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Chapter11-ReturnandRisk:TheCapitalAssetPricingModel11-1Chapter11ReturnandRisk:TheCapitalAssetPricingModelMultipleChoiceQuestions1.Aportfoliois:A.agroupofassets,suchasstocksandbonds,heldasacollectiveunitbyaninvestor.B.theexpectedreturnonariskyasset.C.theexpectedreturnonacollectionofriskyassets.D.thevarianceofreturnsforariskyasset.E.thestandarddeviationofreturnsforacollectionofriskyassets.2.Thepercentageofaportfolio'stotalvalueinvestedinaparticularassetiscalledthatasset's:A.portfolioreturn.B.portfolioweight.C.portfoliorisk.D.rateofreturn.E.investmentvalue.3.Riskthataffectsalargenumberofassets,eachtoagreaterorlesserdegree,iscalled_____risk.A.idiosyncraticB.diversifiableC.systematicD.asset-specificE.total4.Riskthataffectsatmostasmallnumberofassetsiscalled_____risk.A.portfolioB.undiversifiableC.marketD.unsystematicE.totalChapter11-ReturnandRisk:TheCapitalAssetPricingModel11-25.Theprincipleofdiversificationtellsusthat:A.concentratinganinvestmentintwoorthreelargestockswilleliminateallofyourrisk.B.concentratinganinvestmentinthreecompaniesallwithinthesameindustrywillgreatlyreduceyouroverallrisk.C.spreadinganinvestmentacrossfivediversecompanieswillnotloweryouroverallriskatall.D.spreadinganinvestmentacrossmanydiverseassetswilleliminatealloftherisk.E.spreadinganinvestmentacrossmanydiverseassetswilleliminatesomeoftherisk.6.The_____tellsusthattheexpectedreturnonariskyassetdependsonlyonthatasset'snondiversifiablerisk.A.EfficientMarketsHypothesis(EMH)B.systematicriskprincipleC.OpenMarketsTheoremD.LawofOnePriceE.principleofdiversification7.Theamountofsystematicriskpresentinaparticularriskyasset,relativetothesystematicriskpresentinanaverageriskyasset,iscalledtheparticularasset's:A.betacoefficient.B.reward-to-riskratio.C.totalrisk.D.diversifiablerisk.E.Treynorindex.8.Thelinearrelationbetweenanasset'sexpectedreturnanditsbetacoefficientisthe:A.reward-to-riskratio.B.portfolioweight.C.portfoliorisk.D.securitymarketline.E.marketriskpremium.Chapter11-ReturnandRisk:TheCapitalAssetPricingModel11-39.Theslopeofanasset'ssecuritymarketlineisthe:A.reward-to-riskratio.B.portfolioweight.C.betacoefficient.D.risk-freeinterestrate.E.marketriskpremium.10.YouareconsideringpurchasingstockS.Thisstockhasanexpectedreturnof8%iftheeconomyboomsand3%iftheeconomygoesintoarecessionaryperiod.Theoverallexpectedrateofreturnonthisstockwill:A.beequaltoone-halfof8%ifthereisa50%chanceofaneconomicboom.B.varyinverselywiththegrowthoftheeconomy.C.increaseastheprobabilityofarecessionincreases.D.beequalto75%of8%ifthereisa75%chanceofaboomeconomy.E.increaseastheprobabilityofaboomeconomyincreases.11.Whichoneofthefollowingstatementsiscorrectconcerningtheexpectedrateofreturnonanindividualstockgivenvariousstatesoftheeconomy?A.Theexpectedreturnisageometricaveragewheretheprobabilitiesoftheeconomicstatesareusedastheexponentialpowers.B.Theexpectedreturnisanarithmeticaverageoftheindividualreturnsforeachstateoftheeconomy.C.Theexpectedreturnisaweightedaveragewheretheprobabilitiesoftheeconomicstatesareusedastheweights.D.Theexpectedreturnisequaltothesummationofthevaluescomputedbydividingtheexpectedreturnforeacheconomicstatebytheprobabilityofthestate.E.Aslongasthetotalprobabilitiesoftheeconomicstatesequal100%,thentheexpectedreturnonthestockisageometricaverageoftheexpectedreturnsforeacheconomicstate.12.Theexpectedreturnonastockthatiscomputedusingeconomicprobabilitiesis:A.guaranteedtoequaltheactualaveragereturnonthestockforthenextfiveyears.B.guaranteedtobetheminimalrateofreturnonthestockoverthenexttwoyears.C.guaranteedtoequaltheactualreturnfortheimmediatetwelvemonthperiod.D.amathematicalexpectationbasedonaweightedaverageandnotanactualanticipatedoutcome.E.theactualreturnyouwillreceive.Chapter11-ReturnandRisk:TheCapitalAssetPricingModel11-413.Thecharacteristiclineisgraphicallydepictedas:A.theplotoftherelationshipbetweenbetaandexpectedreturn.B.theplotofthereturnsofthesecurityagainstthebeta.C.theplotofthesecurityreturnsagainstthemarketindexreturns.D.theplotofthebetaagainstthemarketindexreturns.E.Noneoftheabove.14.Thebetaofasecurityiscalculatedby:A.dividingthecovarianceofthesecuritywiththemarketbythevarianceofthemarket.B.dividingthecorrelationofthesecuritywiththemarketbythevarianceofthemarket.C.dividingthevarianceofthemarketbythecovarianceofthesecuritywiththemarket.D.dividingthevarianceofthemarketbythecorrelationofthesecuritywiththemarket.E.Noneoftheabove.15.Ifinvestorspossesshomogeneousexpectationsoverallassetsinthemarketportfolio,whenrisklesslendingandborrowingisallowed,themarketportfolioisdefinedto:A.bethesameportfolioofriskyassetschosenbyallinvestors.B.havethesecuritiesweightedbytheirmarketvalueproportions.C.beadiversifiedportfolio.D.Alloftheabove.E.Noneoftheabove.16.Whichoneofthefollowingisanexampleofanondiversifiablerisk?A.awellrespectedpresidentofafirmsuddenlyresignsB.awellrespectedchairmanoftheFederalReservesuddenlyresignsC.akeyemployeesuddenlyresignsandacceptsemploymentwithakeycompetitorD.awellmanagedfirmreducesitsworkforceandautomatesseveraljobsE.apoorlymanagedfirmsuddenlygoesouto