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37-41
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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 ¾ chance of paying a 10 percent rate of
return and a ¼ chance of paying 2 percent. What is the average expected rate of return on the
investment?
37-43
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-46
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-47
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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?
37-48
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-49
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-50
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-51
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-52
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
37-59
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
