Test for Chapter 11

The measure of beta associates most closely with

• the risk-free return

• systematic risk

• unexpected risk

• unsystematic risk

• idiosyncratic risk

The separation principle states that an investor will

• combine a riskless asset with the tangency portfolio based on their risk tolerance level

• combine a riskless asset with the minimum variance portfolio based on their risk tolerance level

• choose a portfolio from the efficient set based on individual risk tolerance

• choose between any efficient portfolio and a riskless asset to generate the desired expected return

• never choose to invest in a riskless asset due to the low expected rate of return

The capital market line

• has a horizontal intercept at the market beta

• intersects the feasible set at its midpoint

• lies tangent to the opportunity set at its minimum point

• has a vertical intercept at the risk-free rate of return

• and the characteristic line are two terms describing the same function

The variance of a portfolio comprised of many securities is primarily dependent upon the

• beta of the portfolio

• variances of the securities held within the portfolio

• covariance between the overall portfolio and the market

• portfolio's correlation with the market

• covariances between the individual securities

You have plotted the monthly returns for two securities for the past ve years on the same graph. The pattern of the movements of each of the two securities generally rose and fell to the same degree in step with each other. This indicates the securities have

• a weak positive correlation

• a strong negative correlation

• a strong positive correlation

• a weak negative correlation

• no correlation with each other

Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk

• asset-specific

• total

• idiosyncratic

• diversifiable

• systematic

As we add more diverse securities to a portfolio, the ____ risks of the portfolio will decrease

• total and unsystematic

• total and systematic

• unsystematic

• systematic and unsystematic

• systematic

The expected return on a stock that is computed using economic probabilities is

• guaranteed to equal the actual average return on the stock for the next five years

• guaranteed to be the minimal rate of return on the stock over the next two years

• a mathematical expectation and not an actual anticipated outcome

• guaranteed to equal the actual return for the immediate twelve month period

• the actual return you will receive

The slope of the security market line is the

• portfolio weight

• beta coefficient

• risk-free interest rate

• reward-to-risk ratio

• market risk premium

According to the CAPM, the expected return on a security is

• positively and linearly related to the security's beta

• positively and non-linearly related to the security's beta

• negatively and non-linearly related to the security's beta

• negatively and linearly related to the security's beta

• positively and linearly related to the security's variance