fa g i ve n ev en t . A)
A di sc ret e B) An expect edval ue C)
A barhar c t D)
A c on t i nu ou s Answ er :
D Topic:
Me a s ur i ngSi ng l eAs s e tRi s k Ques t i onStat us:
Pre viou s Edit i on
26) The ________ easures m t he d i spers i onar ou nd t he exp ect edval ue. A)
coe ffici en t of va rat ii on B) chi squ are C)
me an D)
s t an dardev d i at i on Answ er : 23
D Topic:
St an dard evi at Di on Ques t i onStat us:
Pre viou s Edit i on
27) The ___ ____ _ s i a easu m re of r el at i ve i spersi d onused i n com pari ng t he i r sk foass et s w i t h di fferi ng exp ect edret urns. A)
coe ffici en t of va rat ii on B) chi squ are C)
me an D)
s t an dardev d i at i on Answ er :
A Topic:
Coeffi ci ent V of ari at i on Ques t i onStat us:
Pre vi ou s E dt i on
24
28) Si nceor f a ve gi ni ncr ease n ri i sk, mostman ag ers requ i re an i ncr ease n ret iurn, t heyare A)
risk -seek i ng. B) -i risk ndi fferen t . C)
risk -free. D)
risk -averse. Answ er :
D Topic: Ri s k and Re t urn Fu nd am e nt al s Ques t i onStat us:
Pre viou s Edit i on
29) Whi ch ass etwou l dt he-avers i r ske fi nan cal i man ag erpref er? ( Seeel ow b. )
A)
Ass etA. B) Ass etB. C) 25
Ass etC. D)
Ass etD. Answ er :
D Topic:
Exp et c ed et R urn d anS t an dard evi at Di on( Equ ai t on5. 2 an d . 5 3) Ques t i onStat us:
Pre viou s Edit i on
30) The exp ect edva l ue an dt he st an dard dev i at i onof r et urnsor f ass etA i s See ( el ow b. ) Ass etA
A)
12 erc pen t an d4 p erc en t . B) 12 . 7 p ercen t an d 2. 3 p ercent. C)
12. 7 p erc en t an d4 p er cen t . D)
12perc en t an d 2. 3 p er cen t . Answ er :
B Topic: 26
Exp et c ed et R urn d anS t an dard evi at Di on( Equ ai t on5. 2 an d . 5 3) Ques t i onStat us:
Pre viou s Edit i on
31) The __ ____ __t he co effi ci en t of vari at i on, t he __ ___ ___ t he ri sk. A)
l ow er ;l ow er B) hi gher ;l ow er C)
l ow er ; hi gher D)
moreab st l e;hi gher Answ er :
A Topic:
Coeffi ci ent V of ari at i on Ques t i onStat us:
Pre vi ou s E dt i on
32) Gi ven t he ol fl ow i ng exp ect edr et ur ns and s t an dar d devi at i on s of ass et s B ,M,Q,an d D, whi ch ss a et sho ul dt he p r uden t finan cal i man ager el ect s ?
A)
27
As s etB B) As s e tM C)
As s etQ D) As s etD Answ er :
A Topic:
Exp et c ed et R urn d anS t an dard evi at Di on( Equ ai t on5. 4) Ques t i onStat us:
Pre viou s Edit i on
33) The ex pect edva l ue,st an dard dev i at i onof r et urns, an d coeffi ci en t of va r i at i onf or ass etA are See (be l ow . ) Ass etA
A)
10percen t , 8 percen t , an d 1. 25 , resp ect i vel y. B) 9. 33percen t ,8 p ercen t , an d 2. 15 , resp ecti vel y. C)
9. 35percen t , 4. 68percen t , an d 2. 00 , resp ecti vel y. D)
9. 35percen t , 2. 76percen t , an d 0. 29 5,resp ecti vel y. 28
D Topic:
Exp ect ed et R urn d ant S an dard evi at D i on( Equ ai t on5. 2,5. 3,an d . 5 4) Ques t i onStat us:
Pre viou s Edit i on
34) Whati s h t e m ar ke tr i sk rem pi um i ft he i r sk r ee f at r e s i 5 er p cent an dt he exp ect edmar ket r et urn si gi ven as ol f l ow s?
A)
10. 5% B) 11. 0% C)
16. 0% D)
16. 5% Answ er :
B Topic:
Expec t e d R e t urn dan C APM ( Equat i on 2 5.and 5. 8) Ques t i onStat us:
Pre vi ou s E dt i on
29
35) Ni co ou bgh t 100 ar sh es of Ci sc o Sy s t em s t s ock f or $24. 00 er p shareJ an on uary 1, 2002. He ecei r ved a di vi den d of$2. 00 er p hare s t at he en d of2002 an d $3. 00 er p sha r e at t he en d of 2003 . At t he en d of200 4, Ni co l co l ect eda d i vi den d of$4. 00 er p share d sol an d hi s t s ock f or $18. 00 er p share. Whatwas i N co' s r eal i zed hol di ng per i odr et urn? A)
-12. 5%
B) +12. 5%
C)
-16. 7%
D)
+16. 7%
Answ er :
B Topic:
Me a s ur i ngSi ng l eAs s e tRe t ur n( Eq ua t i o n5. 1) Ques t i onStat us:
Pre viou s Edit i on
36) Ni co ou bgh t 100 ar sh es of Ci sc o Sy s t em s t s ock f or $24. 00 er p shareJ an on uary 1, 2002. He ecei r ved a di vi den d of$2. 00 er p hare s t at he en d of2002 an d $3. 00 er p sha r e at t he en d of 2003 . At t he en d of200 4, Ni co l co l ect eda d i vi den d of$4. 00 er p share d sol an d hi s t s ock f or $18. 00 er p share. Whatwas i N co' s r eal i zed ho l di ngper i odr et ur n? Whatwas i N co' s o cm pou nd an nualr at e o fr et ur n? A)
-12. 5% ;-4. 4%
B) +12. 5% ;+4. 4%
C)
30
-16. 7% ;-4. 4%
D)
+16. 7% ;+4. 4%
Answ er :
B
Topic:
Me a s ur i ngSi ng l eAs s e tRe t ur n( Eq ua t i o n5. 1) Ques t i onStat us:
Pre viou s Edit i on
37) Gi ven t he ol fl ow i ng i nf orm at i onabo ut t he w to ass et s Aan d B,det er mi ne w hi chass eti s pref er r ed .
Answ er :
Ass etA i s pref err edbecau seti has a ow l r er an ge or ft he sam e exp ect edr et urn. Topic:
Exp et c ed et R urn d anS t an dard evi at Di on( Equ ai t on5. 2 an d . 5 3) Ques t i onStat us: Pre vi ou s E dt i on
31
38) Ass umi ng t he ol fl ow i ng r et urns dan corr esp on di ng p r oba bi l i t i esor f ass etA, com put e t i s t s an dard dev i at i on an d coeffi ci en t of vari at i on.
Answ er :
SD= 3. 87 % =
CV
=
=
SDTopic: /R 3. 87/ 15 0. 26
Exp ect ed et R urn, Stand ardevi D at i onan d C oeffi ci ent V of ari at i on( Equ ai t on5. 2,5. 3,an d . 5 4) Ques t i onStat us:
Revi se d
32
39) Cham pi onBr ew er i es u m s t choo s e bet ween t wo as s etpur chase s .The an nualr at e of r et ur n an dr el at ed pr ob ab i l i t i esgi ven bel ow su mmari ze he t fi r m' s an ay l si s.
