Return and Risk: The Capital Asset Pricing Model (CAPM)

CHAPTER 10
Return and Risk: The Capital Asset Pricing Model (CAPM)
Multiple Choice Questions
I.

DEFINITIONS

PORTFOLIOS a 1. A portfolio is:
a. a group of assets, such as stocks and bonds, held as a collective unit by an investor.
b. the expected return on a risky asset.
c. the expected return on a collection of risky assets.
d. the variance of returns for a risky asset.
e. the standard deviation of returns for a collection of risky assets.
Difficulty level: Easy
PORTFOLIO WEIGHTS b 2. The percentage of a portfolio’s total value invested in a particular asset is called that asset’s:
a. portfolio return.
b. portfolio weight.
c. portfolio risk.
d. rate of return.
e. investment value.
Difficulty level: Easy
SYSTEMATIC RISK c 3. Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk.
a. idiosyncratic
b. diversifiable
c. systematic
d. asset-specific
e. total
Difficulty level: Easy
UNSYSTEMATIC RISK d 4. Risk that affects at most a small number of assets is called _____ risk.
a. portfolio
b. undiversifiable
c. market
d. unsystematic
e. total
Difficulty level: Easy

PRINCIPLE OF DIVERSIFICATION

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5.
a.
b.
c.
d.
e.

The principle of diversification tells us that: concentrating an investment in two or three large stocks will eliminate all of your risk. concentrating an investment in three companies all within the same industry will greatly reduce your overall risk. spreading an investment across five diverse companies will not lower your overall risk at all. spreading an investment across many diverse assets will eliminate all of the risk. spreading an investment across many diverse assets will eliminate some of the risk.

Difficulty level: Easy
SYSTEMATIC RISK PRINCIPLE b 6. The _____ tells us that the expected return on a risky asset depends only on that asset’s nondiversifiable risk.
a. Efficient Markets Hypothesis (EMH)
b. systematic risk