Risk and Return
This type of risk is avoidable through proper diversification.
portfolio risk
systematic risk
unsystematic risk
total risk
2. A statistical measure of the degree to which two variables (e.g., securities' returns) move together.
coefficient of variation
variance
covariance
certainty equivalent
3. An "aggressive" common stock would have a "beta"
equal to zero.
greater than one.
equal to one.
less than one.
4. A line that describes the relationship between an individual security's returns and returns on the market portfolio.
characteristic line
security market line
capital market line
beta
5. According to the capital-asset pricing model (CAPM), a security's expected (required) return is equal to the risk-free rate plus a premium
equal to the security's beta.
based on the unsystematic risk of the security.
based on the total risk of the security.
based on the systematic risk of the security.
6. The risk-free security has a beta equal to, while the market portfolio's beta is equal to .
one; more than one.
one; less than one.
zero; one.
less than zero; more than zero.
7. Carrie has a "certainty equivalent" to a risky gamble's expected value that is less than the gamble's expected value. Carrie shows
risk aversion.
risk preference.
risk indifference.
a strange outlook on life.
8. Beta is the slope of
the security market line.
the capital market line.
a characteristic line.
the CAPM.
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9. A measure of "risk per unit of expected return."
standard deviation
coefficient of variation
correlation coefficient
beta
10. The greater the beta, the of the security involved.
greater the unavoidable risk
greater the avoidable risk
less the unavoidable risk
less the avoidable risk
11. Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company common stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is 6 percent. According to the capital-asset pricing model (CAPM) and making use of the information above, the required return on Plaid Pants' common stock should be, and the required return on Acme's common stock should be .
3.6 percent; 7.2 percent
9.6 percent; 13.2 percent
9.0 percent; 18.0 percent
14.0 percent; 23.0 percent
=0.06+(0.1-0.06)*0.9 = .096
0.06+(0.1-0.06)*1.80. = .132
12. Espinosa Coffee & Trading, Inc.'s common stock measured beta is calculated to be 0.75. The market beta is, of course, 1.00 and the beta of the industry of which the company is a part is 1.10. If Merrill Lych were to calculate an "adjusted beta" for Espinosa's common stock, that adjusted beta would most likely be
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less than 0.75
more than 0.75, but less than 1.10
equal to 1.10
equal to 0.95 {i.e., (1/3) x (0.75 + 1.00 + 1.10)}
It will be reverted to industry beta or to market beta .
