FINC340 Project 6 homework

Question Number

Question

1

Which of the following risks confronting ABC Worldwide, Inc. is an example of an unsystematic risk?

A. A possible decline in the value of its holdings of short-term securities due to fluctuation in interest rates

B. A possible decline in its earnings due to a strike by its employees

C. A possible decline in the purchasing power of its net income due to inflations

D. A possible decline in its net worth due to the need to reinvest funds from an investment at a lower rate than was earned initially

2

According to Markowitz risk can be:

A. Minimized and eliminated without diversification

B. Eliminated without compromizing the overall returns

C. Minimized by selecting an optimum combination of investments

D. Analyzed exclusively

3

Which of the following statement(s) concerning beta coefficients is (are) correct?

(1) Investors who tend to be risk averse should have a portfolio made up mostly of high-beta-coefficient securities.

(2) Beta coefficients of particular securities change over time

(3) Beta coefficients are constructed based on past data

A. (1) only

B. (1) and (3) only

C. (1) and (2) only

D. (2) and (3) only

4

A measure of the degree to which two variables move predictably is known as

A. Covariance

B. Standard deviation

C. Semi-variance

D. Positive selection

5

Which of the following concerning the standard deviation of a stock’s rate of return is (are) correct:

(1) The standard deviation of a stock’s rate of return reflects both the systematic and unsystematic risks associated with a stock

(2) Approximately 68% of the rates of return on the stock will fall within plus or minus one stand deviation of the average rate of return

A. (1) only

B. (2) only

C. Both (1) and (2)

D. Neither (1) nor (2)

6

Items that circumvent Fisher’s Perfect World include:

I. No barriers to trade

II. Free flow of information

III. The firm’s indepent decisionmaking

IV. Satisfying stockholder wealth maximization criteria

V. Investor’s receiving regular dividends

A. I, II, III

B. I, II, III IV,

C. II, III, IV, V

D. I, II, III, IV, V

7

Which of the following concerning systematic and/or unsystematic risk is not correct?

A.. Unsystematic risk can be reduced through diversification of a portfolio

B. A coefficient of determination of .75 in a portfolio means that 75% of the portfolio risk is unsystematic

C. A portfolio’s beta is a measure of its systematic risk

D. A fully diversified portfolio has no unsystematic risk ‘

8

Portfolio risks can be calculated. Which of the following statistical formulas calculate portfolio risk?

A. Capital Asset Pricing Model (CAPM)

B. Correlation coefficient

C. Beta

D. Standard deviation of the variance of returns

9

Unsystematic risk is diversifiable:

A. True

B. False

10

The beta of a security:

I. Is not the same as its systematic risk level

II. Can be measured by standard deviation

III. Is the slop of the capital market line

A. III only

B. II only

C. I and III only

D. None of the above

11

Investment risk can best be defined as the _________ in the expected return of an investment.

A. volatility

B. stematic component

C. variability

D. unsystematic component

12

Stocks X and Y produced the following returns in recent years:

Year Stock X Stock Y

1 6% 2%

2 8% 0%

3 4% 10%

4 9% 12%

5 11% 14%

Avg 7.6% 7.6%

Which of the following are the standard deviations of the returns on the two stocks?

A. X = 2.7, Y = 6.2

B. X = 2.7, Y = 4.8

C. X = 3.8, Y = 6.5

D. X = 3.8, & = 5.9