公司理财精要第十一章题库.doc

Chapter 11 - Risk and ReturnChapter 11Risk and Return Multiple Choice Questions1.Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?A.Expected returnB.Real returnC.Market rateD.Systematic returnE.Risk premium2.Which one of the following best describes a portfolio?A.Risky securityB.Security equally as risky as the overall marketC.New issue of stockD.Group of assets held by an investorE.Investment in a risk-free security3.Stock A comprises 28 percent of Susans portfolio. Which one of the following terms applies to the 28 percent?A.Portfolio varianceB.Portfolio standard deviationC.Portfolio weightD.Portfolio expected returnE.Portfolio beta4.Which one of the following describes systemic risk?A.Risk that affects a large number of assetsB.An individual securitys total riskC.Diversifiable riskD.Asset specific riskE.Risk unique to a firms management5.Which of the following terms can be used to describe unsystematic risk?I. asset-specific riskII. diversifiable riskIII. market riskIV. unique riskA.I and IV onlyB.II and III onlyC.I, II, and IV onlyD.II, III, and IV onlyE.I, II, III, and IV6.Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?A.SystematicB.UnsystematicC.DiversificationD.Security market lineE.Capital asset pricing model7.The systematic risk principle states that the expected return on a risky asset depends only on which one of the following?A.Unique riskB.Diversifiable riskC.Asset-specific riskD.Market riskE.Unsystematic risk8.Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?A.Squared deviationB.Beta coefficientC.Standard deviationD.MeanE.Variance9.The security market line is a linear function which is graphed by plotting data points based on the relationship between which two of the following variables?A.Risk-free rate and betaB.Market rate of return and betaC.Market rate of return and the risk-free rateD.Risk-free rate and the market rate of returnE.Expected return and beta10.Which one of the following is the slope of the security market line?A.Risk-free rateB.Market risk premiumC.Beta coefficientD.Risk premium on an individual assetE.Market rate of return11.The security market line is defined as a positively sloped straight line that displays the relationship between which two of the following variables?A.Beta and standard deviationB.Systematic and unsystematic riskC.Nominal and real returnsD.Expected return and betaE.Risk premium and beta12.Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?A.Risk-free rateB.Market risk premiumC.Expected return minus the risk-free rateD.Market rate of returnE.Cost of capital13.A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?A.An increase in the rate of return in a recessionary economyB.An increase in the probability of an economic boomC.A decrease in the probability of a recession occurringD.A decrease in the probability of an economic boomE.An increase in the rate of return for a normal economy14.The expected return on a security is currently based on a 22 percent chance of a 15 percent return given an economic boom and a 78 percent chance of a 12 percent return given a normal economy. Which of the following changes will decrease the expected return on this security?I. an increase in the probability of an economic boomII. a decrease in the rate of return given a normal economyIII. an increase in the probability of a normal economyIV. an increase in the rate of return given an economic boomA.I and II onlyB.I and IV onlyC.II and III onlyD.I, III, and IV onlyE.I, II, III, and IV15.Which one of the following is the computation of the risk premium for an individual security? E(r) is the expected return on the security, rf is the risk-free rate, b is the securitys beta, and E(r)M is the expected rate of return on the market.A.E(r)M - rfB.E(r) - E(r)MC.E(r) - (E(r)M + rf)D.bE(r)M - rfE.b E(r) - rf16.The expected rate of return on Delaware Shores, Inc. stock is based on three possible states of the economy. These states are boom, normal, and recession which have probabilities of occurrence of 20 percent, 75 percent, and 5 percent, respectively. Which one of the following statements is correct concerning the variance of the returns on this stock?A.The variance must decrease if the probability of occurrence for a boom increases.B.The variance will remain constant as long as the sum of the economic probabilities is 100 percent.C.The variance can be positive, zero, or negative, depending on the expected rate of return assigned to each economic state.D.The variance must be positive provided that each state of the economy produces a different expected rate of return.E.The variance is independent of the economic probabilities of occurrence.17.Which one of the following statements is correct?A.The risk premium on a risk-free security is generally considered to be one percent.B.The expected rate of return on any security, given multiple states of the economy, must be positive.C.There is an inverse relationship between the level of risk and the risk premium