Fo r ach e ass et ,com put e ( a) t he exp ect edr at e of r et urn. ( b) t he st an dar d devi at i onofhe t exp ect edr et ur n. ( c) t he coeffi ci en t of vari at i on ofhe t et rurn. ( d)Whi ch s as ets ho ul d Cham pi ons el ec t ? Answ er :
( a)
Exp ec t ed et R ur n = 15% Exp ec t ed et Ru= r n15% ( b) Ass etA ^2
( 10 % – 1 5% )× 0. 30 = 7 . 5% ^2
= ( 15 % - 15 %)× 0. 40 0%
^2
= 7 ( 20 % - 15 %)× 0. 30 . 5% 15% = St an dar d Devi at i onof A 3. 87 % Ass etB
^2
( 5% - 15 %)× 0. 40 =4 0% ^2
( 15 % - 15 %)× 0. 20 = 0 % ^2
=4 ( 25 % - 15 %)× 0. 40 0% 80% St an dar d Devi at i onof =B8. 94 % = 3. = 0. = 8. = 0 ( c ) CVA 87/ 15 26CVB 94/ 15 . 60 ( d) Ass etA; f or 15% r at e o f ret urn na dl esser ri sk.
33
Topic:
Exp ect ed et R urn, Stand ardevi D at i onan d C oeffi ci ent V of ari at i on( Equ ai t on5. 2,5. 3,an d . 5 4) Ques t i onStat us:
Pre viou s Edit i on
34
40) -t The C ol l egeop C y S hopi si n pr ocess ofpur chasi n g ech acop i gh h i er .I nt hei r sear ch ,t heyhave gat hered t he ol fl ow i ng i nf orm at i onabo ut t wo p ossi bl e cop i er s Aan d B.
( a) Com put e exp ect edr at e of r et ur n or f eac h cop i er . ( b) Com put e vari an ce an ds t an dar d devi at i onof at r e ofet u r rn or f each i er . cop ( c) Whi ch cop i ers ho ul dt hey pur c hase ? Answ er :
a n adb.
Exp ec t edval ue = 16. 9% Exp ec t edval u = e 17 . 05 % Var i ance = A 17. 49 ari Van c =e 35 . 65 = =S SD4 . 18% D5. 97 % ( c)CV = S D/ r Copi erA:CV = 4. 18/ 16 . 90 = 0 . 25 = 5. = 0 Cop i erB:CV 97/ 17. 05 . 35 The ol Cl egeop C y Sh ops ho ul d bu y cop i erA. Topic:
Exp et c ed et R urn d anS t an dard evi at Di on( Equ ai t on5. 2 an d . 5 3) Ques t i onStat us:
Pre vi ou s E dt i on
35
41) Gi ve nt he o f l l ow i ng prob ab i l i t y d i st ri but i on f or asset s Xan d Y, com put e h t e exp ect edr at e o f ret urn, vari an ce, st an dard dev i at i on, an d coe ffici en t of va rat ii on f or h t e w to asset s. Whi chasset i s a et b t er i nv et s men t ?
Answ er :
Exp ec t edval ue = 10 . 7%
Expe c t e dval ue = 11 . 15 %
^2
^2
– 11 Vari an ce = 11 6. 5– 1 0. 7 = 2. 01 Var i an c= e 12 4. 95 . 15= 0 . 63 S 1 D= . 42% = S 0. 79 D% CV= SD/r = 1. = 0 As s etX:CV 42 /10. 70 . 13 As s etY:C= V 0. 79 /11 . 15 = 0 . 07 Ass etY i s p r ef err ed .
Topic:
Exp ect ed et R urn, Stand ardevi D at i onan d C oeffi ci ent V of ari at i on( Equ ai t on5. 2,5. 3,an d . 5 4) Ques t i onStat us: Pre viou s Edit i on
42) Ni co ou bgh t 100 ar sh es of Ci sc o Sy s t em s t s ock f or $24. 00 er p shareJ an on uary 1, 2002. He ecei r ved a di vi den d of$2. 00 er p hare s t at he en d of2002 an d $3. 00 er p sha r e at t he en d of 2003 . At t he en d of200 4, Ni co l co l ect eda d i vi den d of$4. 00 er p share d sol an d hi s t s ock f or $18. 00 er p share. Whatwas i N co' s r ea l i ze d h ol di ng er pi od t re urn? What wasNi c o' sc om pou ndann ual r at e of r et urn? Expl ai n h te di ffer en ce? Answ er : 36
= Real i zed re t urn Com pou nd e R t ur n:
=
12 . 5%
= + + $ + 18 $24 $ 2/ $ 3/ (4 ) / So l ve o f r Rei t her i w t h a ca l cu l at or orhrou tgh t ri alan d err or . The cal cu l at or s i ap proxi mat el y 4. 4 p erc en t . The re ason t he real i zed hol di ng per i odr et ur ni s o s muchl ar gerhan tt he com pou nd r at e o fr et ur ni s h t at t he eal ri zed r et urn oe ds no t accou nt f or he t i t me val ue o f mon ey.
Topic:
Me a s ur i ngSi ng l eAs s e tRe t ur n( Eq ua t i o n5. 1) Ques t i onStat us:
Pre vi ou s E dt i on
37
Lear ni ng Goa l 3:
Di s cu s s h t e m easurem en t ofr et ur n an ds t an dar d devi at i onf or a p ort f ol i o an dt he co ncep t of co rel rat i on. 1) An effi ci en t port f ol i oi s a op r t f ol i ot hatmax i mi zes u ret rn or f a ve gi nl eve l of ri sk romi ni mi zessk ri or f a gi venl ev elof ret urn . Answ er :
TRUE Topic:
Port f ol i o R i sk d anR et urn Ques t i onStat us:
Pre viou s Edit i on
2) New i nv est men t s m ustbe con si dered nl i i ght of t hei ri mpact on t he i r sk an dr et urn f ot he p ort f ol i o o f asset s becau se he t ri sk foan y si ngl e p rop osed asset i nve smen t ti s no ti ndep en den t of othe r asset s. Answ er :
TRUE Topic:
Port f ol i o R i sk d anR et urn Ques t i onStat us:
Pre viou s Edit i on
3) The fi nan cal i man ag e' r s go alf or he t fi rm i s o t creat e a ort pf ol i ot hatmaxi mi zeset u r rn niord erot maxi mi ze he t al v ue of t he fi r m. Answ er :
F ALSE Topic: 38
Port f ol i o R i sk d anR et urn Ques t i onStat us:
Pre viou s Edit i on
4) +coeffi Tw o asset s w hoseet u r rns ov m e n it he am se d i r ect i onan d have a r el cor at i on 1 are ci en th of eac
very ri sk y asse t s. Answ er :
F ALSE Topic:
Port f ol i o R i sk d anR et urn Ques t i onStat us:
Pre viou s Edit i on
5) -1 Tw o ass et s w hoseet u r rns ov m e n it he o pposi t e d i r ect i on s and have cor ar el at i on coeffi are ci en t hbot of eit her ri sk -f reesset as o r -o ri l w skasse t s. Answ er :
F ALSE Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
6) The st an dard dev i at i on of a p ort f ol i oi s a un f ct i on of t he st an dard dev i at i ons of hetn i di vi dualsecu ri t i es i nt he p ort f ol i o, t he p rop ort i on of t he p ort f ol i oi nvest edi nt hose secu ri t i es, an d t he co rr el ati on bet ween t he ret urn s f ot hose secu ri t i es. Answ er :
TRUE Topic: 39
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
7) The st an dard dev i at i on of a p ort f ol i o s i a un f ct i on onl y o ft he st an dard dev i at i ons of t he n i di vi dual secu ri t i esnit he p ort f ol i o an d t he p rop ort i on of t he p ort f ol i oi nvest edi nt hose secu ri t i es. Answ er :
F ALSE Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre vi ou s E dt i on
40
8) A( n) ___ __ __ p ort f ol i o m ax i mi zes u ret rn or f a ve gi nl ev elof ri sk, or mi ni mi zessk ri or f a ve gi nl eve l of ret urn . A)
effi ci ent B) coeffi ci ent C)
con t i nuou s D)
-i risk ndi fferen t Answ er :
A
Topic:
Effici en t Po rt f ol i os Ques t i onStat us:
Pre viou s Edit i on
9) A co l l ecti on of asse t s s i cal l eda(n ) A)
gr ou pi ng. B) port f ol i o. C)
i nve smen t t . D)
41
di versit y. Answ er :
B Topic:
Port f ol i o R i sk d anR et urn Ques t i onStat us:
Pre viou s Edit i on
10) An effi ci en t port f ol i oi s on e h t at A)
max i mi zessk ri or f ai ve gn l eve l of ret urn. B) max i mi zes u ret rnf or a i ve gn l eve l of ri sk. C)
