Question: According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock’s contribution to the riskiness of a well-diversified portfolio.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Diversification will normally reduce the riskiness of a portfolio of stocks.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Managers should under no conditions take actions that increase their firm’s risk relative to the market, regardless of how much those actions would increase the firm’s expected rate of return.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm’s stockholders.
Answer Choices:
a. True
b. False
Answer: a. True
Question: In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.
Answer Choices:
a. True
b. False
Answer: a. True
Question: The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.
Answer Choices:
a. True
b. False
Answer: a. True
Question: The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.
Answer Choices:
a. True
b. False
Answer: b. False
Question: When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio’s risk.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.
Answer Choices:
a. True
b. False
Answer: a. True
Question: An individual stock’s diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both the risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio. The risk of the asset held in isolation is not relevant under the CAPM.
Answer Choices:
a. True
b. False
Answer: a. True
Question: If investors become less averse to risk, the slope of the Security Market Line (SML) will increase.
Answer Choices:
a. True
b. False
Answer: b. False