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.

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.

In a CAPM world, what do you need to know in order to estimate an asset's expected return? Group of answer choices The risk free rate, the market risk premium, and the asset's standard deviation The risk free rate, the market risk premium, and the asset's beta The corporate bond rate, the expected return on the S&P 500 and the asset's Beta Market sentiment, historical stock returns and the risk free rate

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