10) Many former employees at AlphaEnergy, an energy trading and supply company, had a
large part of their portfolio invested in AlphaEnergy’s stock. These employees were bearing
a high degree of ________ risk.
A) unsystematic
B) systematic
C) market-speciic
D) non-diversiiable
AACSB Objective: Relective Thinking Skills
Author: KB
Question Status: Revised
11) Which of the following is NOT a diversiiable risk?
A) the risk that oil prices rise, increasing production costs
B) the risk that the CEO is killed in a plane crash
C) the risk of a key employee being hired away by a competitor
D) the risk of a product liability lawsuit
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Previous Edition
12) Which of the following is NOT a systematic risk?
A) the risk that oil prices rise, increasing production costs
B) the risk that the economy slows, reducing demand for your irm’s products
C) the risk that your new product will not receive regulatory approval
D) the risk that the Federal Reserve raises interest rates
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Previous Edition
38
13) Fluctuations of a stock’s return that are due to market-wide news representing
common risk is the ________.
A) idiosyncratic risk
B) systematic risk
C) unique risk
D) unsystematic risk
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
14) The risk premium of a stock is NOT afected by its ________.
A) undiversiiable risk
B) market risk
C) systematic risk
D) unsystematic risk
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
15) Which of the following statements is FALSE?
A) The risk premium of a security is determined by its systematic risk and does not depend
on its diversiiable risk.
B) When we combine many stocks in a large portfolio, the irm-speciic risks for each stock
will average out and be diversiied.
C) Fluctuations of a stock’s return that are due to irm-speciic news are common risks.
D) The volatility in a large portfolio will decline until only the systematic risk remains.
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Revised
39
16) Consider an economy with two types of irms, S and I. S irms always move together,
but I irms move independently of each other. For both types of irms there is a 20%
probability that they will have a 20% return and a(n) 80% probability that they will have a
-30% return.
What is the expected return for an individual irm?
A) -12%
B) -20%
C) 10%
D) 20%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
17) Consider an economy with two types of irms, S and I. S irms always move together,
but I irms move independently of each other. For both types of irms there is a 40%
probability that the irm will have a 20% return and a 60% probability that the irm will
have a -30% return.
The standard deviation for the return on an individual irm is closest to ________.
A) 24.49%
B) -10.00%
C) 12.25%
D) 9.80%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
40
18) Consider an economy with two types of irms, S and I. S irms always move together,
but I irms move independently of each other. For both types of irms there is a 70%
probability that the irm will have a 20% return and a 30% probability that the irm will
have a -30% return.
The standard deviation for the return on an portfolio of 20 type S irms is closest to
________.
A) 13.75%
B) 22.91%
C) 5.00%
D) 4.58%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
19) Consider an economy with two types of irms, S and I. S irms always move together,
but I irms move independently of each other. For both types of irms there is a 60%
probability that the irm will have a 20% return and a 40% probability that the irm will
have a -30% return.
The standard deviation for the return on a portfolio of 20 type I irms is closest to ________.
A) 0.00%
B) 12.25%
C) 5.48%
D) 24.49%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
41
20) If the Federal Reserve were to change from an expansionary to a contractionary
monetary policy, this would be an example of ________.
A) unsystematic risk
B) systematic risk
C) independent risk
D) diversiication risk
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
21) Independent risk is more closely related to ________.
A) unsystematic risk
B) systematic risk
C) common risk
D) diversiication risk
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
22) The risk premium of a stock is not afected by its ________.
A) undiversiiable risk
B) typical risk
C) systematic risk
D) unsystematic risk
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
23) What care, if any, should be taken when selecting stocks for an investment portfolio?
AACSB Objective: Relective Thinking Skills
Author: SS
Question Status: Previous Edition
42
24) Comment on the accuracy of the statement that as we put more stocks in a portfolio, its
risk gets eliminated to zero.
AACSB Objective: Relective Thinking Skills
Author: SS
Question Status: Previous Edition
43