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Chapter 13
Return, Risk, and the Security Market Line
Multiple Choice Questions
1.
You own a stock that you think will produce a return of 11 percent in a good
economy and 3 percent in a poor economy. Given the probabilities of each
state of the economy occurring, you anticipate that your stock will earn 6.5
percent next year. Which one of the following terms applies to this 6.5
percent?
2.
Suzie owns five different bonds valued at $36,000 and twelve different
stocks valued at $82,500 total. Which one of the following terms most
applies to Suzie's investments?
3.
Steve has invested in twelve different stocks that have a combined value
today of $121,300. Fifteen percent of that total is invested in Wise Man
Foods. The 15 percent is a measure of which one of the following?
4.
Which one of the following is a risk that applies to most securities?
5.
A news flash just appeared that caused about a dozen stocks to suddenly
drop in value by about 20 percent. What type of risk does this news flash
represent?
6.
The principle of diversification tells us that:
7.
The _____ tells us that the expected return on a risky asset depends only on
that asset's nondiversifiable risk.
8.
Which one of the following measures the amount of systematic risk present
in a particular risky asset relative to the systematic risk present in an
average risky asset?
9.
Which one of the following is a positively sloped linear function that is
created when expected returns are graphed against security betas?
10.
Which one of the following is represented by the slope of the security
market line?
11.
Which one of the following is the formula that explains the relationship
between the expected return on a security and the level of that security's
systematic risk?
12.
Treynor Industries is investing in a new project. The minimum rate of return
the firm requires on this project is referred to as the:
13.
The expected return on a stock given various states of the economy is equal
to the:
14.
The expected return on a stock computed using economic probabilities is:
15.
The expected risk premium on a stock is equal to the expected return on
the stock minus the:
16.
Standard deviation measures which type of risk?
17.
The expected rate of return on a stock portfolio is a weighted average
where the weights are based on the:
18.
The expected return on a portfolio considers which of the following factors?
I. percentage of the portfolio invested in each individual security
II. projected states of the economy
III. the performance of each security given various economic states
IV. probability of occurrence for each state of the economy
19.
The expected return on a portfolio:
I. can never exceed the expected return of the best performing security in
the portfolio.
II. must be equal to or greater than the expected return of the worst
performing security in the portfolio.
III. is independent of the unsystematic risks of the individual securities held
in the portfolio.
IV. is independent of the allocation of the portfolio amongst individual
securities.
20.
If a stock portfolio is well diversified, then the portfolio variance:
