21
22) Because risk is measured by variability of returns, how long we hold our investments does not matter
very much when it comes to reducing risk.
Keywords: Diversification, Risk Reduction
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
23) The market rewards the patient investor, for between 1926 and 2008, there has never been a time
when an investor lost money if she held an all-stock portfolio for ten years.
Keywords: Diversification, Investment Horizon
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
24) The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.
Keywords: Beta, Portfolio Beta
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
25) Which of the following statements is MOST correct concerning diversification and risk?
A) Risk-averse investors often choose companies from different industries for their portfolios because the
correlation of returns is less than if all the companies came from the same industry.
B) Risk-averse investors often select portfolios that include only companies from the same industry group
because the familiarity reduces the risk.
C) Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks
to gain the benefits of diversification.
D) Proper diversification generally results in the elimination of risk.
Keywords: Diversification, Risk, Correlation
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
26) Which of the following statements is MOST correct concerning diversification and risk?
A) Diversification is mainly achieved by the selection of individual securities for each type of asset held in
a portfolio.
B) Diversification is mainly achieved by the asset allocation decision, not the selection of individual
securities within each asset category.
C) Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in
risk because their returns are negatively correlated.
D) Asset allocation is important for pension funds but not for individual investors.
Keywords: Diversification, Asset Allocation, Risk
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
22
27) An investor currently holds the following portfolio:
Amount
Invested
8,000 shares of Stock A
$16,000
Beta = 1.3
15,000 shares of Stock B
$48,000
Beta = 1.8
25,000 shares of Stock C
$96,000
Beta = 2.2
The investor is worried that the beta of his portfolio is too high, so he wants to sell some stock C and add
stock D, which has a beta of 1.0, to his portfolio. If the investor wants his portfolio to have a beta of 1.72,
how much stock C must he replace with stock D?
A) $18,000
B) $24,000
C) $31,000
D) $36,000
Keywords: Beta, Portfolio
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
28) Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12. Wendy sold the shares on
12/31/12 for $3.45. Genetics stock has a beta of 1.9, the risk-free rate of return is 4%, and the market risk
premium is 9%. Wendy‘s holding period return is
A) 15.0%.
B) 16.5%.
C) 17.6%.
D) 21.1%.
Keywords: Holding Period Return
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
23
29) You are considering investing in Ford Motor Company. Which of the following are examples of
diversifiable risk?
I. Risk resulting from possibility of a stock market crash.
II. Risk resulting from uncertainty regarding a possible strike against Ford.
III. Risk resulting from an expensive recall of a Ford product.
IV. Risk resulting from interest rates decreasing.
A) I only
B) I and IV
C) I, II, III, IV
D) II, III
Keywords: Diversifiable Risk
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
30) You are considering buying some stock in Continental Grain. Which of the following are examples of
non-diversifiable risks?
I. Risk resulting from a general decline in the stock market.
II. Risk resulting from a possible increase in income taxes.
III. Risk resulting from an explosion in a grain elevator owned by Continental.
IV. Risk resulting from a pending lawsuit against Continental.
A) I and II
B) III and IV
C) I only
D) II, III, and IV
Keywords: Non-Diversifiable Risk, Systematic Risk
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
31) Of the following, which differs in meaning from the other three?
A) systematic risk
B) market risk
C) undiversifiable risk
D) asset-unique risk
Keywords: Systematic Risk, Market Risk, Undiversifiable Risk
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
24
32) Most stocks have betas between
A) -1.00 and 1.00.
B) 0.00 and 1.00.
C) 0.60 and 1.60.
D) 1.00 and 2.00.
Keywords: Beta
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
33) A well-diversified portfolio includes investments in 50 securities. The portfolio’s systematic risk is
likely to be about
A) 50% of the total risk.
B) 40% of the total risk.
C) 25% of the total risk.
D) zero because risk is eliminated with a portfolio of 50 securities or more.
Keywords: Systematic Risk, Well-diversified Portfolio
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
34) Beta is a statistical measure of
A) unsystematic risk.
B) total risk.
C) the standard deviation.
D) the relationship between an investment’s returns and the market return.
Keywords: Beta
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
35) A stock’s beta is a measure of its
A) unsystematic risk.
B) systematic risk.
C) company-unique risk.
D) diversifiable risk.
Keywords: Beta, Systematic Risk
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
25
36) If you hold a portfolio made up of the following stocks:
Investment Value
Beta
Stock X
$4,000
1.5
Stock Y
$5,000
1.0
Stock Z
$1,000
.5
What is the beta of the portfolio?
A) 1.33
B) 1.24
C) 1.15
D) 1.00
Keywords: Beta, Portfolio
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
37) Which of the following is/are true?
A) Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.
B) Two points on the Characteristic Line are the T-bill and the market portfolio.
C) The greater the total risk of an asset, the greater the expected return.
D) All securities have a beta between 0 and 1.
Keywords: Systematic Risk, Diversification
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
38) If we are able to fully diversify, what is the appropriate measure of risk to use?
A) expected return
B) standard deviation
C) beta
D) risk-free rate of return
Keywords: Diversification, Beta
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
26
39) You hold a portfolio with the following securities:
Value
Beta
Expected
Return
20%
3.20
36.0%
40%
1.60
20.0%
40%
.20
6.0%
What is the expected return for the portfolio?
