Question 1

The 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

True

Question 2

One 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

True

Question 3

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

True

Question 4

In 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

The answer of In portfolio analysis, we often use ex...

Question 5

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 6

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

Accepted Answer

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

Question 7

The 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 The standard deviation is a better measure...

Question 8

The 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 The tighter the probability distribution of its...

Question 9

An 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 An individual stock's diversifiable risk, which is...

Question 10

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

The answer of Because of differences in the expected returns...

Question 11

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 12

"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 13

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

Accepted Answer

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

Question 14

The 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 The realized return on a stock portfolio...

Question 15

When 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 When adding a randomly chosen new stock...

Question 16

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

Accepted Answer

The answer of If investors become less averse to risk,...

Question 17

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 18

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 19

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 20

If 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 If investors are risk averse and hold...

Quiz 6: Risks and Rates of Return

The 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.

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.

In 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.

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.

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

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

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

An 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.

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.

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

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

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

When 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.

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

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

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.