Question: A stock with a beta equal to –1.0 has zero systematic (or market) risk.
Answer Choices:
a. True
b. False
Answer: b. False
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.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments’ stand-alone risk.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Portfolio A has but one security, while Portfolio B has 100 securities. Because of diversification effects, we would expect Portfolio B to have the lower risk. However, it is possible for Portfolio A to be less risky.
Answer Choices:
a. True
b. False
Answer: a. True
Question: A stock’s beta measures its diversifiable risk relative to the diversifiable risks of other firms.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation.
Answer Choices:
a. True
b. False
Answer: a. True
Question: A stock’s beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.
Answer Choices:
a. True
b. False
Answer: b. False
Question: We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.
Answer Choices:
a. True
b. False
Answer: b. False
Question: It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative.
Answer Choices:
a. True
b. False
Answer: a. True
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 Choices:
a. True
b. False
Answer: a. True
Question: If the returns of two firms are negatively correlated, then one of them must have a negative beta.
Answer Choices:
a. True
b. False
Answer: a. True
Question: We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.
Answer Choices:
a. True
b. False
Answer: b. False
Question: We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.
Answer Choices:
a. True
b. False
Answer: b. False
Question: If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the lower standard deviation.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Someone who is risk averse has a general dislike for risk and a preference for certainty.
Answer Choices:
a. True
b. False
Answer: a. True