Mock quiz Chapter 8

Unsystematic risk is * a.the risk associated with movements in securities prices B.higher when interest rates rise C.the risk of loss of purchasing power D.reduced through diversification

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.

financial risk management fill in the blacks with correct answer. Interest rate risk is the potential for investment (....loss/gain..........). that result from a change in the interest rates. If interest rate (rise/fall)..., for instance, the value of the bond or fixed-income instrument will decline.

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 additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. a. Market Risk Premium b. Risk-free rate С. Stock's beta O d. Security Market Line e. Required Return on Stock

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 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…

Which of the following statements are true about systematic risk? Select one or more: a. Beta is a measure of systematic risk in ALL asset pricing models b. Systematic risk can be fully eliminated by diversification С. Systematic risk can be traded among financial entities but cannot be destroyed or eliminated d. All stocks must have the same exposure/factor loading on systematic risk e. Systematic risk is priced f. The premia on systematic risk must always be higher than the risk-free rate Which statements are true of optimization? Select one or more: a. It is a general mathematical tool and can be used not only in portfolio optimization but many business problems b. When applied in real world setting we often use computers to estimate the optimum numerically rather than doing calculus by hand с. One of the earliest applications of optimization to business problems is Augustin Cournot's 1838 duopoly pricing model d. Optimization can only ever be as effective as the description of the…

1. Risk free rate represents: a. The market rate of return b. The rate provided by long term government securities c. Beta d. The rate provided by short term government securities   2. The market risk premium is measured by: a. T-bill rate. b. market return less risk-free rate. c. beta. d. standard deviation.   3. A stock with a beta of one would be expected to have a rate of return equal to a. the market risk premium b. the risk-free rate c. the market rate of return d. zero

The calculation of an investor's Risk Aversion (A) requires us to look at that individual investor's historic behavior in his/her investing history. Why is Risk Aversion also called "price of risk"? Group of answer choices Risk Aversion measures the risk premium that the investor has required for the Capital Market Line Risk Aversion is determined by the excess return over the risk-free asset, as required by the investor Risk Aversion measures the difference in returns required by the investor in the Capital Allocation Line versus the Capital Market Line Risk Aversion measures the amount of return that the investor has required for each unit of risk taken None of the above

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).

Equity price risk is the risk that arises from security price Choose. - the risk of a Choose.. v in the value of a Choose... v or a portfolio. Equity price risk can be either systematic or Choose. v risk. In a global economic crisis, equity price risk is Choose.. because it affects multiple assets Choose. volatility decline classes. increase specific systematic security