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Flashcards in Final Deck (22):

A stock has a beta of 1.18. A portfolio manager has estimated that the stock is currently priced to yield an expected return of 13.2 percent. The risk-free rate is 4.1 percent and the expected return on the market portfolio is 11.6 percent. According to the Capital Asset Pricing Model, which of the following statements is true?

The stock is underpriced because its estimated return is higher than its required return.


The US Securities and Exchange Commission regularly charges individuals with insider trading and claims that those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than ______ form efficient.



Which form of market efficiency will most likely offer the greatest profit potential to an outstanding professional stock analyst?

weak form


Which of the following statements concerning risk are correct?

I. Non-diversifiable risk is measured by beta

II. The risk premium increases as diversifiable risk increases

III. Systematic risk is another name for non-diversifiable risk

IV. Diversifiable risks are market risks you cannot avoid

I and III


Which one of the following is irrelevant to a well-diversified investor?

unsystematic risk


1. Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. What term refers to the difference between these two rates of return?

risk premium


2. What is the definition of the variance of an investment's annual returns over a number of years?

The average squared difference between the actual returns and the arithmetic average return.


3. Standard deviation is a measure of which one of the following?



4. The average compound return earned per year over a multiyear period is called the _____ average return.



Can be effectively eliminated by portfolio diversification.

Unsystematic risk:


The principle of diversification tells us that:

Spreading an investment across many diverse assets will reduce unsystematic risk.


Which one of the following should earn the most risk premium based on CAPM?

C. Stock with a beta of 1.28.


Standard deviation is a measure of ______________ while beta is a measure of ____________________.

Total risk; systematic risk


You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy
occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?

expected return


You recently overheard your boss telling someone that if he'd actually crunched some numbers and done some analysis instead of just going with his instincts, he
never would have opened the new store in Centre City. Which one of the following caused your boss to make a bad decision?

after heuristic


Which one of the following best illustrates an error which you, as a project manager, might make due to confirmation bias?

Listening to the advice of subordinates with whom you agree while ignoring the advice of subordinates with D. whom you tend to disagree.


Steve purchased a stock last year for $34 a share. The stock increased in value to $36 a share before declining to its current value of $30. Steve has decided to sell the stock, but only if he can receive $34 a share or better. Steve is suffering most from which one of the following behavioral conditions?

loss aversion


Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?

efficient capital market


he risk premium (sometimes referred to as excess return) is computed as the:

A return on risky security minus the risk free rate


Recently, a neighbor you have known for years won a lottery and received a $250,000 prize. This neighbor decided to invest all of his winnings in a new business venture that he knew only had a 5 percent chance of success. Previous to this, the neighbor had always been ultra conservative with his money and had refused to invest in this business venture as recently as last week. Which one of the following behaviors most

house money


Which one of the following is most directly affected by the level of systematic risk in a security?

expected rate of return


Roger's Meat Market is a chain of retail stores that limits its sales to fresh­cut meats. The stores have been very profitable in northern cities. However, when two stores were opened in the south, both lost money and had to be closed. Roger, the owner, has now concluded that no southern­based store should be opened as it would not be profitable. Which one of the following applies to Roger?

representativeness heuristic