mi ni mi zes u ret rnf or a i ve gn l ev elof ri sk. D)
max i mi ze s ret urnat l al ri skl ev es. l Answ er :
B Topic:
Effici en t Po rt f ol i os Ques t i onStat us:
Pre viou s Edit i on
11) The __ ___ __ _ s i at at s i st i cal measu re of t he rel at i onsh i p bet ween ser i es of numbers . A)
42
coe ffici en t of va rat ii on B) s t an dardev d i at i on C)
co rel rati on D) prob ab i l i t y Answ er :
C Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
12) The g oalof aneffi ci en t port f ol i o s io t A)
max i mi zer i sk or f ai ve gn l ev elof ret urn. B) maxi mi ze i sk r niorder o m axi t mi ze r ofi pt . C)
mi ni mi ze r p ofi ti n order o mi t ni mi ze sk. ri D)
mi ni mi zeri skf or a i ve gn l eve l of ret urn. Answ er :
D Topic:
43
Effici en t Po rt f ol i os Ques t i onStat us:
Pre vi ou s E dt i on
44
13) Perf ect l y _ ____ correl at edser i es ov me exa ct l y o t get heran d have ar rel co at i on coe ffici en t of __ ___ __ _, whi l e p erf ect l y ___ __ ___ correl at edser i es ov me exa ct l yi n opposi t e d i rect i ons an d have correl a at i on coeffi ci en t of____ ___ _. A)
+ neg ati vel y;-1; posi t i vel y ;1 B)
neg ati vel y;+1; posi t i vel y -; 1 C)
+ posi t i vel y;-1;neg at i vel y ;1 D)
-; posi t i vel y;+1; neg ati vel y 1 Answ er :
D Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
14) Combi ni ng nega t i vel y corr el at edass et s hav i ng t he sam e ex pect edr et urn resul t s n ia p or t f ol i o wi t h __ ___ __ _ ev lelof exp ect edret urn na d ___ __ ___ l eve l of ri sk. A) a h i gher ; a ow l er B) t he am s e;a h i gh er C)
t he am s e;a ow l er D) 45
a ow l er ;a h i gher Answ er :
C Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
15) An i nv et s men t ad vi sor has com men rededa $5 0, 000 port f ol i o con t ai ni ng ass et s R ,J ,an d K;$25, 000 wi l l be i nve sed t i n asset R, wi t h anex pect edan nualret urn f o12perc en t ; $1 000 ,0 w i l l be n i ve sed t i n asset J , wi t h anexp ect edan nualr et urn fo18 erc pen t ; an d $15, 000 i l l wbe nv i est edi n ass etK, wi t h anexp ect edan nual ret urnof 8 p erc en t . The ex pect edan nualret urn f ot hi s p ort f ol i oi s A)
12. 67% . B) 12. 00% . C)
10. 00% . D)
unabl e o t b e d eer tmi nedf r om t he n i f orm at i onpr ov i ded . Answ er :
B Topic:
Port f ol i o R eu t rn qu (E ati on5. 5) Ques t i onStat us:
Pre viou s Edit i on
Tab l e 5 . 1 46
16) The corr el at i on ofre t urns w bet een Ass etA an d Ass etB can becha r act eri zed asSee ( ab T l e 5. 1) A)
perf ectl y posi t i vel y co rel rated . B) perf ectl y neg ati vel y co rel rated . C)
unco rel rat ed . D)
cann otbe et d er mi ned . Answ er :
B Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre vi ou s E dt i on
17) I f yo u were o cr teat e ao p r t f ol i o desi gnedt or ed uce sk riybi nv et s i ng eq ualpr opor t i ons n i each ofwo t di ffer en t ass et s , whi ch ort pf ol i o w ou l d yo ur ecom men d? ( See Tab l e 5. 1) A)
As s et s A and B B) As s et s A and C C) 47
non e of t he avai l ab l e com bi nat i ons D) cann otbe et d er mi ned Answ er :
A
Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
18) The p ort f ol i o wi t h a st an dard dev i at i on of zero Se e( Ta bl e 5. 1) A)
i s o cm pr i s edofAs s et s Aan d B. B) i s om c pr i s edofAs s et s Aan d C. C)
i s n ot o pssi bl e. D)
cann otbe et d er mi ned . Answ er :
A Topic:
Port f ol i o Stan da rd evi Dati on(E qa uti on5. 3a ) Ques t i onStat us:
Pre viou s Edit i on
19) 48
Akaihas aort p f ol i o of t hree asset s. Fi nd t he ex pect edr at e o f ret urn or fh t e p ort f ol i o assu mi ng he nv iest s 50perc en t oft si m on eyi n ass etA wi t h 10per cen tr at e o fr et urn, 30per cent n ass ietB wi t h a rat e o f re t urn of 20percen t , an d t he res ti n asset C wi t h 30percent at e o f rret urn. Answ er :
Exp ect edr at e o f re t u = rn 17ercen p t . Topic:
Port f ol i o R eu t rn qu (E ati on5. 5) Ques t i onStat us:
Pre viou s Edit i on
Lear ni ng Goa l 4: Under st an d t he ri skan dr et ur n ch aract eri st i cs of o a r t f op l i oi nt erm s f o co r r el at i on an d di vers i ficat i on, an d t he mp i act of i nt ern at i onalasset s on a p ort f ol i o. 1) Combi ni ng neg ai t ve l y correl at edasset s can red uce he t o ve r al l va rab ii l i t y of ret urns. Answ er :
TRUE Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
2) Eve ni f asset s are otn neg at i ve l y correl at ed ,t he ow l erhe t p osi t i vecorrel at i on bet ween t hem ,t he ow l erhe t resu l t i ng ri sk . Answ er : 49
TRUE Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
50
3) I n gen eral ,t he ow l erhe t co rr el ati on bet ween asset ret urn s, t he g reat erhe t p ot en t i aldi versi ficat i on of ri sk . Answ er :
TRUE Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre vi ou s E dt i on
4) A port f ol i o of t wo neg ai t vel y co rel rated asset s a hs ess l i sk rt hanei t her of he t n i di vi dualasset s. Answ er :
TRUE Topic: Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
5) I n no case wi l l creat i ng port f ol i os o f asset s resu l ti n great er sk ri t hant hat of he t ri sk i est asset ncl uded i i n t he p ort f ol i o. Answ er :
TRUE Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
6) A port f ol i o tha t com bi neswo t a set ss hav i ng p erf ect l y posi t i ve l y correl at edret urns can notred uce he t 51
port f ol i o' s v oeral l ri skbel ow t he ri skof t he ea lstri sk y asse t . Answ er :
TRUE Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
7) A port f ol i o com bi ni ng t wo asset s w i t hl ess han t perf ect l y posi t i vecorrel at i on can red uce otal t ri skt oa l evel bel ow t hatof ei t her of t he co mponen t s. Answ er :
TRUE Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
8) Fo r ei gn exch an ger i sk sih t e ri sk hat t ari ses f romt he d an gerhat ta h ost gov ernm en t mi ght t ak e act i on s t hatarearm hf ul t of orei gn i nve so t rsor rom f t he p oss i bi l i t yt hatpol i t i cal t urm oi li n a co unt ry i m ght en dan ger nv e it s men t mad e n it hatcou nt r y byf orei gn nat i on al s. Answ er :
F ALSE Topic:
Fore i gnExchan geRi sk Ques t i onStat us:
Pre viou s Edit i on
9) Ove rl ong peri ods, ret urnsrom fi nt ern at i onal l y di ve ri s fiedport f ol i os en td t o b e su peri or t o tho se el yi ded 52
