Chapter 6: Risk & Return

Which one of the following is an example of unsystematic risk?

• Decrease in the national level of inflation

• Adoption of a national sales tax

• An increased feeling of global prosperity

• Hannan Medispa plan to be listed in Bursa Malaysia

The principle of diversification tells us that:

• concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.

• concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.

• spreading an investment across many diverse assets will eliminate some of the total risk.

• spreading an investment across five diverse companies will not lower the total risk.

Total risk is measured by _____ and systematic risk is measured by _____.

• beta; standard deviation

• alpha; beta

• standard deviation; beta

• standard deviation; variance

Suzie owns five different bonds and twelve different stocks. Which one of the following terms most applies to her investments?

• Index

• Portfolio

• Collection

• Risk-free

Risk can be defined as uncertainty concerning the actual return that an investment will generate.

• True

• False

Which of the following is an example of systematic risk?

• Hilton Hotel declares lower than expected earnings.

• Petronas announces high

  record earnings.

• The government raises interest rates unexpectedly.

• Coca-Cola announces higher than expected earnings

By diversifying, investors can eliminate ____.

• Systematic risk

• Unsystematic risk

• Beta risk

• Total risk

Typically as the potential reward increases, so does the potential risk.

• True

• False

___ reduces risk by spreading investment money among a wide array of investment tools.

• Risk tolerance

• Risk profile

• Portfolio Diversification

• Buying an individual stock

Which of the following investment has higher risk and provide a higher return?

• Savings account

• Bond market

• Mutual fund

• Stock market