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Principles of Finance, 6e
Besley/Brigham
Principles of Finance, 6e
Besley/Brigham
Chapter 11
Cengage Learning Testing, Powered by Cognero
Page 39
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
74. If investors become more averse to risk, the slope of the Security Market Line (SML) will increase.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
Business Program-6 - Reflective Thinking
DISC-FIN-08 - Risk and Return
Time Estimate-a - 5 min.
TOPICS:
SML and Risk Aversion
75. When considering stock and bond valuation models, we implicitly assume that the marginal investor is risk averse,
which means that he or she requires a higher rate of return for a given level of risk than a risk neutral individual, other
things held constant.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
Business Program-6 - Reflective Thinking
DISC-FIN-08 - Risk and Return
Time Estimate-a - 5 min.
TOPICS:
Risk Aversion
76. A firm cannot change its beta through any managerial decision because betas are completely market determined.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
Business Program-6 - Reflective Thinking
DISC-FIN-08 - Risk and Return
Time Estimate-a - 5 min.
TOPICS:
Changes in Beta
77. Businesses earn returns for security holders by purchasing and operating physical assets. The relevant risk of any
physical asset must be measured in terms of its effect on the risk of the firm's securities.
a.
True
b.
False
ANSWER:
True
POINTS:
1
Principles of Finance, 6e
Besley/Brigham
Chapter 11
Cengage Learning Testing, Powered by Cognero
Page 43
TOPICS:
Company Specific Risk
87. If I know for sure that the market will have a positive return over the next year, to maximize my rate of return, I
should increase the beta of my portfolio.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
Business Program-6 - Reflective Thinking
DISC-FIN-08 - Risk and Return
Time Estimate-a - 5 min.
TOPICS:
Portfolio Risk and Beta
88. Because the market return represents the return on an average stock, that return carries risk with it. As a result, there
exists a market risk premium which is the amount over and above the risk-free rate that is required to compensate an
investor for assuming an average amount of risk.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
Business Program-6 - Reflective Thinking
DISC-FIN-08 - Risk and Return
Time Estimate-a - 5 min.
TOPICS:
Market Risk Premium
89. If you plotted the returns of a given stock against those of the market, and if you found that the slope of the regression
line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free
rate for a well-diversified investor, assuming that the observed relationship is expected to continue into the future.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
Business Program-6 - Reflective Thinking
DISC-FIN-08 - Risk and Return
Time Estimate-a - 5 min.
TOPICS:
SML
90. The Y-axis intercept of the SML indicates the return on the individual asset when the realized return on an average
Principles of Finance, 6e
Besley/Brigham
Chapter 11
Cengage Learning Testing, Powered by Cognero
Page 44
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
stock (beta = 1.0) is zero.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
Business Program-6 - Reflective Thinking
DISC-FIN-08 - Risk and Return
Time Estimate-a - 5 min.
TOPICS:
SML
91. Risk in financial assets only occurs when there is a chance that the actual return is less than expected. It is not
considered risk if there is a chance that the actual return is greater than expected.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
Business Program-6 - Reflective Thinking
DISC-FIN-08 - Risk and Return
Time Estimate-a - 5 min.
TOPICS:
Risk
92. Investment risk can be measured by the variability of all the investment's returns, both "good" and "bad."
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
Business Program-6 - Reflective Thinking
DISC-FIN-08 - Risk and Return
Time Estimate-a - 5 min.
TOPICS:
Risk
93. A probability distribution is a listing of all possible outcomes, or events, with a probability assigned to each outcome.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
Principles of Finance, 6e
Besley/Brigham
Chapter 11
Cengage Learning Testing, Powered by Cognero
Page 47
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
ANSWER:
False
RATIONALE:
Even though the two stocks are in different industries some factors are likely to make the
returns for the two stocks to be correlated to some extent.
POINTS:
1
DIFFICULTY:
Moderate
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
Business Program-6 - Reflective Thinking
DISC-FIN-08 - Risk and Return
Time Estimate-a - 5 min.
TOPICS:
Correlation Coefficient
101. Risk is the chance that the actual outcome is different from the expected outcome.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
Business Program-6 - Reflective Thinking
DISC-FIN-08 - Risk and Return
Time Estimate-a - 5 min.
TOPICS:
Risk
102. The coefficient of variation gives you a measure risk per unit of return. All else equal investors would prefer a higher
coefficient of variation.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
Business Program-6 - Reflective Thinking
DISC-FIN-08 - Risk and Return
Time Estimate-a - 5 min.
TOPICS:
Coefficient of Variation
103. The coefficient of variation is useful in evaluating the total risk in situations where assets have different total risk and
expected returns.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Easy
ACCREDITING STANDARDS:
Blooms Taxonomy-3 - Comprehension
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