bypur e l ydome s t i cone s .Ove ranys i ngl es hor tori nt e r medi at epe r i od,howe ve r ,i nt e r nat i onal di vers i ficat i on can yi el d sub par et r u p rns art i cu l arl y duri ng peri ods w hent he d ol l arsiap preci at i ng i n val ue rel ati ve o t o t her rr cu en ces. i Answ er :
TRUE Topic:
I nt erna t i on al i versi D ficati on Ques t i onStat us:
Pre viou s Edit i on
10) Com bi ni ng uncor r el at edass et s can r ed uceni o s t r k as ect eff i ve l y a s com bi ni ng n eg ai t ve l y co r rel at ed asset s, but more ect eff i ve l yt hancom bi ni ng posi t i ve l y correl at edasset s. Answ er :
TRUE
Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
53
11) As s um e your m fir produ c esa good whi c h has gh hi s al eswhen t he ono ecmy s iexpand i ngand l ow s al es duri ng a recessi on. Thi s fi rm ' s ov eral lr i sk i w l l be h i gherfi i ti nv est s n i an othe r p r oductwhi chi s cou nt er cy cli ca l . Answ er :
F ALSE
Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre vi ou s E dt i on
12) A port f ol i o co mbi ni ng tw o a set ss w hose et r urns are ess t hl anperf ect l y p osi t i ve rr co el at edcan i ncr ease t otal ri skt o a ev lelab ov e tha t of ei t her of he tco mponen t s. Answ er :
F ALSE Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
13) The n i cl usi on of asset s r f om cou nt ri es hat t e ar ess l sensi t i vet ot he U . S.busi ness cycl e red uces het port f ol i o' s esp r on si ven ess t o m ar ket mov em en t an dt o orei f gn cu ren rcy u fl ct uat i on . Answ er :
TRUE Topic:
I nt erna t i on al i versi D ficati on Ques t i onStat us:
Pre viou s Edit i on 54
14) -ei Whent he U . S.cu r rency ga i ns n i va l ue,t he d ol l ar val ue -currency o fa o f r dg en nom i nat edport f ol i o of asse t s d ecl i ne. Answ er :
TRUE Topic: Fore i gnExchan geRi sk Ques t i onStat us:
Pre viou s Edit i on
15) The cr eat i on of a p ort f ol i o b y co mbi ni ng t wo a set ss hav i ng perf ect l y posi t i vel y correl at edret urns n can ot red uce he t p ort f ol i o' s ov eral l ri sk el b ow t he ri sk fot he ea lstri sky asset . O nt he t o her an hd, a p ort f ol i o com bi ni ng t wo asset s w i t hl ess han t perf ect l y posi t i vecorrel at i on can red uce otal t ri sk ota ev lelbel ow t hatof ei t her of he tco mpon en t s. Answ er : TRUE Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
16) The ri skof a port f ol i o con t ai ni ng i nt ern at i onalst ock s g en eral l y con t ai ns ess l onn di ve ri s fiab l e ri skt han on e h t atcon t ai ns onl y A meri can s t ock s. Answ er :
TRUE Topic:
I nt erna t i on al i versi D ficati on Ques t i onStat us:
55
Pre viou s Edit i on
17) The ri skof a p ort f ol i o con t ai ni ng i nt ern at i onalst ock s ge neral l y does ot n con t ai nl essonn di ve ri s fiab l e ri sk t hanon e h t atcon t ai ns on l y A mer i canocks. st Answ er :
F ALSE Topic:
I nt erna t i on al i versi D ficati on Ques t i onStat us:
Pre viou s Edit i on
18) To t alsecu ri t y ri sk sih t e su m of a secu ri t y' s o nndi versi fiab l e an d di versi fiab l e ri sk . Answ er :
TRUE Topic:
Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre viou s Edit i on
56
19) To t alsecu ri t y ri ski s h t e su m of a secu ri t y' s n ondi ve ri s fiab l e,di ve ri s fiab l e,syst em at i c,an d unsyst em at i c risk . Answ er :
F ALSE Topic: Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre vi ou s E dt i on
20) Com bi ni ng t wo negat i vel y cor r el at edass et s o tr ed uce i sk r si kn ow n as A)
di versi fica t i on. B) val uati on. C)
l i qui dati on. D)
ri skav ersi on. Answ er :
A Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
21) I n gen eral ,t he ow l erl ess ( osi p t i vean d more eg nai t ve )t he co rr el at i on bet ween asset ret urns, 57
A)
t he ess l het p ot en t i aldi versi ficati on of ri sk . B) t he r gea t er he t p ot en t i aldi versi fica t i on of ri sk . C)
t he ow l erhe t p ot en t i alprofi t . D)
t he ess l t he asset s hav e o t b e m oni t or ed . Answ er :
B Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
22) Combi ni ng t wo asset s h av i ng perf ect l y neg ai t ve l y correl at edret urns i l l wres ul ti nt he creat i on of a port f ol i o wi t h anov eral l ri skt hat A)
r em ai ns nchan u ged . B) decreases o a ev le tlbel ow t hat of t her ei asset . C)
i ncrea ses oa t ev lelab ove th atof ei t her asset. D)
st ab i l i zeso t a eve l l bet ween t he asset wi t ht he h i gher i sk r an d t he asset wi t ht he ow l er i sk. r Answ er :
58
B Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
23) Combi ni ng t wo asset s h av i ng perf ect l y posi t i ve l y correl at edret urns i l l wr esu l ti nt he creat i on of a port f ol i o wi t h anov eral l ri skt hat A)
r em ai ns nchan u ged . B) decreases o a ev le tlbel ow t hat of t her ei asset . C)
i ncrea ses oa t ev lelab ove th atof ei t her asset. D)
l i es t be ween t he asset wi t ht he h i gher i sk r na d t he asset wi t ht he ow l er i sk. r Answ er :
D Topic:
Corre l ati onan d Port f ol i o R i sk Ques t i onStat us:
Pre viou s Edit i on
59
Lear ni ng Goa l 5:
Revi ew t he wo t t ypes of r i s k an dt he d ei r vat i on an dr ol e o f bet a n i measuri ng t he r el ev an tr i skof bot h a secu r i t y an d a p ort f ol i o. 1) Bet a coeffi ci en ti s an i ndex f ot he d egree ovem of en mt of an ss et a ' s et rur ni nr es pon s e o t a ch an ge nit he risk -fr eeasse t . Answ er :
F ALSE Topic:
Bet a an d Syst em at i c R i sk Ques t i onStat us:
Pre vi ou s E dt i on
2) Becau se ny ai nvest or can creat e aport f ol i o of asset s h t at i l w l el i mi natel ,al or i v rt ual l y al l , nondi versi fiab l e ri sk ,t he o nl y rel ev an t ri ski s d i versi fiab l e ri sk . Answ er :
F ALSE Topic:
Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre viou s Edit i on
3) Di versi fiab l e ri ski s h t e rel ev an t port i on of ri skatt ri but ab l e o t marke tf act orst hat ect affal l firm s. Answ er :
F ALSE Topic:
60
Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre viou s Edit i on
4) Di versi fiedi nv est orshou sl d be con cer nedsol el y wi t h nondi vers i fiab l e ri sk ecau b seti can cr eat e a port f ol i o of asse t s h t at wi l l eli mi nat e l a l , or i v rt ual l y al l , di versi fiabl e ri sk . Answ er :
TRUE Topic:
Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre viou s Edit i on
5) Nondi ve ri s fiab l e ri skrefl ect s h t e co nt ri but i on of anasset t ot he ri sk, or t s an dard dev i at i on, of t he port f ol i o. Answ er :
