BUS 405 Week 4 Chapter 12 Return Risk and the Security Market Line

This work of BUS 405 Week 4 Chapter 12 Return, Risk, and the Security Market Line contains:

1. Which one of the following is the type of risk that affects a large number of assets?

2. Which one of the following is the type of risk that only affects either a single firm or just a small number of firms?

3. According to the systematic risk principle, the reward for bearing risk is based on which one of the following types of risk?

4. Which one of the following measures systematic risk?

5. The security market line depicts the graphical relationship between which two of the following?

I. expected return

II. surprise return

III. systematic risk

IV. unsystematic risk

6. Which one of the following is expressed as "E(RM) - Rf"?

7. Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money, the reward for bearing systematic risk, and the amount of systematic risk?

8. Which one of the following terms is the measure of the tendency of two things to move or vary together?

9. Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month. This announcement will cause the firm's stock price to:

10. Which one of the following is the best example of a risk associated with stock ownership?

11. Which one of the following announcements is most apt to cause the price of a firm's stock to increase?

12. Which one of the following terms is another name for systematic risk?

13. Which one of the following is the best example of systematic risk?

14. Which one of the following statements applies to unsystematic risk?

15. Which one of the following is the best example of unsystematic risk?

16. Which one of the following qualifies as diversifiable risk?

17. Which one of the following betas represents the greatest level of systematic risk?

18. A stock with which one of the following betas has an expected return that most resembles the overall market expected rate of return?

19. What is the beta of a risk-free security?

20. Which one of the following stocks has the highest expected risk premium?

21. Of the following, Stock _____ has the greatest level of total risk and Stock _____ has the highest risk premium.

22. A portfolio beta is computed as which one of the following?

23. You own a portfolio which is invested equally in two stocks and a risk-free security. The stock betas are .89 for Stock A and 1.26 for Stock B. Which one of the following will increase the portfolio beta, all else constant?

24. A portfolio of securities has a beta of 1.14. Given this, you know that:

25. You own three stocks which have betas of 1.16, 1.34, and 1.02. You would like to add a fourth security such that your portfolio beta will match that of the market. Given this situation, the new security:

26. The amount of risk premium allocated to Security A is dependent upon which one of the following?

27. What is the beta of an average asset?

28. All else held constant, which of the following will increase the expected return on a security based on CAPM? Assume the market return exceeds the risk-free rate and both values are positive. Also assume the beta exceeds 1.0.

I. decrease in the security beta

II. increase in the market risk premium

III. decrease in the risk-free rate

IV. increase in the market rate of return

29. The slope of the security market line is equal to the:

30. Where will a security plot in relation to the security market line (SML) if it has a beta of 1.1 and is overvalued?

31. Where will a security plot in relation to the security market line (SML) if it is considered to be a good purchase because it is underpriced?

32. According to the capital asset pricing model, which of the following will increase the expected rate of return on a security that has a beta that is less than that of the market? Assume the market rate of return is greater than the risk-free rate and both rates are positive.

I. increase in the risk-free rate

II. decrease in the risk-free rate

III. increase in the market risk premium

IV. decrease in the market rate of return

33. Which one of the following has the highest expected risk premium?

34. Which one of the following must be equal for two individual securities with differing betas if those securities are correctly priced according to the capital asset pricing model?

35. Stocks D, E, and F have actual reward-to-risk ratios of 7.1, 6.8, and 7.4, respectively. Given this, you know for certain that:

36. Which one of the following will increase the slope of the security market line? Assume all else constant.

37. Which two of the following determine how sensitive a security is relative to movements in the overall market?

I. the standard deviation of the security

II. correlation between the security's return and the market return

III. the volatility of the security relative to the market

IV. the amount of unsystematic risk inherent in the security

38. Which of the following are needed to compute the beta of an individual security?

I. average return on the market for the period

II. standard deviation of the security and the market

III. returns on the security and the market for multiple time periods

IV. correlation of the security to the market

39. A security has a zero covariance with the market. This means that:

40. Which of the following will affect the beta value of an individual security?

I. interval of time frequency used for the data sample

II. length of the time period used for the data sample

III. particular time period selected for the sampling

IV. choice of index used as the measure of the market

41. Which one of the following is most commonly used as the measure of the overall market rate of return?

42. Which one of the following statements is true?

43. Which of the following correctly identifies the factors included in the Fama-French three-factor model?

44. Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases.

45. Phil realized a total return of 13.2 percent which is less than his expected return of 14.4 percent. What is the amount of his unexpected return?

46. Brooke invested $3,500 in the stock market with the expectation of earning 9.5 percent. She actually earned 10.7 percent for the year. What is the amount of her unexpected return?

47. Reed Plastics just announced the earnings per share for the quarter just ended were $.45 a share. Analysts were expecting $.51. What is the amount of the surprise portion of the announcement?