Chapter 7 Quiz, Introduction to Risk, Return, and the Opportunity Cost of Capital
1.
Which of the following portfolios have the least risk?
A.
A portfolio of treasury bills
B.
A portfolio of long term United States Government bonds
C.
Standard and Poor's composite index
D.
Portfolio of common stocks of small firms
2.
Long-term government bonds have:
A.
Interest rate risk
B.
Default risk
C.
Market risk
D.
None of the above
3.
If the average annual rate of return for common stocks is 13%, and treasury bills is 3.8%, what is the average market risk premium?
A.
13%
B.
3.8%
C.
9.2%
D.
None of the above
4.
Safro Corporation has had returns of –5%, 15% and 20% for the past three years. Calculate the standard deviation of the returns.
A.
10%
B.
22.9%
C.
30%
D.
None of the above
5.
The portion of the risk that can be eliminated by diversification is called:
A.
Unique risk
B.
Market risk
C.
Interest rate risk
D.
Default risk
6.
Stock A has an expected return of 10% per year and stock B has an expected return of 20%. If 55% of the funds are invested in stock B, what is the expected return on the portfolio of stock A and stock B?
A.
10%
B.
20%
C.
14.5%
D.
None of the above
7.
For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between the two stocks is:
A.
+1
B.
0
C.
-0.5
D.
-1
8.
The "beta" is a measure of:
A.
Unique risk
B.
Market risk
C.
Total risk
D.
None of the above
9.
The variance or standard deviation is a measure of:
A.
Total risk
B.
Unique risk
C.
Market risk
D.
None of the above
10.
The beta of a risk-free portfolio is:
A.
0
B.
+0.5
C.
+1.0
D.
-1.0
11.
Risk premium is the difference between the security return and the treasury bill return.
A.
True
B.
False
12.
Diversification reduces risk because prices of different securities do not move exactly together.
A.
True
B.
False
13.
The risk that cannot be eliminated by diversification is called market risk.
A.
True
B.
False
14.
The sensitivity of an investment's return to market movement is called beta.
A.
True
B.
False
15.
Beta of a well diversified portfolio is equal to the value weighted average beta of the securities included in the portfolio.
A.
True
B.
False
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