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Investment Risk and Return Analysis

This document contains 10 multiple choice questions about finance and investment concepts like the Security Market Line, risk, diversification, beta, required rates of return, and portfolio risk. Each question is followed by the correct answer. The questions cover topics such as how risk and the SML relate, measuring asset and firm risk, calculating expected returns, how diversification and beta impact portfolio risk, and determining required rates of return using the capital asset pricing model.

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jonathan_stewart0983
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6K views2 pages

Investment Risk and Return Analysis

This document contains 10 multiple choice questions about finance and investment concepts like the Security Market Line, risk, diversification, beta, required rates of return, and portfolio risk. Each question is followed by the correct answer. The questions cover topics such as how risk and the SML relate, measuring asset and firm risk, calculating expected returns, how diversification and beta impact portfolio risk, and determining required rates of return using the capital asset pricing model.

Uploaded by

jonathan_stewart0983
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Question 1 If investors become less averse to risk, the slope of the Security Market Line (SML) will increase.

Correct Answer: False Question 2 Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each such asset should be measured in terms of its effect on the risk of the firm's stockholders. Correct Answer: True Question 3 Taggart Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate of return? Correct Answer: 9.9% Question 4 Diversification will normally reduce the riskiness of a portfolio of stocks. Correct Answer: True Question 5 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. Correct Answer: True Question 6 The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation. Correct Answer: False Question 7 Tom O'Brien has a 2-stock portfolio with a total value of $100,000. $37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio's beta? Correct Answer: 1.17 Question 8 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. Correct Answer: False Question 9 Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.

Correct Answer: True Question 10 Cooley Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%.What is the firm's required rate of return? Correct Answer: 11.95%

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