TRUE Topic:
Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre viou s Edit i on
6) -u Syst em ati c ri ski s h t at ort pi on of anasse t ' s ri skt hatsiatt ri b speci t ab l e fic, o t r an firm dom cau se s. Answ er :
F ALSE Topic:
Syst em at i c and Unsys t em at i c R i sk 61
Ques t i onStat us:
Pre viou s Edit i on
7) Unsyst em at i c i r sk can beel i mi nat edt hrou gh di versi ficat i on. Answ er :
TRUE Topic:
Syst em at i c and Unsys t em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
8) Unsy sem t ati c ri ski s h t e rel ev an t port i on of anasset ' s ri skatt ri but ab l e o t marke tf act orshat t ect affal l fir ms . Answ er :
F ALSE Topic:
Syst em at i c and Unsys t em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
62
9) The requ i red ret urnon anasset i s an i ncr easi ng f unct i on of i t s n ondi vers i fiab l e ri sk. Answ er :
TRUE Topic:
Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre viou s Edit i on
10) The em pi r i cal meas ur em ent ofbet a can e b ap pr oached byu -squ s i ng ares eas lt eg r ess ri onan ay l si s o t find t he reg ressi on co effi ci en t( bj )i nt he q euat i on f or h t e sl ope o ft he "ch aract eri st i c i l ne. " Answ er :
TRUE
Topic:
Bet a an d Syst em at i c R i sk Ques t i onStat us:
Pre vi ou s E dt i on
11) I nve so t rssh oul d rec ogni ze hat t bet as are al cu l at cedusi ng hi st ori cal dat a an dt hatpast perf orm an ce r el at i vet ot he m arket average maynot acc ur at el y predi ctf ut ure er p f or man ce. Answ er :
TRUE Topic:
Bet a an d Syst em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
12) 63
The b ea t o fa p ort f ol i oi s a un f ct i on of t he st an dard dev i ati ons f ot he n i di vi dualsecu ri t i esnit he p ort f ol i o, t he p rop ort i on of t he p ort f ol i oi nve sed t i nt hose secu ri t i es, an dt he co rr el at i on bet ween t he ret urnsfo t hose cu se rt i es. Answ er :
F ALSE Topic:
Portf oli o e Bas t Ques t i onStat us:
Pre viou s Edit i on
13) Syst em ati c ri ski s al soref err edt o as A)
di versi fiab l e ri sk . B) econ om i c ri sk. C)
nondi versi fiab l e i r sk . D)
not rel ev an t . Answ er :
C
Topic:
Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre viou s Edit i on
14) The p urpo se of ad di ng a n ass etwi t ha n ega t i ve r ol ow posi t i ve et b a s io t 64
A)
r ed uce profi t . B) red uce sk ri . C)
i ncrease rofi t .p D)
i ncrea se sk ri . Answ er :
B Topic:
Bet a an d Syst em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
15) The bet a ofhet m ar ket A)
i s r gea t er han t 1. B) i s ess l an th 1. C)
i s . 1 D)
cann otbe et d er mi ned . Answ er :
65
C Topic:
Bet a an d Syst em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
16) Ri skt hat ect aff s al l firm s s i cal l ed A)
t otalsk . ri B) managem ent r i s k. C)
nondi versi fiab l e i r sk . D)
di versi fiab l e ri sk . Answ er :
C Topic:
Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre vi ou s E dt i on
17) -speci The p ort i on of anasset ' s ri skt hatsiatt ri but ab l e to fic, rm r an fidom cau ses si cal l ed A)
unsy sem t ati c ri sk . B)
66
nondi versi fiab l e i r sk . C)
sy sem t ati c ri sk . D)
non e of het ab ove. Answ er :
A Topic:
Syst em at i c and Unsys t em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
18) The rel ev an t port i on of anasset ' s i r skat t ri but ab l e o t marke tf act orst hat ect affal l firm s s i cal l ed A)
unsy sem t ati c ri sk . B) di versi fiab l e ri sk . C)
sy sem t ati c ri sk . D)
non e of het ab ove. Answ er :
C Topic:
Syst em at i c and Unsys t em at i c R i sk Ques t i onStat us: 67
Pre viou s Edit i on
19) __ ___ __ _ ri sk rep res en t s h t e p ort i on of anasset ' s i r sk hat t can be el i mi nat edbycom bi ni ng asset s w i t hl ess t hanperf ect posi t i ve co rr el ati on. A)
Di ve ri s fiab l e B) Non di vers i fiabl e C)
Sy s t em at i c D)
Total Answ er :
A Topic:
Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre viou s Edit i on
20) Unsyst em at i c ri sk si n ot el r eva nt , becau se A) i t doe s n ot han cge. B) i t can be el i mi nat edt hr ough di ve ri s ficat i on. C)
i t can not be est i mat ed . D) 68
i t can notbe el i mi nat edt hrou gh di ve ri s ficat i on. Answ er :
B Topic:
Syst em at i c and Unsys t em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
69
21) St ri kes, l aw su i t s, regu l at oryact i ons, an di ncr eased com pet i t i on arelal ex am pl es fo A)
di versi fiab l e ri sk . B) nondi versi fiab l e i r sk . C)
econ om i c ri sk. D)
sy sem t ati c. Answ er :
A Topic: Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre vi ou s E dt i on
22) War ,i nflat i on, an dt he con di t i on ofhe to f r ei gn mar ket s ar e al l exam pl es of A)
di versi fiab l e ri sk . B) nondi versi fiab l e i r sk . C)
econ om i c ri sk. D)
unsyst em at i c. 70
B Topic:
Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre viou s Edit i on
23) A bet a coeffi ci ent + of 1 rep res en t s an asset t hat A)
i s m ore p res on si vet hant he m ar ketport f ol i o. B) has he t sam e espo r nse as t he m ar ketport f ol i o. C)
i s ess l esp r onsi ve h t ant he m arke t port f ol i o. D)
i s unaff ec t ed by mar ket movem ent . Answ er :
B Topic:
Bet a an d Syst em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
24) -1 A bet a coeffi ci ent of r ep res en t s an asset t hat A)
i s m ore p res on si vet hant he m ar ketport f ol i o. B)
71
has he t sam e res ponse as he tm ar ketport f ol i o bu ti n op posi t e d i r ect i on C)
i s ess l esp r onsi ve h t ant he m arke t port f ol i o. D)
i s unaff ec t ed by mar ket movem ent . Answ er :
B Topic:
Bet a an d Syst em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
25) A beta oeffi c ci en t of 0ep r r esent s an ass ett hat A)
i s m ore p res on si vet hant he m ar ketport f ol i o. B) has he t sam e espo r nse as t he m ar ketport f ol i o. C)
i s ess l esp r onsi ve h t ant he m arke t port f ol i o. D)
i s u nrel ated t ot he m arke t port f ol i o. Answ er :
D Topic:
Bet a an d Syst em at i c R i sk Ques t i onStat us: 72
Pre viou s Edit i on
73
26) An i nv et s men t ban ker sha ecom r men deda $100, 000ort p f ol i o con t ai ni ng ass et s B ,D,an d F.$20, 000 i l l w bei nve s t e di nas s e tB,wi t habe t aof1. 5;$50, 000wi l lbei nve s t e di nas s etD,wi t habe t aof2. 0;and$30, 000 wi l l be n i vest edi n asset F,wi t ha b ea t o f 0. 5.The b ea t o ft he p ort f ol i oi s A)
1.25.
