Investments Final Chapter 12 Exam
Questions With Verified Answers.
1. Which one of the following is the type of risk that affects a large number of assets? -
answer✔B. systematic
2. Which one of the following is the type of risk that only affects either a single firm or just a
small number of firms? - answer✔D. unsystematic
3. According to the systematic risk principle, the reward for bearing risk is based on which one
of the following types of risk? - answer✔D. systematic
4. Which one of the following measures systematic risk? - answer✔A. beta
5. The security market line depicts the graphical relationship between which two of the
following?
I. expected return
II. surprise return
III. systematic risk
IV. unsystematic risk - answer✔A. I and III
6. Which one of the following is expressed as "E(RM) - Rf"? - answer✔A. market risk premium
7. Which one of the following is the theory which states that the value of a security is dependent
upon the pure time value of money, the reward for bearing systematic risk, and the amount of
systematic risk? - answer✔B. capital asset pricing model
8. Which one of the following terms is the measure of the tendency of two things to move or
vary together? - answer✔E. covariance
9. Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this
month. This announcement will cause the firm's stock price to: - answer✔E. either increase,
decrease, or remain constant.
10. Which one of the following is the best example of a risk associated with stock ownership? -
answer✔C. One of the firm's patent applications was unexpectedly rejected.
11. Which one of the following announcements is most apt to cause the price of a firm's stock to
increase? - answer✔B. An unpopular CEO unexpectedly announced he is resigning effective
immediately.
12. Which one of the following terms is another name for systematic risk? - answer✔C. market
risk
13. Which one of the following is the best example of systematic risk? - answer✔C. gas prices
rise sharply
14. Which one of the following statements applies to unsystematic risk? - answer✔A. It can be
eliminated through portfolio diversification.
15. Which one of the following is the best example of unsystematic risk? - answer✔A. decrease
in company sales
16. Which one of the following qualifies as diversifiable risk? - answer✔E. the unsystematic
portion of an unexpected return
17. Which one of the following betas represents the greatest level of systematic risk? -
answer✔E. 1.27
18. A stock with which one of the following betas has an expected return that most resembles the
overall market expected rate of return? - answer✔C. .99
19. What is the beta of a risk-free security? - answer✔A. .00
Which has the highest expected risk premium? - answer✔Highest Beta
________ has the greatest level of total risk and _________ has the highest risk premium -
answer✔Combination of high beta and high standard deviation; highest beta
22. A portfolio beta is computed as which one of the following? - answer✔A. weighted average
23. You own a portfolio which is invested equally in two stocks and a risk-free security. The
stock betas are .89 for Stock A and 1.26 for Stock B. Which one of the following will increase
the portfolio beta, all else constant? - answer✔D. increasing the weight of Stock A and
decreasing the weight of the risk-free security
24. A portfolio of securities has a beta of 1.14. Given this, you know that: - answer✔E. the
expected return on the portfolio is greater than the expected market return.
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