Ch 13

Question 1

expected return

Answer 1

((stock 1/total)(ER1))+((stock 2/total)(ER2)) or (probabilityreturn)+(probabilityreturn)

Question 2

Expected return of a portfolio

Answer 2

1.R= sum of all stocks/amount of stocks
2. (return of a portfolioxprobability)+(return of a portfolioxprobability)

Question 3

Beta Portfolio

Answer 3

((stock/total stock)beta)+((stock/total stock)beta)

Question 3

Variance of a portfolio

Answer 3

(probability(return-ER))^2+(probability(return-ER))^2

Question 3

ER using CAPM

Answer 3

risk free-(ER market-risk free)*beta

Question 4

Beta of a stock using CAPM

Answer 4

(expected return-risk free)/market return-risk free)

Question 5

Market ER using CAPM

Answer 5

((ER-risk free)/beta)+risk free

Question 6

A firm is intending to invest in a new project. The __________blank is the minimum rate of return the firm will accept on this project.

Answer 6

cost of capital

Question 7

An investor owns stocks issued by 14 different companies, plus bonds issued by seven different companies. Her investments are best described as a(n):

Answer 7

portfolio

Question 8

The market risk premium equals the:

Answer 8

market rate of return minus the risk-free rate of return

Question 9

The __________blank is a positively sloped linear function that plots securities’ expected returns against their betas.

Answer 9

security market line

Question 10

If the market is efficient and securities are priced fairly, all securities will have the same:

Answer 10

reward-risk-ratio

Question 11

which is the best measure of systematic risk?

Answer 11

beta

Question 12

What is one of the statements regarding unsystematic risk is accurate?

Answer 12

It can be effectively eliminated by portfolio diversification.

Question 13

A __________blank is the market’s measure of systematic risk.

Answer 13

beta of 1

Question 14

a statement that best describes the principle of diversification

Answer 14

Spreading an investment across many diverse assets will eliminate some of the total risk.

Question 15

Which of the following statements are accurate?

one. Nondiversifiable risk is measured by beta.

two. The risk premium increases as diversifiable risk increases.

three. Systematic risk is another name for nondiversifiable risk.

four. Diversifiable risks are market risks you cannot avoid.

Answer 15

1 and 3 only

Question 16

Risk premium CAPM

Answer 16

(ER-risk free)/beta

Question 17

A collection of assets is considered as _________.

Answer 17

a portfolio

Question 18

Which one of the following portfolios is the most diversified?
A. Holding 100 internet company stocks.
B. Holding 100 stocks of Ohio companies.
C. Holding 100 randomly picked stocks and bonds
D. Holding 100 randomly picked bonds.

Answer 18

C. Holding 100 randomly picked stocks and bonds

Question 19

Diversification is effective to reduce _______.

Answer 19

unsystematic risk
firm-specific risk

Question 20

9. A stock is considered having greater systematic risk than the market if
   ______.

Answer 20

its beta is greater than 1.

Question 21

If a market is in an equilibrium, ______ will lie on the Security
Market Line.

Answer 21

the market portfolio
the large company stocks
the small company stocks
the bonds
the T-bills

Question 22

CAPM captures the positive association between _____ and _____.

Answer 22

risk premium, stock beta
expected return, stock systematic risk

Question 23

The inputs useful to estimate required rate of return with CAPM are _______.

Answer 23

risk-free rate market expected return market risk premium beta systematic risk