Unit 5 math test

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The variances of an investments returns is a measure of the:

A. Volatility of the rates of return.
B. Probability of a negative return.
C. Historic return over long period
D. Average value of the investment.
E none of the above

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Terms in this set (36)

A. Volatility of the rates of return.

What is the expected return on asset A if it has a beta of 0.6, the expected market return is 15%, and the risk free rate is 6% ?

A. 5.4%
B. 9.6%
C. 11.4%
D. 15%
E. None of the above

C. 11.4%

Regarding diversification, _____________________________.

A. most of the benefits are realized with about 20 to 30 stocks
B. It is the process of increasing the riskiness associated.
C. The portfolio returns are reduced, and the standard deviation
D. There is no limit to the amount of risk that can be eliminated through the process.
E. None of the above

A. most of the benefits are realized with about 20 to 30 stocks

Which of the following is least effective in reducing the unsystematic risk of a portfolio?

A. Reducing the number of stocks held in a portfolio
B. Adding bonds to a stock portfolio.
C. Adding international securities.
D. Adding US Treasury bills to a risky portfolio
E. Adding technology stocks

A. Reducing the number of stocks held in a portfolio

A stock investor owns a diversified portfolio of 15 stocks. What will be the likely effect in portfolio return standard deviation from adding one more stock?

A. A Slight increase will occur.
B. A large increase will occur.
C. A large decrease will occur.
D. A slight decrease will occur
E. None of the above

D. A slight decrease will occur.

Which of the following statements related to risk is correct?

A. The beta portfolio must increase when a stock with a high return.......
B. Every portfolio that contains 25 or more securities is free of unsystematic risk.
C. Adding five additional stock to a deviation portfolio must lower the portfolio beta .
D. Portfolio beta can be effectively lowered by adding t-bills to the portfolio.
E. None of the above

D. Portfolio beta can be effectively lowered by adding t-bills to the portfolio.

Which of the following portfolios might be expected to exhibit less unsystematic risk?

A. Five random stocks; portfolio beta = 0.8
B. Three random stocks; portfolio beta = 1.2
C. Ten random stocks; portfolio beta = 1.0
D. Thirty random stocks; portfolio beta unknown.
E. Not enough info provided

D. Thirty random stocks; portfolio beta unknown.

The company cost of capital WACC may be an inappropriate discount rate for a capital budgeting proposal if:

A. It calculates a negative NPV
B. The proposal has a different degree of risk
C. The company had unique risk
D. The company expects to earn more than the risk-free rate.
E. WACC is an appropriate discount rate for all project of the firm

B. The proposal has a different degree of risk

A stock as been held for one year, during which time its dividend yield was greater than its capital gains yield. For this stock the percentage return:

A. Is zero
B. Is negative
C. Equals the dividend yield.
D. Less than dividend
E. Cannot be determined

E. Cannot be determined

If a security plots below the security market line, it is:

A. Not rewarding the investor.
B. Underpriced, a situation that should be temporary
C. Offering too little return to adjust its risk.
D. A defensive security, which expects to offer lower returns
E. None of the above

