Finance: Chapter 8 Concept Self-Test

Risk averse individuals will always choose the lowest risk alternative.

T or F
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Terms in this set (20)
Risk averse individuals will always choose the lowest risk alternative.

T or F
False
Empirical studies show that the CAPM is completely valid.

T or F
False
Which of the following statements are correct?

A) diversifiable risk can be eliminated by proper diversification

B) market risk cannot be eliminated by proper diversification

C) the market portfolio still has risk

D) all of the above are correct
All of the above
A number of recent studies have raised concerns about the validity of the CAPM.

T or F
True
Risk averse individuals will take on higher risk alternatives if they are adequately compensated with higher returns.

T or F
True
Expressing investment results as rates of return addresses scale of investment and timing of return problems.

T or F
True
If investment return is stated in dollars, you also need to know the scale of investment and the timing of the return to make a decision regarding return adequacy.

T or F
True
The riskiness of the portfolio is generally less than the weighted average risk of the individual assets. Portfolio risk depends on the risk of the individual stocks and the correlation between stocks.

T or F
True
The standard deviation:

A) is a stand-alone risk measure

B) provides an idea of how far above or below the expected value the actual value is likely to be

C) shows the risk per unit of return

D) a and b are correct
a and b are correct
Which of the following statements is incorrect?

A) The slope of the security market line is measured by beta.

B) Two securities with the same stand-alone risk can have different betas.

C) Company-specific risk can be diversified away.

D) The market risk premium is affected by attitudes about risk.

E) Higher beta stocks have a higher required return.
Two securities with the same stand-alone risk can have different betas.
The coefficient of variation: A) is a stand-alone risk measure B) provides an idea of how far above or below the expected value the actual value is likely to be C) shows the risk per unit of return D) a and c are correcta and c are correctThe CAPM says that the relevant risk of an individual asset is its contribution to the risk of a well-diversified portfolio (its market risk). T or FTrueWhich of the following statements best describes what would be expected to happen as you randomly add stocks to your portfolio?Adding more stocks to your portfolio reduces the portfolio's company-specific risk.The expected return for a portfolio is a weighted average of the expected returns for the individual assets in the portfolio with the weights equal to the fraction of the total portfolio funds invested in each asset. T or FTrueRisk refers to the chance that some unfavorable event will occur. T or FTrueFor management whose primary goal is stock price maximization, the relevant risk of any physical asset should be measured in terms of its effect on the risk of the firm's stock. T or FTrueThe CAPM says that the relevant risk of an individual asset is its stand-alone risk.FalseFor virtually all portfolios, the riskiness of the portfolio is a weighted average of the riskiness of the individual assets in the portfolio with the weights equal to the fraction of the total portfolio funds invested in each asset. T or FFalseRisk can be analyzed on a stand-alone basis or a portfolio basis. T or FTrueStock A has a beta of 1.0 and Stock B has a beta of 0.8. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.) A) When held in isolation, Stock A has greater risk than Stock B. B) Stock B would be a more desirable addition to a portfolio than Stock A. C) Stock A would be a more desirable addition to a portfolio than Stock B. D) The expected return on Stock A will be greater than that on Stock B. E) The expected return on Stock B will be greater than that on Stock A.The expected return on Stock A will be greater than that on Stock B.