Hrm/531 Week 9

Finance Ch. 8
1)Most manager are risk-averse, since for a given increase in risk they require an increase in return True
2) IF a person required return decreases for an increase in risk that person is said to be Risk-Seeking
3.) Risk aversion is the behavior exhibited by managers who require a greater than proportional _________
(a) increase in return, for a given decrease in risk.
(b) increase in return, for a given increase in risk.
(c) decrease in return, for a given increase in risk.
(d) decrease in return, for a given decrease in risk.
4.)On Average, during the past 75 years, the return on the U.S. Treasury bills has exceeded the return on long term government bonds False
5.) The higher the coefficient of variation, the
greater the risk and therefore the higher the expected return.
True
6.) The expected value and the standard deviation of returns for asset
A is (See below.)
Asset A
PossibleOutcomes Probability Returns(%)
Pessimistic 0.25 10
Most likely 0.45 12
Optimistic 0.30 16
(a) 12 percent and 4 percent.
(b) 12.7 percent and 2.3 percent.
(c) 12.7 percent and 4 percent.
(d) 12 percent and 2.3 percent.

7.) An Efficient portfolio maximizes return for a given level of risk or minimizes risk for a given level of return.
8.)The goal of an efficient portfolio is to minimize risk for a given level of return 9.)In general the lower the correlation between asset returns the greater the potential diversification of risk
True
10.) A porfolio combining two assets with less than perfectly postive correlation can reduce total risk to a level below that of either of the components True
11.) The risk of a portfolio containing international stocks generally does not contain less nondiversifiable risk than one that contains only American stocks. False
12) Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that
(a) remains unchanged.
(b) decreases to a level below that of either asset.
(c) increases to a level above that of either asset.
(d) stabilizes to a level between the asset with the higher risk and the asset with the lower risk.
13)Systematic risk is that portion of an assets risk that is attributable to firm specific random causes. False
14)The beta of a portfolio is a function of the standard deviations of the individual securities in the portfolio the proportion of the portfolio invested in those securities and the correlation between the return of those securities False
15War, inflation and the condion of the foreign markets are all example of Nondiversifiable risk
16A beta coefficient of 1 represents an asset that
(a) is more responsive than the market portfolio.
(b) has the same response as the market portfolio.
(c) is less responsive than the market portfolio.
(d) is unaffected by market movement.

17)The beta of a portfolio is the weighted average of the betas of the individual assets in the portfolio

18What is Nico’s portfolio beta if he invests an equal amount in asset X with a beta of 0.60, asset Y with a beta of 1.60, the risk-free asset, and the market portfolio?
(a) 1.20
(b) 1.00
(c) 0.80
(d) 0.60
19)The security market line is not stable over time and shift in it can result in a change in required
return True
20) What is the expected risk-free rate of return if asset X, with a beta of 1.5, has an expected return of 20 percent, and the expected market return is 15 percent?
-5.0%

Chapter TEST
1.)For the risk – seeking manager, no change in return would be required for an increase in risk. False
2.)For the risk – indifferent manager, no change in return would be required for an increase in risk True
3.) The return on an asset is the change in its value plus any cash distribution over a given period of time, expressed as a percentage of its ending value.

FA
4.) Investment A guarantees its holder $100 return. Investment B earns $0 or $200 with equal chances (i.e., an average of $100) over the same period. Both investments have equal risk. FA

5.) For the risk-averse manager, the required return decreases for an increase in risk.
FA
6.) Business risk is the chance that the firm will be unable to cover its operating costs and is affected by a firm’s revenue stability and the structure of its operating costs (fixed vs. variable).
TR
7.) Liquidity risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall.
FA
8.)Risk Aversion is the behavior exhibited by managers who require a(n) Increase in return for a given increase in risk
9.)On average, during the past 75 years the return on large company stocks has exceeded the return on small company stocks Flase
10) A normal probability distribution is a symmetrical distribution whose shape resembles a bell - shaped curve True
11 Since, for a given increase in risk, most managers require an increase in return, they are: Risk-averse
12 Nico bought 100 shares of Cisco Systems stock for $24.00 per share on January 1, 2002.
He received a dividend of $2.00 per share at the end of 2002 and $3.00 per share at the end of 2003. At the end of 2004, Nico collected a dividend of $4.00 per share and sold his stock for $18.00 per share. What was Nico's realized holding period return? What was Nico's compound annual rate of return?
A) -12.5%; -4.4%
B) +12.5%; +4.4%
13 A(n) ______ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return efficient
14) Table 5.1Expected Return (%) Year AssetA AssetB AssetC
1 6 8 6
2 7 7 7
3 8 6 8
The correlation of returns between Asset A and Asset B can be characterized as (See Table
5.1)
(a) perfectly positively correlated.
(b) perfectly negatively correlated.
(c) uncorrelated.
(d) cannot be determined.

15.) Combining uncorrelated assets can reduce risk—not as effectivelyas combining negatively correlated assets, but more effectively thancombining positively correlated assets. TR

16) Combining uncorrelated assets can reduce risk—not as effectively as combining negatively correlated assets, but more effectively than combining positively correlated assets.
TR
17.)Diversifiable risk is the relevant portion of risk attributable to market factors that affect all firms False
18) The purpose of adding an asset with a negative or low positive beta is to
(a) reduce profit.
(b) reduce risk.
(c) increase profit.
(d) increase risk.
19) ______ risk represents the portion of an asset’s risk that can be eliminated by combining assets with less than perfect positive correlation. (a) Diversifiable
(b) Nondiversifiable
(c) Systematic
(d) Total
A
20) The higher an asset’s beta,
(a) the more responsive it is to changing market returns.
(b) the less responsive it is to changing market returns.
(c) the higher the expected return will be in a down market.
(d) the lower the expected return will be in an up market.
A

21) An increase in nondiversifiable risk
(a) would cause an increase in the beta and would lower the required return.
(b) would have no effect on the beta and would, therefore, cause no change in the required return.
(c) would cause an increase in the beta and would increase the required return.
(d) would cause a decrease in the beta and would, therefore, lower the required rate of return.
C
22.) Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all of her investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will be:
(a) 0.60.
(b) 0.88.
(c) 1.00.
(d) 1.25.
D
23) The difference between the return to the market portfolio of assetsand the risk-free rate of return represents the premium the investor must receive for taking the average amount of risk associated with holding the market portfolio of assets.
TR
24) In the capital asset pricing model, the beta coefficient is a measure of Nondiversifiable risk
25)An Increase in the Beta of a corporation indicates _____, and, all else being the same results in ______. An increase in risk; a higher required rate of return and hence lower share price