C. Offering too little return to adjust its risk.

Holding all else equal if the beta of a stock increase the stock process will: A. Increase. B. Decrease. C. Remain unchanged D. Increase or decrease E. None of the aboveB. Decrease____________ refers to the company finances itself through some combinations of loans, bonds for sale, preferred stocks sales, common stock sales and retention of earnings: A. Capital structure B. Cost if capital C. Working capital management D. NPV E. NoneA. Capital structureThe standard deviation for historical stock returns can be calculated as: a. The positive square root of the average return. b. The average difference between the actual return and the average return. c. The positive square root of the variance. d. The average return divided by N minus one, where N is the number of returns. e. The variance squared.C. The positive square root of the varianceOver the past 75 years, which of following investments has provided the largest average return? a. Small company stocks b. Common stocks c. Treasury bills d. Treasury bonds e. Corporate bondsa. Small company stocksWhich of the following is false regarding risk and return? a. The risk-free asset earns the lowest rate of return. b. The reward for bearing risk is known as the standard deviation. c. Based on historical data, there are rewards for bearing risk. d. An increase in the systematic risk of an investment will result in an increased risk premium. e. None of the aboveb. The reward for bearing risk is known as the standard deviation.The principle of diversification tells us that: a. Concentrating an investment in two or three large stocks will eliminate all of your risk. b. Spreading an investment across many diverse assets cannot (in an efficient market) eliminate risk. c. Spreading an investment across many diverse assets will eliminate all of the risk. d. Spreading an investment across many diverse assets will eliminate some of the risk. e. None of the above.D. Spreading an investment across many diverse assets will eliminate some of the risk.The slope of an asset's security market line is the __________. a. market risk premium b. portfolio weight c. beta coefficient d. risk-free interest rate e. None of the aboveA. market risk premiumWhat is the beta for a portfolio equally weighted in four assets: A, the market portfolio; B, which has half the risk of A; C, which has twice the risk of A; and D, which is risk-free? a. 0.219 b. 0.875 c. 1.000 d. It depends on what beta the market portfolio has e. None of the aboveB. 0.875Ed Lawrence has $100,000 invested. Of that, $30,000 is invested in IBM stock, $25,000 is invested in T-bills, and the remainder is invested in corporate bonds. Which of the following is true regarding his portfolio? a. Ed has 30% of his portfolio invested in stocks. b. Ed has 55% of his portfolio invested in corporate bonds. c. If IBM has a beta less than one, the portfolio has a beta greater than one. d. Ed has 70% of his portfolio invested in risk-free assets. e. Changes in the return on IBM stock will have the greatest impact on changes in the portfolio return.A. Ed has 30% of his portfolio invested in stocks.Which of the following would be considered an example of systematic risk? a. Intel reports record sales. b. Quarterly profit for GM equals expectations. c. Lower quarterly sales for IBM than expected. d. Greater new jobless claims than expected. e. None of the aboveD. Greater new jobless claims than expected.Regarding diversification, _____________________________. a. most of the benefits are realized with about 20 to 30 stocks b. it is the process of increasing the riskiness associated with individual assets by spreading an investment across numerous assets c. the portfolio returns are reduced, and the standard deviation of that portfolio remains unchanged d. there is no limit to the amount of risk that can be eliminated through this process e. None of the aboveA. most of the benefits are realized with about 20 to 30 stocks1. Bradshaw Steel has a capital structure with 30 percent debt (all long-term bonds) and 70 percent common equity. The coupon rate on the company's long-term bonds is 8 percent and the bond is selling at a premium. The firm estimates that its overall composite WACC is 10 percent. The risk-free rate of interest is 5.5 percent, the market risk premium is 5 percent, and the company's tax rate is 40 percent. Bradshaw uses the CAPM to determine its cost of equity. What is the beta on Bradshaw's stock? a. 0.64 b. 1.07 c. 1.35 d. Cannot be solved because not enough information is provided e. None of the aboveD. Cannot be solved because not enough information isSuppose that the Federal Reserve takes actions that cause the risk-free rate to fall. All else the same (that is, the market risk premium and stock beta remain unchanged), we would expect a firm's cost of equity to. a. increase if we are using the SML b. decrease if we are using the SML c. either increase or decrease if we are using the SML, but we can't determine which without more information d. increase if expected return on the market decreases e. decrease if the firm's beta increasesB. decrease if we are using the SMLThe weight average of betas of all individuals assets is: A. Exactly 0 B. Between 0 and 1. C. Exactly 1 D. Greater than 1. E. Unknown; beats are continually changingC. Exactly 1Assume that a company had equal amounts of debt, common stock, and proffered stock. An increase in the corporate tax rate of a firm will cause its weight average cost of capital (WACC) to: A. Fall B. Rise C. Remain unchanged. D. Either fall or rise, depending on the riskiness of the company's debt. E. None of the aboveA. Fall__________ refers to the way a company finances itself through some combination of loans, bonds sales, preferred stock sales, common stock sales, and retention of earnings. A. Capital structure. B. Cost of capital C. Working capital management. D. NPV E. None of the aboveA. Capital structureHolding all else equal, if the beta of a stock increase, the stocks price will: A. Increase. B. Decrease. C. Remain unchanged. D. Increase or decrease. E. None of the aboveB. DecreaseIf a security plots below the security market line. It is. A. Not rewarding the investor for its non-systematic risk. B. Underpriced, a situation that should be temporary C. Offering too little return to justify its risk D. A defensive security, which expects to offer lower returns E. None of the aboveC. Offering too little return to justify its riskA stock has been held for one year, during which time it's dividend yield was greater than its capital grains yield. For this stock, the percentage return: A. Is zero B. Is negative. C. Less than dividend yield. D. Less than dividend yield. E. Cannot be determinedE. Cannot be determinedThe company cost of capital WACC may be an inappropriate discount rate for a capital budgeting proposal if: A. It calculates a negative NPV for the proposal. B. The proposal has a different degree of risk C. The company has unique risk D. The company expects to earn more than the risk-free rate. E. WACC is an appropriate discount rate for all projects of the firm.B. The proposal has a different degree of riskWhich of the following portfolio might be expect to exhibit less unsystematic risk? A. Five random stocks; portfolio beta = 0.8 B. Three random stocks; portfolio beta = 1.2 C. Ten random stocks; portfolio beta = 1.0. D. Thirty random stocks; portfolio beta unknown E. Not enough information to answer this questionD. Thirty random stocks; portfolio beta unknownWhich one of the following statements related to risk is corrected? A. The beta of a portfolio must increase when. B. Every portfolio that contains 25 or more. C. Adding five additional stocks. D. Portfolio beta can be effectively lowered by adding t-bills to the portfolioD. Portfolio beta can be effectively lowered byA stock investor owns a diversified portfolio of 15 stocks. What will be the likely effect on portfolio return standard deviation from adding one more stock? A. A slight decrease. B. A large increase. C. A large decrease D. A slight decrease E. None of the aboveD. A slight decreaseWhich one of the following is least effective in reducing the unsystematic risk of a portfolio? A. Reducing the number of stocks held ins portfolio B. Adding bonds to a stock portfolio C. Adding international securities into a portfolio of US stocks D. Adding U.S treasury bills to a risk portfolio E. Adding technology stocks to a portfolio of industry stocksA. Reducing the number of stocks held ins portfolioRegarding diversification, _____________________________. A. Most of the benefits are realized with 20 to 30 stocks B. It is the process of increasing the riskiness associated with individual C. The profit returns are reduced and the standard deviation of that portfolio D. There is no limit to the amount of risk that can be eliminated through this process. E. None of the aboveA. Most of the benefits are realized with 20 to 30 stocksThe variances of an investment returns is a measurement: A. Volatility of the rates of return B. Probability of a negative return. C. Historic return over long periods D. Average values of the investigation. E. None.A. Volatility of the rates of return