MGT201 Market Risk and Return http://groups.google.com/group/vuZs
1. Market risk is also called __________ and __________.
A. systematic risk, diversifiable risk
B. systematic risk, nondiversifiable risk
C. unique risk, nondiversifiable risk
D. unique risk, diversifiable risk
2. A measure of the riskiness of an asset held in isolation is _____________.
A. beta
B. standard deviation
C. covariance
D. semi-variance
3. The systematic risk of a security __________.
A. is likely to be higher in a rising market
B. results from its own unique factors
C. depends upon market volatility
D. cannot be diversified away
4. The variability of the rate of return on a security depends on ______________.
A. uncertainty common to the entire market
B. uncertainty due to firm specific factors
C. Both a and b above
D. None of the above answers is correct
5. The security characteristic line is ________________.
A. the trend line representing the security's tendency to advance or decline in the market over some period of time
B. the "best fit" line representing the regression of the security's excess returns on market excess returns over some period of time
C. another term for the capital allocation line representing the set of complete portfolios that can be constructed by combining the security with T-bill holdings
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6. The market value weighted average beta of firms included in the market index will always be ______________.
A. 0
B. between 0 and 1
C. 1
D. There is no particular rule concerning the average beta of firms included in the market index
11. Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk?
A. Market risk
B. Unique risk
C. Unsystematic risk
D. None of the above
12. A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be eliminated through diversification, it is called
A. Firm specific risk
B. Systematic risk
C. Unique risk
D. None of the above
13. In a well diversified portfolio, __________ risk is negligible.
A. nondiversifiable
B. market
C. systematic
D. unsystematic
14. According to the capital asset pricing model, a well-diversified portfolio's rate of return is a function of __________.
A. market risk
B. unsystematic risk
C. unique risk
D. reinvestment risk
15. According to the capital asset pricing model, a security with a __________.
A. negative alpha is considered a good buy
B. positive alpha is considered overpriced
C. positive alpha is considered underpriced
D. zero alpha is considered a good buy
16. Arbitrage is based on the idea that __________.
A. assets with identical risks must have the same expected rate of return
B. securities with similar risk should sell at different prices
C. the expected returns from equally risky assets are different
D. none of the above
17. The portion of a security's average return that is not explained by market risk is usually called ____________.
A. alpha
B. beta
C. epsilon
D. None of the above
http://groups.google.com/group/vuZs 18. The difference between a security's actual return and the return predicted by the characteristic line associated with the security's past returns is ___________.
A. alpha
B. beta
C. gamma
D. residual
19. The beta, of a security is equal to __________.
A. the covariance between the security and market returns divided by the variance of the market's returns
B. the covariance between the security and market returns divided by the standard deviation of the market's returns
C. the variance of the security's returns divided by the covariance between the security and market returns
D. the variance of the security's returns divided by the variance of the market's returns
20. Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of 13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio __________.
A. A, A
B. A, B
C. B, A
D. B, B
