D) all of the above
95) When investing for a long horizon, investors care about the volatility of ________ returns and not the
volatility of ________ returns.
A) average, cumulative
B) cumulative, average
C) mean, cumulative
D) mean, average
96) Many former employees at Enron, an energy trading and supply company, had a large part of their portfolio
invested in Enron stock. These employees were bearing a high degree of ________ risk.
A) unsystematic
B) systematic
C) market specific
D) non–diversifiable
97) Which of the following is NOT a diversifiable risk?
A) the risk that oil prices rise, increasing production costs
B) the risk that the CEO is killed in a plane crash
C) the risk of a key employee being hired away by a competitor
D) the risk of a product liability lawsuit
98) Which of the following is NOT a systematic risk?
A) the risk that oil prices rise, increasing production costs
B) the risk that the economy slows, reducing demand for your firm’s products
C) the risk that your new product will not receive regulatory approval
D) the risk that the Federal Reserve raises interest rates
99) Which of the following types of risk does NOT belong?
A) idiosyncratic risk
B) market risk
C) unique risk
D) unsystematic risk
100) Which of the following types of risk does NOT belong?
A) Undiversifiable risk
B) Market risk
C) Systematic risk
D) Idiosyncratic risk
101) Which of the following statements is FALSE?
A) The risk premium of a security is determined by its systematic risk and does not depend on its
diversifiable risk.
B) When we combine many stocks in a large portfolio, the firm–specific risks for each stock will average
out and be diversified.
C) Fluctuations of a stock’s returns that are due to firm–specific news are common risks.
D) The volatility in a large portfolio will decline until only the systematic risk remains.
Use the information for the question(s) below.
Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of
each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability
that the firm will have a –30% return.
102) What is the expected return for an individual firm?
A) 3%
B) 5%
C) 14%
D) –5%
103) The standard deviation for the return on an individual firm is closest to:
A) 23.0%
B) 5.25%
C) 15.0%
D) 10.0%
104) The standard deviation for the return on an portfolio of 20 type S firms is closest to:
A) 15.0%
B) 23.0%
C) 5.25%
D) 5.10%
105) The standard deviation for the return on a portfolio of 20 type I firms is closest to:
A) 5.25%
B) 15.0%
C) 5.10%
D) 23.0%
106) If the Federal Reserve were to change from an expansionary to contractionary monetary policy, this would
be an example of:
A) unsystematic risk.
B) systematic risk.
C) independent risk.
D) diversification risk.
107) Independent risk is more closely related to:
A) unsystematic risk.
B) systematic risk.
C) common risk.
D) diversification risk.
108) The risk premium of a stock is not affected by its:
A) undiversifiable risk.
B) typical risk.
C) systematick risk.
D) unsystematic risk.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
109) What care, if any, should be taken when selecting stocks for an investment portfolio?
110) Comment on the accuracy of the statement that as we put more stocks in a portfolio, its risk gets eliminated
to zero.