B)
1.33. C)
1.45. D)
unabl e o t b e d eer tmi nedf r om t he n i f orm at i onpr ov i ded . Answ er :
C Topic:
Port f ol i o Bet a (E qa uti on5. 7) Ques t i onStat us:
Pre vi ou s E dt i on
27) The h i gher an asset ' s b ea, t A)
t he m or e res pon si vei ti s o t ch an gi ng mar ketr et urns. B) t he ess l esp r onsi vei ti s o t ch an gi ng market et urns. r C)
t he h i ghert he exp ect edr et ur n wi l l be nia d ow n mar ket . D)
74
t he ow l erhe t exp ect edr et ur n wi l l bei n anup mar ket . Answ er :
A Topic:
Bet a an d Syst em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
28) An i ncr ease nn i ondi vers i fiab l e ri sk A)
wou l d cau se an ncr ease i nt h i e bet a an d wou l dl ow ert he equ r i r edr et ur n. B) wou l d haveoneff ect ont he bet a an d wou l d,t her ef ore, cause o ch n an ge nit he equ r i r edr et urn. C)
wou l d cau se an i ncr ease nt h i e b ea t an d wou l di ncr ease he tre qui r edr et ur n. D)
wou l d cau se aecr d ease nt h i e b ea t an d woul d, t heref ore, l ow erhe t requ i red e rat o fr et urn. Answ er :
C Topic:
Bet a an d Syst em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
29) An i ncr ease nt h i e T r easu ry i l B lr at e ___ ____ _ h t e requ i r edr at e ofet u r rn f oa com monst ock. A)
75
has no effect on B) i ncreases C)
decr eases D) c ann otbe et d er mi ned by Answ er :
B Topic:
Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre viou s Edit i on
30) An ex am pl e o f anexter nalf act or t hataff ect s a corp or at i on' s i r sk robet a,an d hen ce eq r ui red r at e o f ret urn wou l d be ____ ____ by he t com pany. A)
a change nt he inan fic i ngmi x u s ed B) t oxi c sp i l l s. C)
a cha nge nit he ass etmi x D)
a h can ge niop t managem ent . Answ er :
B Topic: 76
Bet a an d Syst em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
31) The b ea t o fa p ort f ol i oi s A)
t he su m of t he b eas t foal l asset s n it he p ort f ol i o. B) i rr el ev an t , onl yt he b eas t fot he n i di vi dualasset s are mpo i rt an t . C)
doesot nchan ge ver o i me. t D)
i s h t e w ei ght edave r ag e o ft he b eas t fot he i ndi vi dualasset s n it he p ort f ol i o. Answ er :
D Topic:
Portf oli o e Bas t Ques t i onStat us:
Pre vi ou s E dt i on
Tab l e 5 . 2
You areoi n g gt oi nve st$20 , 000 i na p ort f ol i o con si st i ng of asset s X , Y, an d Z, asol f l ow s:
32)
77
Gi ve nt he n i f orm at i on i n Ta bl e 5. 2,whati s h t e exp ect edan nualret urn fot hi s po rt f ol i o? A)
11. 4% B) 10. 0% C) 11. 0% D)
11. 7% Answ er :
C Topic:
Port f ol i o Bet a (E qa uti on5. 7) Ques t i onStat us:
Pre viou s Edit i on
33) The b ea t o ft he p ort f ol i oi n Tab l e . 5 2,co nt ai ni ng asset s X , Y, an d Z, i s A)
1. 5. B) 2. 4. C)
1. 6. D)
2. 0. Answ er :
78
C Topic:
Port f ol i o Bet a (E qa uti on5. 7) Ques t i onStat us:
Pre viou s Edit i on
34) The b ea t o ft he p ort f ol i oi n Tab l e 5 . 2 n i di cat es hi t s p ort f ol i o A)
has ore m i sk r han t t he m ar ket . B) hasess l i sk r tha nt he m arket . C)
hasan nd uet er mi ned am ou nt ofr i s k com par ed oth t e m ar ket . D)
hashe t sam e ri sk as he tm ar ket . Answ er :
A Topic:
Port f ol i o Bet a (E qa uti on5. 7) Ques t i onStat us:
Pre viou s Edit i on
79
35) As an rdoml y sel ect edsecu ri t i es arebi n com edt o cr eate o a r t f ol p i o, t he __ __ ___ _ ri sk f ot he p ort f ol i o decreases nt i l 10u t o 20secu ri t i es are ncl ud i ed . The p ort i on of t he ri skel i mi nat edi s ___ __ __ ri sk, whi l e t hatrem ai ni ng i s ___ ___ __ri sk. A)
di versi fiab l e; n no di versi fiab l e;t otal B) relev ant ;i rrel ev ant ;t ot al C)
t ot al ; di versi fiab l e;nondi versi fiab l e D)
t ot al ; nondi versi fiab l e;di versi fiab l e Answ er :
C Topic:
Di vers i fiabl e and Non dvers ii fiabl e R i sk Ques t i onStat us:
Pre vi ou s E dt i on
36) Ni col e h ol ds h t r ee o st ck s n i her po r t f ol i o: A, B, an d C. The p ort f ol i o bet a s i 1. 40 . St ock Acom pri ses 15 percent t heof d ol l ar l va ue o f her ol h di ngs an d has aet a b o f 1. 0.I f Ni col e sel l s al l of hernve ismen t ti nA -e an d i nve ss th t e p roceed s n it h f ree ri sk asset , her ew n port f ol i o bet a w i l l be: A)
0.60. B) 0.88. C)
1.00. 80
D)
1.25. Answ er :
D Topic: Port f ol i o Bet a (E qa uti on5. 7) Ques t i onStat us:
Pre viou s Edit i on
37) Ni co ow ns 100 hares s ofs t ock wh Xi ch as h a ce pri of $12er ps har e and 200 shar esofs t ock wh Yi ch as h a pri ce of $3 er hp are. s Whati s h t e p rop ort i on of Ni co' s p ort f ol i oi nve sed t i n st ock ? X A)
77% B) 67% C)
50% D)
33% Answ er :
B Topic:
Port f ol i o W ei gh t s E ( qu ati on5. 5) Ques t i onStat us:
Pre viou s Edit i on
38) 81
Ni co an wt s o t nv iest al l of hi s m oneyi nj ustt wo asset s: t he ri sk ree f et ass an d t he m arket por t f ol i o. What i s N i co' s p ort f ol i o bet a f ihe n i ve ss t au q art er of s hi m oneyi nt he m arket rt f ol po i o an d t he res ti nt he ri sk f ree asse t ? A)
0.00 B) 0.25 C)
0.75 D)
1.00 Answ er :
B Topic: Port f ol i o W ei gh t s E ( qu ati on5. 5) Ques t i onStat us:
Pre viou s Edit i on
82
39) Whati s h t e ex pect edmarket ret urn fi t he ex pect edr et urn n oasset X i s 20ercent, p i t s beta s 1. 5, i an d t he ri skf ree rate s 5percen i t ? A)
5. 0% B) 7. 5% C)
15. 0% D)
22. 5% Answ er :
C
Topic:
Capi t alAss etPri ci ng M odel ( CAPM) ( Equat i on5. 8) Ques t i onStat us:
Pre vi ou s E dt i on
40) Whati s N i co' s p ort f ol i o be t a f ihe nv iest s an eq ualam ou nt i n ass etX wi t ha b ea t o f 0. 60, ass etY wi t ha bet aof1. 60,t her i s k-f ree asset , an dt he m arket ort f ol p i o? A)
1.20 B) 1.00 C)
0.80 D)
83
0.60 Answ er :
C Topic:
Port f ol i o Bet a (E qa uti on5. 7) Ques t i onStat us:
Pre viou s Edit i on
Tab l e 5 . 3
Con si derhe t ol fl ow i ng t wo sec ur i t i es X an d Y.
