Question: Bad managerial judgments or unforeseen negative events that happen to a firm are defined as “company-specific,” or “unsystematic,” events, and their effects on investment risk can in theory be diversified away. a. True b. False

Answer:
a

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. a. True b. False

Answer:
a

Question: Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock’s price, other things held constant.

Answer Options:
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. a. True b. False

Answer:
b

Question: A “reverse split” reduces the number of shares outstanding. a. True b. False

Answer:
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. a. True b. False

Answer:
a. True

Question: Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone. a. True b. False

Answer:
b

Question: Is it possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative. a. True b. False

Answer:
a. True

Question: The key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both 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. a.True b.False

Answer:
a. True

Question: A stock with a beta equal to –1.0 has zero systematic (or market) risk. a. True b. False

Answer:
b. False

Question: Bad managerial judgments or unforeseen negative events that happen to a firm are defined as “company-specific,” or “unsystematic,” events, and their effects on investment risk can in theory be diversified away.

Answer Options:
a. True
b. False

Answer:
a. True