FIN301 chapter 11 Exam Questions with Correct Answers
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Course
FIN 301
Institution
FIN 301
Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate? - Answer-Expected return
Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent? -...
FIN301 chapter 11 Exam Questions with
Correct Answers
Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that
stock. Which one of the following best describes the 16.5 percent rate? - Answer-
Expected return
Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms
applies to the 28 percent? - Answer-Portfolio weight
Systematic risk is defined as: - Answer-any risk that affects a large number of assets.
Unsystematic risk can be defined by all of the following except: - Answer-market risk.
Which term best refers to the practice of investing in a variety of diverse assets as a
means of reducing risk? - Answer-Diversification
The systematic risk principle states that the expected return on a risky asset depends
only on the asset's ___ risk. - Answer-market
The amount of systematic risk present in a particular risky asset relative to that in an
average risky asset is measured by the: - Answer-beta coefficient.
The security market line is a linear function that is graphed by plotting data points based
on the relationship between the: - Answer-expected return and beta.
The slope of the security market line represents the: - Answer-market risk premium.
The security market line is defined as a positively sloped straight line that displays the
relationship between the: - Answer-expected return and beta of either a security or a
portfolio.
Which one of the following is the minimum required rate of return on a new investment
that makes that investment attractive? - Answer-Cost of capital
A stock is expected to return 13 percent in an economic boom, 10 percent in a normal
economy, and 3 percent in a recessionary economy. Which one of the following will
lower the overall expected rate of return on this stock? - Answer-A decrease in the
probability of an economic boom
Which one of the following is the computation of the risk premium for an individual
security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the
security's beta, and E(RM) is the expected rate of return on the market. - Answer-
β[E(RM) -Rf]
, Which one of the following statements is correct? - Answer-If a risky security is correctly
priced, its expected risk premium will be positive.
Which statement is true? - Answer-The weights of the securities held in any portfolio
must equal 1.0.
Which one of the following is the best example of an announcement that is most apt to
result in an unexpected return? - Answer-Statement by a firm that it has just discovered
a manufacturing defect and is recalling its product
Which one of the following is the best example of unsystematic risk? - Answer-A
warehouse fire
Which one of these represents systematic risk? - Answer-Increase in consumption
created by a reduction in personal tax rates
Which one of these is the best example of systematic risk? - Answer-Decrease in gross
domestic product
Standard deviation measures _____ risk while beta measures _____ risk. - Answer-
total; systematic
Which one of the following best exemplifies unsystematic risk? - Answer-Unexpected
increase in the variable costs for a firm
The risk premium for an individual security is based on which one of the following types
of risk? - Answer-Systematic
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-Zero
Which statement is correct? - Answer-An underpriced security will plot above the
security market line.
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-Reduce the portfolio's unique risks
For a risky security to have a positive expected return but less risk than the overall
market, the security must have a beta: - Answer-that is > 0 but < 1.
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