41) Whi chasset ( X or Y )i n Ta bl e 5. 3 h as he t east l t otal ri sk? Whi chhas he t east l syst em at i c i r sk? A)
X; X. B) X; Y. C)
Y; X. D)
Y; Y. Answ er :
B Topic:
Syst em at i c and Unsys t em at i c R i sk Ques t i onStat us: 84
Pre viou s Edit i on
42) Usi ng t he d at a r f om Ta bl e 5. 3,whati s h t e syst em at i c ri sk or f ao p r -t f h o i l r i d o swi of t ht h t e wou f nds -t i nvest edi n X and on hi e r d i nve sed t i n Y? A)
0.88 B) 1.17 C)
1.33 D)
1.67 Answ er :
C Topic:
Port f ol i o Bet a (E qa uti on5. 7) Ques t i onStat us:
Pre viou s Edit i on
85
43) Usi ng t he d aa t rom f Ta bl e 5. 3,whati s h t e p or t f ol i o e xp ect edret urn na d t he p ort f ol i o b ea tf iyo ui nv est 35 percent n X,i 45 erc pen ti n Y, an d 20 erc pen t -f ree i nt asse he t ? ri sk A)
12 . 5% , 0. 975 B) 12 . 5% , 1. 975 C)
15 . 0% , 0. 975 D)
15 . 0% , 1. 975 Answ er :
A
Topic:
Port f ol i o R eu t rn nd a P ort f ol i o B ea tE ( qu ati on5. 5 an d . 5 7) Ques t i onStat us:
Pre vi ou s E dt i on
44) Usi ng t he d at a r f om Ta bl e 5. 3,whati s h t e p or t f ol i o exp ect edr et urni f yo ui nv est 100 per cen t of u yo r mon ey niX,bo r r ow anam ou nt equ alt o h al f ofyo ur ow ni nv et s men t att he i r sk r ee f at r e an di nv et syo ur bor r owi ngsi nas s e tX? A) 15. 0% B) 22. 5% C)
25. 0% D) 86
27. 5% Answ er :
D Topic:
Port f ol i o R eu t rn qu (E ati on5. 5) Ques t i onStat us:
Pre viou s Edit i on
Lear ni ng Goa l 6:
Exp l ai nt he cap i t alasset pr i ci ng model( CAPM) ,i t s el rat i onsh i pt ot he secu r i t y mar ket l i ne SM ( L) , an dt he m aj or f or ces cau si ng shi f t si nt he SM L. 1) The b ea t coeffi ci en ti s an i ndex hat t measures t he d egreemovem of en t ofanass et ' s et rur ni nr es pon seota cha nge nit he m ar ketr et urn. Answ er :
TRUE Topic:
Bet a an d Syst em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
2) The d i fference t ween be t he et rurn n ot he m ar ketpor t f ol i o o f ass et s-f ree and t he e rat o i r sk f ret urn r ep r esent s h t e p r em i um t he nv iest or u m str ecei ve or f ak t i ng h t e average ount of amr i sk ass oci at edwi t h hol di ng t he m arket ort f ol p i o of asset s. Answ er :
TRUE Topic:
87
Ma r k e tRi s kPr e mi um Ques t i onStat us:
Pre viou s Edit i on
3) The securi t y mar ket i nel SM ( L) r efl ect s h t e requ i r edr et urn nit he m ar ket pl aceorf each evel l of nondi versi fiab l e ri sk( bet a). Answ er :
TRUE Topic:
Sec ur i t y M ar ke t Li ne ( SML) Ques t i onStat us:
Pre viou s Edit i on
4) The cap i t alass etpr i ci ng model( CAPM) l i nks og teh t er nu syst em at i c ri sk na dr et urnf or l al ass et s. Answ er :
F ALSE Topic:
Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre viou s Edit i on
88
5) The b ea t coeffi ci en ti s an i ndex f ot he d egreemovem of en t ofanass et ' s et rur ni nr es pon seota ch an ge ni t he ri sk -f ree asse t ret urn . Answ er :
F ALSE Topic: Bet a an d Syst em at i c R i sk Ques t i onStat us:
Pre viou s Edit i on
6) The secu ri t y market i ne s l i n ot t ab sl e o ve r i t me an d shi f t s n ii t can r esu l ti n a ch an ge n i requ i red ret urn. Answ er :
TRUE
Topic:
Sec ur i t y M ar ke t Li ne ( SML) Ques t i onStat us:
Pre vi ou s E dt i on
7) The st eep erhe t sl ope o ft he secu ri t y market i ne,t l he g reat erhe t d eg reef o ri skaversi on. Answ er :
TRUE Topic:
Sec ur i t y M ar ke t Li ne ( SML) Ques t i onStat us:
Pre viou s Edit i on
8) The v au l e o f zero or fbet a co effi ci en t of -f ree he t ri sk asset refl ect s n ot onl yi t s ab sen ce fori sk ub t al so e th 89
f act t hatt he asset ' s et rurn si u naff ect edbymov em en t s n it he m ar ketet u r rn. Answ er :
TRUE Topic:
Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre viou s Edit i on
9) A cha nge nii nflat i on ary pex ect at i ons esu rl t i ng f r om even t s u s ch san i t ernat i on alt r ad e em bargo es or maj or ch an gesniFe deral Reserve ol i cyp i w l l res ul ti n a sh i f ti nt he SM L. Answ er :
TRUE Topic:
Sec ur i t y M ar ke t Li ne ( SML) Ques t i onStat us:
Pre viou s Edit i on
10) Great er i sk r ave rs i on res ul t s n il ow er eq r ui red ret urnsorf each l ev elof ri sk, whereas red a uct i on i n ri sk ave rs i on woul d cau se he t requ i red ret urnf or each l eve l of ri sk oti ncr ease. Answ er :
F ALSE
Topic:
Fu nd am e nt al s of Ri skand Ret urn Ques t i onStat us:
Pre viou s Edit i on
11) A gi ven cha nge nii nflat i onary pex ect at i on s w i l l be ul f l y re flect edi n a corr espo ndi ng cha nge nit he 90
ret urns of al l asset s an d wi l l be refl ect edgr ap hi cal l yi n a paral l elsh i f t of t he SM L. Answ er :
TRUE Topic:
Sec ur i t y M ar ke t Li ne ( SML) Ques t i onStat us:
Pre viou s Edit i on
12) The sl ope o ft he SM L refl ect s h t e d eg ree of ri sk ers av i on; t he st eep ert si l s ope,t he g reat erhe t d eg ree of ri skav ersi on. Answ er :
TRUE Topic:
Sec ur i t y M ar ke t Li ne ( SML) Ques t i onStat us:
Pre viou s Edit i on
91
13) The A CPM i s bas edonan ass umedeffi c i ent mar ket i n whi ch her te ar e m any al sm li nves t or s ,eac h havi ng t he sam e n i f orm at i on an d exp ect at i ons w i t h res pect t o secu ri t i es; t here are o res t n ri ct i ons on i nve smen t t , no t ax es, an d no t ran sact i ons co st s;an d al li nvest ors are i onal rat , vi ew secu ri t i es mi si l arl - y, an d aresk ri ave rs e,pref err i ng hi gher et r urnsndal ow er i sk. r Answ er :
TRUE Topic:
Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre viou s Edit i on
14) Chan gesn i r i sk av er si on , an dt heref or e sh i f t s n it he S ML, res ul tf r om cha ngi ng t ast es an d pr ef er en ces of i nvest ors , whi chgen eral l y resu l tf romvari ous econ omi c,pol i t i cal , an d soci alev en t s. Answ er : TRUE Topic:
Sec ur i t y M ar ke t Li ne ( SML) Ques t i onStat us:
Pre vi ou s E dt i on
15) I n gen er al , wi del y accept edexp ect at i on s of hard t i mes ah ead t en dt o cau senv i est or s o t-becom e ess l r i sk averse. Answ er :
F ALSE Topic:
Sec ur i t y M ar ke t Li ne ( SML) Ques t i onStat us:
92
Pre viou s Edit i on
16) The __ ___ __ _ d escr i bes he t rel at i onsh i p bet ween nondi ve ri s fiab l e ri sk na d ret urn or fal l asset s. A)
EBIT -E PS ap proach t o cap i t als t ruct ur e B) s uppl y-dem an df unct i onf or ass et s C)
cap i t alasset pri ci ng model D)
Gor don ode ml Answ er :
C Topic:
Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre viou s Edit i on
17) Exam pl es foeven t s h t atncr iease sk ri avers i oni ncl ude A)
