Chapter 11

Question 1

Which statement is true?

Answer 1

The weights of the securities held in any portfolio must equal 1.0

Question 2

Systematic risk is defined as…

Answer 2

any risk that affects a large number of assets

Question 3

Unsystematic risk can be defined by all of the following except…

Answer 3

market risk

Question 4

The capital asset pricing model states that the expected return on a risky asset depends only on the asset’s _____________ risk

Answer 4

market

Question 5

Which one of the following is the best example of unsystematic risk?

Answer 5

A warehouse fire

Question 6

Which one of these represents systematic risk?

Answer 6

Increase in consumption created by a reduction in personal tax rates

Question 7

Which one of these is the best example of systematic risk?

Answer 7

Decrease in gross domestic product

Question 8

Which one of the following best exemplifies unsystematic risk?

Answer 8

Unexpected increase in the variable costs for a firm

Question 9

Which term best refers to the practice of investing in a variety of diverse assets as a means
of reducing risk?

Answer 9

Diversification

Question 10

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?

Answer 10

Reduce the portfolio’s unique risks

Question 11

Portfolio diversification eliminates…

Answer 11

unsystematic risk

Question 12

The beta of a risky portfolio cannot be less than _____________ nor greater than
_____________

Answer 12

the lowest individual beta in the portfolio; the highest individual beta in the portfolio

Question 13

When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the…

Answer 13

market value of the investment in each stock

Question 14

A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual
security is .74 and the highest of the security betas of 1.51. Given this information, you know
that the portfolio beta…

Answer 14

will be greater than or equal to .74 but less than or equal to 1.51

Question 15

Which one of the following statements is accurate?

Answer 15

A portfolio beta is a weighted average of the betas of the individual securities contained
in the portfolio

Question 16

The addition of a risky security to a fully diversified portfolio…

Answer 16

may or may not affect the portfolio beta

Question 17

The most important reason to diversify a portfolio is to…

Answer 17

eliminate asset-specific risk

Question 18

For a risky security to have a positive expected return but less risk than the overall market,
the security must have a beta

Answer 18

that is > 0 but < 1

Question 19

Systematic risk is…

Answer 19

measured by beta

Question 20

Which one of the following portfolios will have a beta of zero, theoretically?

Answer 20

A portfolio comprised solely of U. S. Treasury bills

Question 21

Standard deviation measures _____________ risk while beta measures _____________ risk.

Answer 21

total; systematic

Question 22

Which of the following statements best describes the principle of diversification?

Answer 22

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

Question 23

Which of the following statements are accurate?

I. Nondiversifiable risk is measured by beta.
II. The risk premium increases as diversifiable risk increases.
III. Systematic risk is another name for nondiversifiable risk.
IV. Diversifiable risks are market risks you cannot avoid

Answer 23

I and III only

Question 24

The amount of systematic risk present in a particular risky asset relative to that in a market
portfolio is measured by the…

Answer 24

beta coefficient

Question 25

Use the financial information below to choose the correct statement. Stock STD Beta ABC 25% 0.85 XYZ 15% 1.25

Answer 25

ABC has greater stock return volatility than XYZ. (*STD ABC > STD XYZ)

Question 26

According to the capital asset pricing model, the expected return on a security will be affected by all of the following except the...

Answer 26

security’s standard deviation

Question 27

According to the capital asset pricing model, the expected return on a security is not affected by the...

Answer 27

security’s unique risks

Question 28

The capital asset pricing model...

Answer 28

considers the relationship between the fluctuations in a security’s returns versus the market’s returns

Question 29

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?

Answer 29

Zero

Question 30

The slope of the security market line represents the...

Answer 30

market risk premium

Question 31

The security market line is defined as a positively sloped straight line that displays the relationship between the...

Answer 31

expected return and beta of either a security or a portfolio

Question 32

Which statement is correct?

Answer 32

An underpriced security will plot above the security market line

Question 33

Which statement is correct?

Answer 33

A security with a beta of 1.54 will plot on the security market line if it is correctly priced

Question 34

If a security plots to the right and below the security market line, then the security has _____________ systematic risk than the market and is _____________

Answer 34

more; overpriced