Question 1

Asset 1 has an expected return of 10% and a standard deviation of 20%.Asset 2 has an expected return of 15% and a standard deviation of 30%.The correlation between the two assets is -1.0.Portfolios of these two assets will have an expected return ________.

Accepted Answer

A)  between 0% and 15%
B)  between 10% and 15%
C)  below 10%
D)  above 15%E) A) and D)
F) B) and C)

Question 2

The capital asset pricing model (CAPM)links together unsystematic risk and return for all assets.

Accepted Answer

A) True 
 B)False

Question 3

A beta coefficient of 0 represents an asset that ________.

Accepted Answer

A)  has an expected return greater than the market portfolio
B)  has the same expected return as the market portfolio
C)  has returns that do not fluctuate at all
D)  has an expected return equal to the risk-free rateE) None of the above
F) A) and D)

Question 4

As risk aversion increases ________.

Accepted Answer

A)  a firm's beta will remain neutral
B)  investors' required rate of return will increase
C)  a firm's beta will decrease
D)  investors' required rate of return will remain unchangedE) All of the above
F) A) and C)

Question 5

Table 8.1 
-The correlation of returns between Asset A and Asset B can be characterized as ________.(See Table 8.1)

Accepted Answer

A)  perfectly positively correlated
B)  perfectly negatively correlated
C)  uncorrelated
D)  partially correlatedE) All of the above
F) C) and D)

Question 6

A portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

Accepted Answer

A) True 
 B)False

Question 7

The expected value,standard deviation of returns,and coefficient of variation for asset A are ________.(See below.)  Asset A

Accepted Answer

A)  10 percent,8 percent,and 1.25,respectively
B)  9.33 percent,8 percent,and 2.15,respectively
C)  9.35 percent,4.68 percent,and 2.00,respectively
D)  9.35 percent,2.76 percent,and 0.295,respectivelyE) C) and D)
F) B) and D)

Question 8

The purpose of adding an asset with a negative or low positive beta to a portfolio is to ________.

Accepted Answer

A)  reduce profit
B)  reduce risk
C)  increase profit
D)  increase riskE) B) and C)
F) A) and C)

Question 9

The higher an asset's beta,________.

Accepted Answer

A)  the more responsive it is to changing market returns
B)  the less responsive it is to changing market returns
C)  the higher the expected return will be in a down market
D)  the lower the expected return will be in an up marketE) C) and D)
F) B) and C)

Question 10

In the most basic sense,risk is a measure of the uncertainty surrounding the return that an investment will earn.

Accepted Answer

A) True 
 B)False

Question 11

Risk that affects all firms is called ________.

Accepted Answer

A)  maturity risk
B)  unsystematic risk
C)  nondiversifiable risk
D)  reinvestment riskE) A) and C)
F) B) and D)

Question 12

Combining uncorrelated assets can reduce risk-not as effectively as combining negatively correlated assets,but more effectively than combining positively correlated assets.

Accepted Answer

A) True 
 B)False

Question 13

A change in inflationary expectations resulting from events such as international trade embargoes or major changes in Federal Reserve policy will result in a shift in the SML.

Accepted Answer

A) True 
 B)False

Question 14

If an investor prefers investments with greater risk even if they have lower expected returns,then he is following a ________ strategy.

Accepted Answer

A)  risk-seeking
B)  risk-indifferent
C)  risk-averse
D)  risk-neutralE) All of the above
F) C) and D)

Question 15

The widely shared expectations of hard times ahead tend to cause investors to become less risk-averse.

Accepted Answer

A) True 
 B)False

Question 16

The inclusion of assets from countries with business cycles that are not highly correlated with the U.S.business cycle reduces the portfolio's responsiveness to market movements.

Accepted Answer

A) True 
 B)False

Question 17

The portion of an asset's risk that is attributable to firm-specific,random causes is called ________.

