Chapter 27 (B)

143. David increases the number of companies in which he holds stocks.

• A.This reduces risk’s standard deviation and idiosyncratic risk.
• B.This reduces risk’s standard deviation and aggregate risk.
• C. This raises aggregate risk, but lowers idiosyncratic risk. What happens to overall risk is unclear.
• D.This raises idiosyncratic risk, but lowers aggregate risk. What happens to overall risk is unclear.

144. Dakota rearranges her portfolio so that it has a higher average return. In doing this rearranging, she

• A.raised both idiosyncratic risk and aggregate risk.
• B.raised idiosyncratic risk, but not aggregate risk.
• C. raised aggregate risk, but not idiosyncratic risk.
• D.None of the above are correct.

145. Marcus puts a greater proportion of his portfolio into government bonds. This

• A.increases both risk and the average rate of return
• B.decreases both risk and the average rate of return
• C. increases risk, but decreases the average rate of return
• D.decreases risk, but increases the average rate of return

146. Fundamental analysis shows that stock in BN Corporation has a present value that is higher than its price.

• A.This stock is overvalued; you should consider adding it to your portfolio.
• B.This stock is overvalued; you shouldn’t consider adding it to your portfolio.
• C. This stock is undervalued; you should consider adding it to your portfolio.
• D.This stock is undervalued; you shouldn’t consider adding it to your portfolio.

147. Dividends are

• A.the rates of return on different portfolios.
• B.cash payments that companies make to shareholders.
• C. the value of stocks.
• D.measures of the value of companies’ capital.

148. If stock prices follow a random walk, it means that, based on publicly available information, changes in stock prices

• A.are impossible to consistently predict.
• B.can be consistently predicted by fundamental analysis.
• C. are random and never reflect fundamentals such as dividend payments, demand for the firm’s product, and the like.
• D.are irrational.

149. Psychologists say that some people, especially men, suffer from “self-serving attribution bias.” This means that

• A.men are less risk averse than women. As a result, men’s actions may help reduce fluctuations in the stock market.
• B.men are more risk averse than women. As a result, men’s actions may increase fluctuations in the stock market.
• C. men are more likely than women to think that their success is the result of their own skill rather than luck. As a result, men’s actions may contribute to speculative bubbles.
• D.men are more likely than women to think that their success is the result of their own skill rather than luck. As a result, men’s actions may counteract speculative bubbles.

150. Under what circumstances might it be a good idea to require people to put their retirement savings into defined benefit plans as opposed to letting people choose their own retirement options?

• A.if people are risk averse
• B.if the stock market follows a random walk
• C. if people tend to be overconfident in their own abilities
• D.if interest rates are low

151. Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

• A.This stock is overvalued; you should consider adding it to your portfolio.
• B.This stock is overvalued; you shouldn’t consider adding it to your portfolio.
• C. This stock is undervalued; you should consider adding it to your portfolio.
• D.This stock is undervalued; you shouldn’t consider adding it to your portfolio.

152. Fundamental analysis shows that stock in Peapod Vegetarian Restaurants has a present value below its price.

• A.This stock is overvalued; you should consider adding it to your portfolio.
• B.This stock is overvalued; you shouldn’t consider adding it to your portfolio.
• C. This stock is undervalued; you should consider adding it to your portfolio.
• D.This stock is undervalued; you shouldn’t consider adding it to your portfolio.