A) 17.60%
B) 20.67%
C) 23.54%
D) 28.59%
Keywords: Expected Return, Portfolio
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
40) The prices for the National Gasworks Corporation for the second quarter of 2012 are given below. The
price of the stock on April 1, 2012 was $130. Find the holding period return for an investor who
purchased the stock on April 1, 2012 and sold it the last day of June 2012.
Month End
Price
April
$125.00
May
138.50
June
132.75
A) -4.2%
B) -3.7%
C) 2.1%
D) 3.7%
Keywords: Holding Period Return
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
27
41) Beginning with an investment in one company‘s securities, as we add securities of other companies to
our portfolio, which type of risk declines?
A) systematic risk
B) market risk
C) non-diversifiable risk
D) unsystematic risk
Keywords: Unsystematic Risk, Diversification
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
42) Assume that you expect to hold a $40,000 investment for one year. It is forecasted to have a year end
value of $42,000 with a 30% probability; a year end value of $48,000 with a 45% probability; and a year
end value of $60,000 with a 25% probability. What is the expected holding period return for this
investment?
A) 50%
B) 25%
C) 23%
D) 18%
Keywords: Holding Period Return, Expected Return
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
43) Portfolio risk is typically measured by ________ while the risk of a single investment is measured by
________.
A) standard deviation; beta
B) security market line; standard deviation
C) beta; standard deviation
D) beta; slope of the characteristic line
Keywords: Portfolio Risk, Beta, Standard Deviation
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
44) How can investors reduce the risk associated with an investment portfolio without having to accept a
lower expected return?
A) Wait until the stock market rises.
B) Increase the amount of money invested in the portfolio.
C) Purchase a variety of securities; i.e., diversify.
D) Purchase stocks that have exceptionally high standard deviations.
Keywords: Diversification, Risk
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
28
45) Which of the following types of risk is diversifiable?
A) unsystematic, or company-unique risk
B) betagenic, or ecocentric risk
C) systematic risk
D) market risk
Keywords: Diversifiable Risk, Unsystematic Risk
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
46) You purchased 500 shares of A.M.J. Inc. common stock one year ago for $50 per share. You received a
dividend of $2 per share today and decide to take your profits by selling at $54.50 per share. What is your
holding period return?
A) 13.0%
B) 9.0%
C) 6.5%
D) 4.0%
Keywords: Holding Period Return, Dividends
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
47) Which of the following measures the average relationship between a stock’s returns and the market’s
returns?
A) coefficient of validation
B) standard deviation
C) geometric regression
D) beta coefficient
Keywords: Beta
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
48) Assume that you have $165,000 invested in a stock whose beta is 1.25, $85,000 invested in a stock
whose beta is 2.35, and $235,000 invested in a stock whose beta is 1.11. What is the beta of your portfolio?
A) 1.37
B) 2.01
C) 1.85
D) 1.57
Keywords: Beta, Portfolio
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
29
49) Assume that you have $100,000 invested in a stock whose beta is .85, $200,000 invested in a stock
whose beta is 1.05, and $300,000 invested in a stock whose beta is 1.25. What is the beta of your portfolio?
A) 0.97
B) 1.02
C) 1.12
D) 1.21
Keywords: Beta, Portfolio
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
50) Which of the following statements is MOST correct regarding beta?
A) Beta must be calculated using at least 5 years of monthly returns data to be accurate.
B) Beta can only be measured properly using daily returns.
C) Beta for a particular company remains constant over time.
D) Even professionals may not agree on the measurement of beta.
Keywords: Beta
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
51) What is diversifying among different kinds of assets known as?
A) portfolio funding
B) capital asset classification
C) asset allocation
D) multi-diversification
Keywords: Asset Allocation, Diversification
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
52) Investment A has an expected return of 14% with a standard deviation of 4%, while investment B has
an expected return of 20% with a standard deviation of 9%. Therefore,
A) a risk averse investor will definitely select investment A because the standard deviation is lower.
B) a rational investor will pick investment B because the return adjusted for risk (20% – 9%) is higher than
the return adjusted for risk for investment A ($14% – 4%).
C) it is irrational for a risk-averse investor to select investment B because its standard deviation is more
than twice as big as investment A’s, but the return is not twice as big.
D) rational investors could pick either A or B, depending on their level of risk aversion.
Keywords: Expected Return, Standard Deviation, Risk-Return Trade-off
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
30
53) Which of the following investments is clearly preferred to the others for a risk-averse investor?
Investment
σ
A
14%
2%
B
22%
20%
C
18%
16%
A) Investment A
B) Investment B
C) Investment C
D) Cannot be determined without additional information
Keywords: Expected Return, Standard Deviation, Risk-Return Trade-off
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking
54) Changes in the general economy, like changes in interest rates or tax laws, represent what type of
risk?
A) company-unique risk
B) market risk
C) unsystematic risk
D) diversifiable risk
Keywords: Market Risk
Learning Obj.: L.O. 6.4
AACSB: Reflective Thinking
55) An investor currently holds the following portfolio:
Amount
Invested
4,000 shares of Stock H
$8,000
Beta = 1.3
7,500 shares of Stock I
$24,000
Beta = 1.8
12,500 shares of Stock J
$48,000
Beta = 2.2
The beta for the portfolio is
A) 1.99.
B) 1.77.
C) 1.45.
D) 1.27.
Keywords: Beta, Portfolio, Security Market Line
Learning Obj.: L.O. 6.4
AACSB: Analytical Thinking