Accepted Answer

A)  unsystematic risk
B)  nondiversifiable risk
C)  market risk
D)  political riskE) B) and D)
F) A) and B)

Question 18

The standard deviation of a portfolio is a function of the standard deviations of the individual securities in the portfolio,the proportion of the portfolio invested in those securities,and the correlation between the returns of those securities.

Accepted Answer

A) True 
 B)False

Question 19

Table 8.3
Consider the following two securities X and Y. 
-Using the data from Table 8.3,what is the portfolio expected return if you invest 100 percent of your money in X,borrow an amount equal to half of your own investment at the risk-free rate and invest your borrowings in asset X?

Accepted Answer

A)  18.75%
B)  22.50%
C)  12.50%
D)  16.25%E) C) and D)
F) B) and D)

Question 20

Nico wants to invest all of his money in just two assets: the risk-free asset and the market portfolio.What is Nico's portfolio beta if he invests a quarter of his money in the market portfolio and the rest in the risk free asset?

Accepted Answer

A)  0.00
B)  0.25
C)  0.75
D)  1.00E) A) and C)
F) A) and D)

Exam 8: Risk and Return

The purpose of adding an asset with a negative or low positive beta to a portfolio is to ________.

Correct AnswerverifiedShow Answer

In the most basic sense,risk is a measure of the uncertainty surrounding the return that an investment will earn.

Correct AnswerverifiedShow Answer

Table 8.3 Consider the following two securities X and Y. -Using the data from Table 8.3,what is the portfolio expected return if you invest 100 percent of your money in X,borrow an amount equal to half of your own investment at the risk-free rate and invest your borrowings in asset X?

Correct AnswerverifiedShow Answer

Asset 1 has an expected return of 10% and a standard deviation of 20%.Asset 2 has an expected return of 15% and a standard deviation of 30%.The correlation between the two assets is -1.0.Portfolios of these two assets will have an expected return ________.

Correct AnswerverifiedShow Answer

Table 8.1 -The correlation of returns between Asset A and Asset B can be characterized as ________.(See Table 8.1)

Correct AnswerverifiedShow Answer

The standard deviation of a portfolio is a function of the standard deviations of the individual securities in the portfolio,the proportion of the portfolio invested in those securities,and the correlation between the returns of those securities.

Correct AnswerverifiedShow Answer

A beta coefficient of 0 represents an asset that ________.

Correct AnswerverifiedShow Answer

A change in inflationary expectations resulting from events such as international trade embargoes or major changes in Federal Reserve policy will result in a shift in the SML.

Correct AnswerverifiedShow Answer

The capital asset pricing model (CAPM)links together unsystematic risk and return for all assets.

Correct AnswerverifiedShow Answer

Risk that affects all firms is called ________.

Correct AnswerverifiedShow Answer

The higher an asset's beta,________.

Correct AnswerverifiedShow Answer

The inclusion of assets from countries with business cycles that are not highly correlated with the U.S.business cycle reduces the portfolio's responsiveness to market movements.

Correct AnswerverifiedShow Answer

Combining uncorrelated assets can reduce risk-not as effectively as combining negatively correlated assets,but more effectively than combining positively correlated assets.

Correct AnswerverifiedShow Answer

Nico wants to invest all of his money in just two assets: the risk-free asset and the market portfolio.What is Nico's portfolio beta if he invests a quarter of his money in the market portfolio and the rest in the risk free asset?

Correct AnswerverifiedShow Answer

If an investor prefers investments with greater risk even if they have lower expected returns,then he is following a ________ strategy.

Correct AnswerverifiedShow Answer

The expected value,standard deviation of returns,and coefficient of variation for asset A are ________.(See below.) Asset A

Correct AnswerverifiedShow Answer

The widely shared expectations of hard times ahead tend to cause investors to become less risk-averse.

Correct AnswerverifiedShow Answer

A portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

Correct AnswerverifiedShow Answer

The portion of an asset's risk that is attributable to firm-specific,random causes is called ________.

Correct AnswerverifiedShow Answer

As risk aversion increases ________.

Correct AnswerverifiedShow Answer

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