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Market Risk and Return

  • 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

Market Risk and Return 1. Market risk is also called __________ and __________. A. systematic risk,http://groups.google.com/group/vuZs 6. The market value weighted average beta of firms included in the market index will always be ______________. A. 0 B. between 0 and 1 " id="pdf-obj-0-62" src="pdf-obj-0-62.jpg">
  • 6. The market value weighted average beta of firms included in the market index will always

be ______________.

  • A. 0

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

  • 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