Exam (elaborations) FIN 605 (FIN605) Quiz 3 Questions & Answers.

Quiz 3 Investors generally are considered to be a risk ___ because they expect to be compensated for assuming risk.  Averse  Seekers  Adverse  Takers Dana has a portfolio of 8 securities, each with a market value of $5,000. The current beta of the portfolio is 1.28 and the beta of the riskiest security is 1.75. Dana wishes to reduce her portfolio beta to 1.15 by selling the riskiest security and replacing it with another security with a lower beta. What must be the beta of the replacement security?  1.21  1.62  0.91  0.73 Beta is defined as:  A measure of volatility of a security’s returns relative to the returns of a broad-based market portfolio of securities.  The ratio of the variance of market returns to the covariance of returns on a security with the market  The inverse of the slop of the security regression line  All of the above A beta value of 0.5 for a security indicates  The security has below-average systematic risk  The security has average systematic risk  The security has no unsystematic risk  The security has above-average systematic risk The risk-free rate of return is 5.51 percent, based on an expected inflation premium of 2.54 percent. The expected return on the market is 12.8 percent. What is the required rate of return for Envoy common stock which has a beta of 1.35?  15.35%  12.80%  6.98%  16.24% An investor, by investing in combinations of stocks, develops a ____portfolio.  Diversified  Simple  Energetic  Structured Investors can obtain high returns in their investments if:  They assume high risks  They use hedging techniques  They invest only international securities  They invest in legal Ponzi type securities The ___ is a statistical measure of the mean or average value of the possible outcomes.  Standard deviation  Expected value  Coefficient of variation  Probability distribution An investor, who believes the economy is slowing down wishes to reduce the risk of her portfolio. She currently owns 12 securities, each with a market value of $3,000. The current beta of the portfolio is 1.21 and the beta of the riskiest security is 1.62. What will the portfolio beta be if the riskiest security is replaced with a security of equal market value but a beta of 0.80?  1.18  1.05  1.10  1.14 The security market line can be thought of as expressing relationship between required rates of return and  Total risk  The time value of money  Beta  Portfolio diversification Correlation is a statistical measure of the relationship between a series of numbers representing data. Which of the following statements about correlation is/are correct? I. Perfectly negatively correlated describes two negatively correlated stocks that have a correlation coefficient of -1. II. Perfectly positively correlated describes two positively correlated stocks that have a correlation coefficient of 0.  I only  Both I and II  II only  Neither I nor II The _____ is an absolute measure of risk, and the _____ is a relative measure of risk.  Systematic risk, unsystematic risk  Standard deviation, coefficient of variation Security market line, characteristic line  Correlation, covariance Beta is defined as:  A measure of volatility of a security’s returns relative to the returns of a broad-based market portfolio of securities  The ratio of the variance of market returns to the covariance of returns on a security with the market  The inverse of the slop of the security regression line  All of the above A beta value of 0.5 for security indicates  The security has a below-average systematic risk  The security has average systematic risk  The security has no unsystematic risk  The security has above average systematic risk Compute the risk premium for the stock of Omega Tools if the risk-free rate is 6%, the expected market return is 12%, and Omega’s stock has a beta of .8.  48.0%  10.8%  16.8%  4.8% Which of the following is not an example of a source of systematic risk?  Changes in the overall economic outlook  Foreign competition with an industry’s products  Changes in the inflation rate  Interest changes The risk remaining after extensive diversification is primarily:  Systematic risk  Coefficient of variation risk  Unsystematic risk  Standard deviation risk Which of the following is not an approach for managing risk:  Limited use of firm-specific assets  Hedging  Ignoring system risk  Gaining control over the operation environment In order to completely eliminate the risk (i.e., a portfolio standard deviation of zero) in a two-asset portfolio, the correlation coefficient between the securities must be ____ Less than 0.0  Equal to -1.0  Equal 0.0  Less than +1.0 Values of the ___ can range from +1.0 to -1.0  Covariance  Standard deviation  Coefficient of variation  Correlation coefficient The ____ correlated the returns from two securities are, the ____ will be the portfolio effects of risk reduction.  Greater, greater  Lower, lower  More positively, greater  Less positively, greater