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11
6) A beta of 0.5 means that a stock is half as risky the overall market.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
7) The index used to represent market returns is always assigned a beta of 1.0.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
8) The betas of most stocks are constant over time.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
9) A stock with a beta of 1.3 is less risky than a stock with a beta of 0.42.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
10) For stocks with positive betas, higher risk stocks will have higher beta values.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
12
11) Adding stocks with higher standard deviations to a portfolio will necessarily increase the
portfolio's risk.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
12) Beta measures diversifiable risk while standard deviation measures systematic risk.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
13) By design, half of all stocks betas are positive betas and half are negative.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
14) Which of the following represent unsystematic risks?
I. the president of a company suddenly resigns
II. the economy goes into a recessionary period
III. a company's product is recalled for defects
IV. the Federal Reserve unexpectedly changes interest rates
A) I, II and IV only
B) II and IV only
C) I and III only
D) I, II and III only
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
13
15) Which of the following represent systematic risks?
I. the president of a company suddenly resigns
II. the economy goes into a recessionary period
III. a company's product is recalled for defects
IV. the Federal Reserve unexpectedly changes interest rates
A) I, II and IV only
B) II and IV only
C) I and III only
D) I, II and III only
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
16) Estimates of a stock's beta may vary depending on
I. when the estimate was made.
II. the risk-free rate of interest used.
III. how many months of returns were used to estimate the beta.
IV. the index used to represent market returns.
A) I, II and IV only
B) II and IV only
C) I, III and IV only
D) I, II and III only
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
14
17) Which one of the following conditions can be effectively eliminated through portfolio
diversification?
A) a general price increase nationwide
B) an interest rate reduction by the Federal Reserve
C) increased government regulation of auto emissions
D) change in the political party that controls Congress
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
18) Which one of the following types of risk cannot be effectively eliminated through portfolio
diversification?
A) inflation risk
B) labor problems
C) materials shortages
D) product recalls
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
19) Which one of the following conditions can be effectively eliminated through portfolio
diversification?
A) a general price increase nationwide
B) an interest rate reduction by the Federal Reserve
C) increased government regulation of auto emissions
D) change in the political party that controls Congress
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
15
20) Systematic risks
A) can be eliminated by investing in a variety of economic sectors.
B) are forces that affect all investment categories.
C) result from random firm-specific events.
D) are unique to certain types of investment.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
21) A measure of systematic risk is
A) standard deviation.
B) correlation coefficient.
C) beta.
D) variance.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
22) Beta can be defined as the slope of the line that explains the relationship between
A) the return on a security and the return on the market.
B) the returns on a security and various points in time.
C) the return on stocks and the returns on bonds.
D) the risk free rate of return versus the market rate of return.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
23) In designing a portfolio, relevant risk is
A) total risk.
B) unsystematic risk.
C) event risk.
D) nondiversifiable risk.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
16
24) Which of the following best describes the relationship between a stock's beta and the
standard deviation of the stock's returns?
A) The higher the standard deviation, the higher the beta.
B) The higher the standard deviation, the lower the beta.
C) The relationship depends on the correlation between the stock's returns and the market's
returns.
D) Standard deviation and beta are different ways of measuring the same thing.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
25) A stock's beta value is a measure of
A) interest rate risk.
B) total risk.
C) systematic risk.
D) diversifiable risk.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
26) The beta of the market is
A) -1.0.
B) 0.0.
C) 1.0.
D) undefined.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
17
27) When the stock market has bottomed out and is beginning to recover, the best portfolio to
own is the one with a beta of
A) 0.0.
B) +0.5.
C) +1.5.
D) +2.0.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
28) The best stock to own when the stock market is at a peak and is expected to decline in value
is one with a beta of
A) +1.5.
B) +1.0.
C) -1.0.
D) -0.5.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
29) Stock of Gould and Silber Inc. has a beta of -1. If the market declines by 10%, Gould and
Silber would be expected to
A) decline by 10%.
B) rise by 10%.
C) not respond to market fluctuations.
D) decline by 1%.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
18
30) Beta is the slope of the best fit line for the points with coordinates representing the
________ and the ________ for each one of several years.
A) rate of return; level of risk for an individual security
B) rate of inflation; rate of return for an individual security
C) risk level of a stock; market rate of return
D) market rate of return; security's rate of return
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
31) The stock of ABC, Inc. has a beta of .80. The market rate of return is expected to increase
by by 5%. Beta predicts that ABC stock should
A) increase in value by 6.25%.
B) increase in value by 4.0%.
C) decrease in value by 1.0%.
D) increase in value by .8%.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
32) Analysts commonly use the ________ to measure market return.
A) the Dow Jones Industrial Average
B) the rate of return on 10 year Treasury bonds
C) some large, mainstream company such as General Electric
D) the Standard & Poor's 500 Index
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
19
33) The market rate of return increased by 8% while the rate of return on XYZ stock increased
by 4%. The beta of XYZ stock is
A) -2.0.
B) -0.40.
C) 0.50.
D) 2.0.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
34) Which of the following statements concerning beta are correct?
I. Stock with high standard deviations of returns will always high betas.
II. The higher the beta, the higher the expected return.
III. A beta can be positive, negative, or equal to zero.
IV. A beta of .35 indicates a lower rate of risk than a beta of -0.50.
A) II and III only
B) I and IV only
C) II, III and IV only
D) I, II, III and IV
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Revised
Learning Goal: Learning Goal 3
35) Explain what beta measures and how investors can use beta.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
20
Copyright © 2017 Pearson Education, Inc.
5.4 Learning Goal 4
1) The basic theory linking portfolio risk and return is the Capital Asset Pricing Model.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
2) The CAPM estimates the required rate of return on a stock held as part of a well diversified
portfolio.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
3) The Dow Jones Industrial Average of thirty stocks is customarily used to represent market
returns in the CAPM.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
4) In the Capital Asset Pricing Model, beta measures a stock's sensitivity to overall market
returns.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
5) According to the CAPM, the required rate of a return on a stock can be estimated using only
beta and the risk-free rate.
role in shaping investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
