Mock quiz Chapter 8

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Tulsa Community College *

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5013

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Finance

Date

Jan 9, 2024

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docx

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Name____________________________ 1. Which of the following is not an example of a source of systematic risk? a. interest rate changes b. changes in competitive pressure in a given industry c. changes in the overall economic outlook d. changes in the inflation rate 2. The risk remaining after extensive diversification (e.g., portfolio of 500 randomly selected stocks) is primarily: a unsystematic risk b. systematic risk c. coefficient of variation risk d. standard deviation risk 3. Risk and required rate of return have a _______ relationship with each other a. negative or inverse b . positive or direct c. indeterminate d. diversified 4. A beta value of 0.5 for a security indicates a. the security has the same relative systematic risk as the market portfolio b. the security has greater relative systematic risk than the market portfolio c. the security has no unsystematic risk d. the security has lower relative systematic risk than the market portfolio 5. Security analysts at Boldman Saks have assigned the following probability distribution to the rate of return on Phoenix stock for the coming year based on the various states of the economy: Rate of Return State of economy Probability -20% Recession 0.25 0% Mild recession 0.30 +20% Moderate 0.25 +40% Strong 0.20 Determine the expected rate of return on Phoenix Stock. a. 8% b. 0% c. 10% d. 40% 6. Determine the standard deviation of possible rates of return on Phoenix stock (to the nearest tenth of a percent). Use the data from the previous question. a. 456% b. 20.9% c. 2.2% d. 21.4% 7. The standard deviation that you calculated above is a measure of a. Total risk b. Diversifiable risk c. Unsystematic risk d. Covariance risk

e. Expected return 8. A distribution that consists of a finite number of outcomes is called a __________ distribution. a. continuous b. limited c. discrete d. objective 9. Historically, over a long period of time, a portfolio of small company stocks have yielded greater returns than a portfolio of large company stocks. a. True b. False 10. For a portfolio consisting of two stocks that are perfectly negatively correlated, it is possible to completely eliminate risk, i.e., reduce portfolio standard deviation to zero. a. True b. False 11. Values of the can range from +1.0 to -1.0. a. coefficient of variation b. correlation coefficient c. standard deviation d. covariance 12. The security market line a. is defined as the slope of a line relating an individual security’s return to the returns of other securities in that firm’s primary industry. b. captures the risk – return relationship where risk is assessed in terms of systematic risk in relation to the market portfolio. c. has as its slope the beta of the security d. is determined by the prevailing level of risk-free interest rates minus a risk premium 13. The term structure of interest rates is related to the . a. default risk premium b. seniority risk premium c. marketability risk premium d. maturity risk premium 14. Elephant Company common stock has a beta of 1.2. The risk-free rate is 6 percent and the expected market rate of return is 12 percent. Determine the required rate of return on the security. a. 7.2% b. 14.4% c. 19.2% d. 13.2% 15. An investor plans to invest 75 percent of her funds in the common stock of Gamma Industries and 25 percent in Epsilon Company. The expected return on Gamma is 12 percent and the expected return on Epsilon is 16 percent. The standard deviation of returns for Gamma is 8 percent and for Epsilon is 12 percent. The correlation between the returns for Gamma and Epsilon is +0.8. Determine the standard deviation of returns for this investor’s portfolio. a. 73.8% b. 6.71% c. 3.00%

d. 8.59%

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