Question 1

Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk.

Accepted Answer

True

Question 2

investors become less averse to risk, the slope of the Security Market Line (SML) will increase.

Accepted Answer

False

Question 3

portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data.

Accepted Answer

True

Question 4

standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

Accepted Answer

The answer of standard deviation is a better measure of...

Question 5

adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.

Accepted Answer

The answer of adding a randomly chosen new stock to...

Question 6

Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.

Accepted Answer

The answer of Risk-averse investors require higher rates of return...

Question 7

Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, its standard deviation.

Accepted Answer

The answer of Variance is a measure of the variability...

Question 8

key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both the risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio The risk of the asset held in isolation is not relevant under the CAPM.

Accepted Answer

The answer of key conclusion of the Capital Asset Pricing...

Question 9

According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

Accepted Answer

The answer of According to the Capital Asset Pricing Model,...

Question 10

stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Accepted Answer

The answer of stock's beta measures its diversifiable risk relative...

Question 11

"Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

Accepted Answer

The answer of "Risk aversion" implies that investors require higher...

Question 12

tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.

Accepted Answer

The answer of tighter the probability distribution of its expected...

Question 13

realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Accepted Answer

The answer of realized return on a stock portfolio is...

Question 14

Market risk refers to the tendency of a stock to move with the general stock market A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

Accepted Answer

The answer of Market risk refers to the tendency of...

Question 15

Diversification will normally reduce the riskiness of a portfolio of stocks.

Accepted Answer

The answer of Diversification will normally reduce the riskiness of...

Question 16

Someone who is risk averse has a general dislike for risk and a preference for certainty If risk aversion exists in the market, then investors in general are willing to accept somewhat lower returns on less risky securities Different investors have different degrees of risk aversion, and the end result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return) than investors who have more tolerance for risk.

Accepted Answer

The answer of Someone who is risk averse has a...

Question 17

investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10 However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the low standard deviation.

Accepted Answer

The answer of investors are risk averse and hold only...

Question 18

individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Accepted Answer

The answer of individual stock's diversifiable risk, which is measured...

Question 19

Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

Accepted Answer

The answer of Managers should under no conditions take actions...

Question 20

coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

Accepted Answer

The answer of coefficient of variation, calculated as the standard...

Quiz 2: Risk and Return: Part I