a st ockmar ketr ash. c B) assa ssi nati on of a k eypol i t i cal l ea der. C)
t he ou t br eak of war . D)
93
al l of t he a bov e. Answ er :
D Topic:
Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre viou s Edit i on
18) I nt he cap i t alass etpr i ci ng mod el ,t he b ea t coeffi ci en ti s a easu m re of ____ ___ _ ri sk an d ani ndex f ot he degree ovem of en mt of an ass et ' s et rurn nir es pon seota ch an gei n _______ _. A)
di ve ri s fiab l e;t he p ri me rat e B) nondi versi fiab l e;t he r Teasu ry i l b l rat e C)
di ve ri s fiab l e;t he bo nd i ndex rat e D)
non di vers i fiab l e;t he m ar ketet u r rn Answ er :
D Topic: Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre viou s Edit i on
94
19) -T Ass etY has aet a b o f 1. 2. f ree he ri at sk e ro f ret urni s 6 ercent, p whi l e h t e ret urnon t he m arket ort f ol p i o of asset s s i 12ercen pt . The asset ' s m arket ri sk rem pi um i s A)
7. 2 p ercen t . B) 6. 0 p ercen t . C)
13 . 2 percen t . D)
10percent. Answ er :
B
Topic:
Capi t alAss etPri ci ng M odel ( CAPM) ( Equat i on5. 8) Ques t i onStat us:
Pre viou s Edit i on
20) I nt he cap i t alass etpr i ci ng mod el ,t he b ea t co effi ci en ti s a easu m re of A)
econ om i c ri sk. B) di versi fiab l e ri sk . C)
nondi versi fiab l e i r sk . D)
95
unsy sem t ati c ri sk . Answ er :
C Topic:
Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre vi ou s E dt i on
21) -T Ass etP has aet a b o f 0. 9. f ree he ri at sk e ro f ret urni s 8 ercent, p whi l e the ret urnon t he m arket rt f ol po i o of asset s s i 14 percen t . The a sset ' s req ui red rat e o f ret urni s A)
13 . 4 percen t . B) 6. 0 p ercen t . C)
5. 4 p ercen t . D)
10percent. Answ er :
A Topic: Capi t alAss etPri ci ng M odel ( CAPM) ( Equat i on5. 8) Ques t i onStat us:
Pre viou s Edit i on
22) As i r sk ers av i on i ncr eases A) 96
a fi rm ' s be t a w i l li ncrease. B) i nvest ors' req ui red rat e o f ret urnwi l li ncrea se. C)
a fi rm ' s beta i l ld w ecrease. D)
i nvest ors 'req ui red rat e o f ret urnwi l l decrease. Answ er :
B Topic:
Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre viou s Edit i on
23) I nt he cap i t alasset pri ci ng model , ani ncr ease ni n i flat i onary exp ect at i ons w i l l be refl ect edbya( n) A)
i ncrease nt hei sl ope o ft he secu ri t y marke tl i ne. B) decrease nt he isl ope o ft he secu ri t y market i ne.l C)
paral l elsh i f t dow nward i nt he secu ri t y market l i ne. D)
paral l elsh i f t upward i nt he secu ri t y market i ne.l Answ er :
D Topic: 97
Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre viou s Edit i on
98
24) I nt he cap i t alasset pri ci ng model ,t he g en eral r i skpref eren cesf o i nve so t rsnit he m arket pl acere a refl ect ed by A)
t he ri sk -f ree rate. B) t he ev lelof t he secu ri t y marke tl i ne. C)
t he sl ope of t he secu ri t y market i ne.l D)
t he d i fference et ween bt he sec uri t y mar ketl i ne an d-fr t ee he rate. ri sk Answ er :
C
Topic:
Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre viou s Edit i on
25) An i ncr ease nt h i e b ea t o f a co rp or at i on i ndi cat es ___ ___ __ , an d, al l el se i be ng t he sam e,res ul t s n i ____ ___ _. A)
a d ecr ease nr i sk; a h i gher eq r ui r edr at e o fr et urnan d hen ce aow l er hare s r i ce p B) ani ncr ease n ri i sk; a h i gherrequ i red r at e o f ret urn na d hen ce a ow er l hare s ri ce p C)
a d ecr ease nr i sk; a ow l er eq r ui red r at e o fr et urnan d hen ce ai gh h er hare s ri ce p D)
99
ani ncr ease n ri i sk; a ow l er eq r ui red r at e o f ret urn na d hen ce ai gh h ersh areri ce p Answ er :
B Topic:
Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre vi ou s E dt i on
26) A chan ge nit he-f r i r sk ee at r e w ou l d notbe u d e o t A)
ani nt ernat i on alt r ad e em ba r go. B) a ch an gei n Fed er alReser vepol i cy. C)
f orei gn com pet i t i oni nt he fi rm ' s prod uctmar ket area. D)
non e of het ab ove. Answ er :
C Topic:
Capi t al As s e t Pr i ci ngMode l( CAPM) Ques t i onStat us:
Pre viou s Edit i on
27) Whati s h t e exp ect ed -f ri ree sk at e ro fr et urni f asset X, wi t h a bet a o f 1. 5,has naex pect edr et urnof 20 perc en t , an dt he exp ect edmar ketr et urn si 15er cen pt ? A) 100
5. 0% B) 7. 5% C)
15. 0%
D)
22. 5% Answ er :
A Topic:
Capi t alAss etPri ci ng M odel ( CAPM) ( Equat i on5. 8) Ques t i onStat us:
Pre viou s Edit i on
28) Whati s h t e ex pect edret urn or f ass etX i fi t has aet a b o f 1. 5,t he ex pect edmarket ret urn si 15ercent, p an d -sk t he ex pect edri f ree rate s 5 ercen p i t ? A)
5. 0% B) 7. 5% C) 15. 0% D)
20. 0% Answ er :
D 101
Topic:
Capi t alAss etPri ci ng M odel ( CAPM) ( Equat i on5. 8) Ques t i onStat us:
Pre viou s Edit i on
102
29) Adam wan t s o t d et er mi ne h t e equ r i r edr et ur n ona t s ock port f ol i o w i t h a bet a coeffi ci en t of0. 5.Ass umi ng t he ri sk -f reeat e ro f6 p er cen t an dt he m ar ketet u r rnof 12per cent , com put e h t e requ i r edr at e o f re t urn. Answ er :
R= RF+ b( Rm -R F) =
+ 0 - 0 = 0. =9 0. 06 . 5( 0. 12 . 06 ) 09 % The com pan y sho ul d exp ect atl east 9 p ecen r t ret urn n ot he st ock o p r t f ol i o.
Topic:
Capi t alAss etPri ci ng M odel ( CAPM) ( Equat i on5. 8) Ques t i onStat us:
Pre viou s Edit i on
30) As s umi nga i r s f k r ee at r e o f8 p erc en t an da m ar ketre t urn f o12 er p cen t , wou l da w i senv i et s or acq ui re a secu ri t y wi t ha B ea t o f 1. 5 an d a rat e o f ret urn f o14 ercent p ve nt gi he act f s ab ov e? Answ er : -R R= RF+ b( Rm F) = 0. 08 + 1 . 5( 0. 12 - 0 . 08 ) = 0. 14 =1 4% Yes, a secu ri t y wi t ha b ea t o f 1. 5 sh oul d yi el d 14percent at e o f rret urn.
Topic:
Capi t alAss etPri ci ng M odel ( CAPM) ( Equat i on5. 8) Ques t i onStat us:
Pre vi ou s E dt i on
31) Dr .Dani s on cs i der i ngi nvest ment ni a p r oj ec t wi t h bet a coeffi ci ent of1. 75. Whatwou l d you r ec om mend hi m t o do i ft hi s n i ve smen t t has an 11 . 5 p ercent at e -f o ree rret urn, e rat ri s i sk 5. 5 percen t , an d t he rat e o f ret urnon t he m arket ort f ol p i o of asset s s i 8. 5 p erc en t ? Answ er :
-R R= RF+ b( Rm F) = 0. 05 5+ 1 . 75 ( 0. 08 5- 0 . 05 5= ) 0. 10 8= 10 . 8% Dr . Dansh oul d i nvest i nt he p roj ect beca use he t p roj ect ' s act ualrat e o f ret urn( 11 . 5 p ercen t )i s grea t erhan t t he p rj o ect' s eq rui red rat e o f ret urn( 10 . 8 p ercen t ) .
103
Topic:
Capi t alAss etPri ci ng M odel ( CAPM) ( Equat i on5. 8) Ques t i onSt at us:
Pr ev i ou s E di t i on
104
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