given a risky security.D.If a risky security is correctly priced, its expected risk premium will be positive.E.If a risky security is priced correctly, it will have an expected return equal to the risk-free rate.18.You are assigned the task of computing the expected return on a portfolio containing several individual stocks. Which one of the following statements is correct concerning this task?A.The expected rate of return on the portfolio must be positive.B.The arithmetic average of the betas for each security held in the portfolio must equal 1.0.C.The portfolio beta must be 1.0.D.The summation of the return deviation from the portfolio expected return for each economic state must equal zero.E.The standard deviation of the portfolio must equal 1.0.19.Consider a portfolio comprised of four risky securities. Assume the economy has three states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero?A.The portfolio beta must be 1.0.B.The portfolio expected rate of return must be the same for each economic state.C.The portfolio risk premium must equal zero.D.The portfolio expected rate of return must equal the expected market rate of return.E.There must be equal probabilities that the state of the economy will be a boom or a bust.20.Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?A.A news bulletin that the anticipated layoffs by a firm will occur as expected on December 1B.Announcement that the CFO of the firm is retiring June 1st as previously announcedC.Announcement that a firm will continue its practice of paying a $3 a share annual dividendD.Statement by a firm that it has just discovered a manufacturing defect and is recalling its productE.The verification by senior management that the firm is being acquired as had been rumored21.Which one of the following is the best example of unsystematic risk?A.Inflation exceeding market expectationsB.A warehouse fireC.Decrease in corporate tax ratesD.Decrease in the value of the dollarE.Increase in consumer spending22.Which one of the following is an example of systematic risk?A.Major layoff by a regional manufacturer of power boatsB.Increase in consumption created by a reduction in personal tax ratesC.Surprise firing of a firms chief financial officerD.Closure of a major retail chain of storesE.Product recall by one manufacturer23.Which one of the following is the best example of systematic risk?A.Discovery of a major gas fieldB.Decrease in textile importsC.Increase in agricultural exportsD.Decrease in gross domestic productE.Decrease in management bonuses for banking executives24.Standard deviation measures _ risk while beta measures _ risk.A.systematic; unsystematicB.unsystematic; systematicC.total; unsystematicD.total; systematicE.asset-specific; market25.Which one of the following portfolios will have a beta of zero?A.A portfolio that is equally as risky as the overall market.B.A portfolio that consists of a single stock.C.A portfolio comprised solely of U. S. Treasury bills.D.A portfolio with a zero variance of returns.E.No portfolio can have a beta of zero.26.Which one of the following best exemplifies unsystematic risk?A.Unexpected economic collapseB.Unexpected increase in interest ratesC.Unexpected increase in the variable costs for a firmD.Sudden decrease in inflationE.Expected increase in tax rates27.The risk premium for an individual security is based on which one of the following types of risk?A.TotalB.SurpriseC.DiversifiableD.SystematicE.Unsystematic28.Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security?A.Security beta multiplied by the market rate of returnB.Market risk premiumC.Security beta multiplied by the market risk premiumD.Risk-free rate of returnE.Zero29.Systematic risk is:A.totally eliminated when a portfolio is fully diversified.B.defined as the total risk associated with surprise events.C.risk that affects a limited number of securities.D.measured by beta.E.measured by standard deviation.30.Which one of the following statements is correct?A.A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0.B.Any portfolio that is correctly valued will have a beta of 1.0.C.A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a security market line graph.D.A risk-free security plots at the origin on a security market line graph.E.An underpriced security will plot above the security market line.31.Portfolio diversification eliminates which one of the following?A.Total investment riskB.Portfolio risk premiumC.Market riskD.Unsystematic riskE.Reward for bearing risk32.Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following?A.Increase the expected risk premiumB.Reduce the beta of the portfolio to zeroC.Increase the securitys risk premiumD.Reduce the portfolios systematic risk levelE.Reduce the portfolios unique risks33.A risky security has less risk than the overall market. What must the beta of this security be?A.0B. 0 but 1E.The beta cannot be determined based on the information provided.34.The addition of a risky security to a fully diversified portfolio:A.must decrease the portfolios expected return.B.must increase the portfolio beta.C.may or may not affect the portfolio beta.D.will increase the unsystematic risk of the portfolio.E.will have no effect on the portfolio beta or its expected return.35.A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is 0.74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta:A.must be 1.0 because of the large number of securities in the portfolio.B.is the geometric average of the individual security betas.C.must be less than the market beta.D.will be between 0 and 1.0.E.will be greater than or equal to 0.74 but less than or equal to 1.51.36.The beta of a risky portfolio cannot be less than _ nor greater than _.A.0; 1B.1; the market betaC.the lowest individual beta in the portfolio; market betaD.the market beta; the highest individual beta in the portfolioE.the lowest individual beta in the portfolio; the highest individual beta in the portfolio37.If a security plots to the right and below the security market line, then the security has _ systematic risk than the market and is _.A.more; overpricedB.more; underpricedC.less; overpricedD.less; underpricedE.less; correctly priced38.Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio:A.for the portfolio must equal 1.0.B.for the portfolio must be less than the market risk premium.C.for each security must equal zero.D.of each security is equal to the risk-free rate.E.of each security must equal the slope of the security market line.39.Which one of the following statements related to the security market line is correct?A.An underpriced security will plot below the security market line.B.A security with a beta of 1.54 will plot on the security market line if it is correctly priced.C.A portfolio with a beta of 0.93 will plot to the right of the overall market.D.A security with a beta of 0.99 will plot above the security market line if it is correctly priced.E.A risk-free security will plot at the origin.40.Which one of the following is the vertical intercept of the security market line?A.Market rate of returnB.Individual security rate of returnC.Market risk premiumD.Individual security beta multiplied by the market risk premiumE.Risk-free rate41.Based on the capital asset pricing model, investors are compensated based on which of the following?I. market risk premiumII. portfolio standard deviationIII. portfolio betaIV. risk-free rateA.I and III onlyB.II and IV onlyC.I, II, and III onlyD.I, III, and IV onlyE.I, II, III, and IV42.World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stocks rate of return without affecting the risk level of the stock, all else constant?A.An increase in the risk-free rateB.Decrease in the securitys betaC.Overpricing of the stock in the market placeD.Increase in the market risk-to-reward ratioE.Decrease in the market rate of return43.The expected return on a security depends on which of the following?I. risk-free rate of returnII. amount of the securitys unique riskIII market rate of returnIV. standard deviation of returnsA.I and III onlyB.II and IV onlyC.II, III, and IV onlyD.I, III, and IV onlyE.I, II, III, and IV44.The capital asset pricing model:A.assumes the market has a beta of zero.B.rewards investors based on total risk.C.considers the time value of money.D.applies to portfolios but not to individual securities.E.assumes the market risk premium is constant over time.45.Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives?A.Invest the entire $5,000 in a stock with a beta of 1.0B.Invest $2,500 in a stock with a beta of 1.98 and $2,500 in a stock with a beta of 1.0C.Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0D.Invest $2,500 in a stock with a beta of 1.0, $1,250 in a risk-free asset, and $1,250 in a stock with a beta of 2.0E.Invest $2,000 in a stock with a beta of 3, $2,000 in a risk-free asset, and $1,000 in a stock with a beta of 1.046.Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else constant?A.An increase in the risk level of that security as measured by the standard deviationB.An increase in the risk-free rate given a security beta of 1.42C.A decrease in the market rate of return given a security beta of 1.13D.A decrease in the market rate of return given a security beta of .78E.A decrease in the risk-free rate given a security beta of 1.0647.Blue Lagoon stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock?A.3.90 percentB.4.23 percentC.4.51 percentD.5.47 percentE.5.92 percent48.Candy and More stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock?A.7.89 percentB.8.56 percentC.9.43 percentD.9.90 percentE.10.02 percent49.Northern Wear stock has an expected return of 14.6 percent. Given the information below, what is the expected return on this stock if the economy is normal?A.13 percentB.16 percentC.18 percentD.21 percentE.23 percent50.Hal Enterprises stock has an expected return of 10.2 percent. Given the information below, what is the expected return if the economy is in a recession?A.-12.94 percentB.-11.7