978-1259723223 Test Bank TBChap037 Part 3

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AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Understand

Difficulty : 02 Medium

Learning Objective: 37–06 Describe how the word risk is used in financial economics and

explain the difference between diversifiable and nondiversifiable risk.

Test Bank: I

T op i c: Risk

106.

Nondiversifiable risk refers to potential losses from

107.

According to economists, the two factors most important to personal investment decisions

are

108.

One statistic that quantifies the risk of an investment is

109.

An investment’s average expected rate of return is the

110.

Hermione is considering an investment that has a Â¾ chance of paying a 10 percent rate of

return and a Â¼ chance of paying 2 percent. What is the average expected rate of return on the

investment?

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Blooms: Understand

Difficulty : 02 Medium

Learning Objective: 37-07 Convey why investment decisions are determined primarily by

investment returns and nondiversifiable risk and how investment returns compensate for being

patient and for bearing nondiversifiable risk.

Test Bank: I

T op i c: Comparing Risky Investments

111.

Bobbie is contemplating buying a lottery ticket for $1 that has a 1 percent chance of paying

$100. What is Bobbie’s average expected rate of return on this “investment?”

112.

Jacob is holding an investment he bought for $1,000 that has a 60 percent chance of gaining

$200 in value and a 40 percent chance of losing $40. Jacob’s average expected rate of return on

this investment is

113.

The beta for the market portfolio‘s level of nondiversifiable risk is

114.

Two investments, X and Y, have beta values of 0.1 and 3.0 respectively. Based on this, we

can claim that, relative to the market portfolio,

115.

An investment with a beta of 4.0 means that the investment has four times the

116.

Suppose stock X has a beta of 2.5 and stock Y has a beta of 0.5. From this we can conclude

that X has

117.

In general, risk levels and average expected rates of return are

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T op i c: Comparing Risky Investments

118.

Riskier investments tend to sell for

119.

Which of the following statements is true?

120.

For any given financial asset, risk levels and average expected rates of return are

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prices, which are inversely related to risk.

C.

positively related because both are inversely related to the rate of inflation.

D. positively related because investors must be compensated for taking greater risks.

121.

According to The International Country Risk Guide, financial assets in

122.

Which of the following financial assets is considered to be essentially risk-free?

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patient and for bearing nondiversifiable risk.

Test Bank: I

T op i c: Comparing Risky Investments

123.

The concept of time preference in financial investing rests on the belief that people

124.

Suppose that some people invest $1,000 today in a financial asset that will make one future

payment. The longer they must wait for the future payment, the

125.

Rates of return on short-term U.S. government bonds are compensation for

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D.

factors other than risk and delaying consumption.

126.

Alex wants to borrow $1,000 from Kara. If he repays the loan in one year, Kara will

require him to pay 5 percent interest on the loan. If Alex wants to repay the loan over three

years, but Kara strongly prefers present to future consumption, we would expect the interest rate

on a three-year loan to be

127.

The rate of return on short-term U.S. government bonds is often referred to as the

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investment returns and nondiversifiable risk and how investment returns compensate for being

patient and for bearing nondiversifiable risk.

Test Bank: I

T op i c: Comparing Risky Investments

128.

The risk-free interest rate is determined primarily by the

129.

The Federal Reserve changes the risk-free interest rate most directly

130.

For most financial assets, investors must be compensated for

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D. nondiversifiable and diversifiable risk, and time preference.

131.

The average expected rate of return on most financial assets is the sum of the rates that

compensate for

132.

The risk premium of a financial asset is the

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Test Bank: I

T op i c: The Security Market Line

133.

The beta for an asset considered to be risk-free

134.

The average expected rate of return of a financial asset equals

135.

The line that depicts the relationship between the average expected rate of return and the

risk level of a financial asset is known as the

136.

The Security Market Line depicts the relationship between the

137.

A horizontal Security Market Line would imply that investors

138.

The steeper the Security Market Line,

139.

The vertical intercept of the Security Market Line is determined by the

140.

Refer to the graph. Which of the three Security Market Lines depicts the situation where

investors most dislike risk?

141.

Refer to the graph. Which of the three Security Market Lines would represent a situation where

investors do not care about the risk level of a financial asset?

142.

Refer to the graph. The intercept of the three Security Market Lines is determined by

143.

Refer to the graph. An increase in investor concern about risk would be shown by

144.

The intercept of the Security Market Line at any point in time is determined primarily by

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Blooms: Understand

Difficulty : 02 Medium

Learning Objective: 37-08 Explain how the Security Market Line illustrates the compensation

that investors receive for time preference and nondiversifiable risk and why arbitrage will tend

to move all assets onto the Security Market Line.

Test Bank: I

T op i c: The Security Market Line

145.

A change in Federal Reserve monetary policy will

146.

The process of arbitrage

147.

Refer to the graph. Suppose a particular financial asset’s risk and return profile puts it at point E.

The process of arbitrage will