Mock quiz Chapter 8

Which of the following is a false statement of the market price of risk found in the Capital Market Line?   a) The incremental risk divided by the incremental expected return.   b) Indicates the additional expected return that the market demands for an increase in a portfolios risk.   c) The equilibrium price of risk in the capital market.   d) The slope of the capital market line.

Exposure to systematic or market risk can be reduced by?             A. adding low or negative beta stocks to the portfolio.   B. investing in a variety of economic sectors.   C. cannot be reduced or avoided.   D. diversifying internationally.

The risk premium for an investment: Answer a. Is negative for U.S. Treasury Securities b. Is zero (0) for risk-averse investors c. Increases with risk d. Is a fixed amount added to the risk-free return, regardless of the level of risk

1. What effect does increasing inflation expectations have on the required returns of investors in common stock? 2. Explain the specific relationship between risk and reward and why this relationship must be true.

A reduction in the willingness of investors to take on risk would have what effect on the Security Market Line? A.no effect B.rotate the SML counter clockwise around the risk-free rate C.rotate the SML clockwise around the risk-free rate D.shift the SML upward, parallel to its previous location

Which asset below is generally the most suitable benchmark measure of the risk-free return? Treasury bills Small stocks Long-term government bonds Non-investment grade bonds Common stocks

D4

Unsystematic risk: is compensated for by the risk premium. is measured by standard deviation. is related to the overall economy. can be effectively eliminated by portfolio diversification. is measured by beta.

Which of the following statements is FALSE? OA. In theory, the market portfolio includes all risky assets that are available to investors 8. Based on the CAPM, the beta of the market portfolio is 1. OcBeta measures the sensitivity of a security to systematic risk factors OD. If we assume that the market portfolio (e.g., S&P 500) is efficient, then changes in the value of the market portfolio represent systematic shocks to the economy E. None of the above

Which of the following statements regarding unsystematic risk is accurate?   Multiple Choice   It is measured by beta. It is compensated for by the risk premium. It can be effectively eliminated by portfolio diversification. It is measured by standard deviation. It is related to the overall economy.

Which of the following statements is correct? Check all that apply. Non-systematic risk reflects the risk that remains after an investor has diversified his or her portfolio. Possible sources of market or non-diversifiable risk include inflation and commodity price changes, changes in currency exchange rates, and fluctuations in interest rates. A investor's exposure to market risk can be diversified away by holding approximately 40 randomly-selected securities in an investor's portfolio. The phenomena and behaviors discussed above are based on the assumption that the majority of investors are risk averse. According to the ncept of risk aversion, Check all that apply. An investor will assess the rate of return offered by a security, and then determine the corresponding riskiness of the security. An investor will assess the riskiness of a security, and then determine his or her appropriate rate of return. Which statement is correct? O It is theoretically possible to create a portfolio…

5. Which of the following statements about event studies is/are true? (a) Event time is measured relative to the date on which the event (e.g. the stock split) is first announced to the market. (b) CAAR stands for Cumulative Average Abnormal Return. (c) Abnormal returns are always measured as the return over and above the Capital Asset Pricing Model. * (a) only. (b) only. (c) only. (a) and (b) only. (a) and (c) only. (a), (b) and (c).

What does Jensen's alpha measure? a. An investor's reward in proportion to their assumption of systematic risk b. The abnormal return of an asset, defined as the degree to which its actual return exceeds that predicted by the capital asset pricing model c. The degree to which diversifiable risk is eliminated d. How much reward an investor is getting for each unit of risk assumed

Which of the following is the risk due to a changes in the stock market?      Business risk     Financial risk     Market risk     Interest rate risk     Purchasing power risk     Exchange rate risk

The risk associated with the overall market is referred to as _____ risk. a. unsystematic b. diversified c. portfolio d. systematic

Inflation, recession, and high interest rates are economic events which are characterized as: A. Company-specific risk that can be diversified away. B. Systematic risk that can be diversified away. C. Diversifiable risk. D. Market risk. E. Unsystematic risk that can be diversified away.

Please do a and b separate (Question 2) a) Plot the Security Market Line (SML)b) Superimpose the CAPM’s required return on the SMLc) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph.

When a firm invests in money market instruments, it is taking _______ and should expect __________.   Question 17 options:   1)  high risk, high returns   2)  high risk, low returns   3)  low risk, low returns   4)  low risk, high returns

Which of the following is the risk due to inflation?      Business risk     Financial risk     Market risk     Interest rate risk     Purchasing power risk     Exchange rate risk