Quiz Ch 10 11 13 - diversification, market return, capital asset pricing model (CAPM), security PDF

Preview

Summary

diversification, market return, capital asset pricing model (CAPM), security market line, stock's sensitivity to market risks, cost of capital...

Description

1

Quiz_ Ch 10_11_13

BA 518

1. A market index is used to measure performance of a broad-based portfolio of stocks. True 2. Stock market indexes are found in several countries outside the United States. True 3. Long-term corporate bonds are the only portfolio of securities found to be riskier than common stocks. False 4. For investment horizons greater than 20 years, long-term corporate bonds traditionally have outperformed common stocks. False 5. If one portfolio's variance exceeds that of another portfolio, its standard deviation will also be greater than that of the other portfolio. True 6. Market risk can be eliminated in a stock portfolio through diversification. False

7. Macro risks are faced by all common stock investors. True 8. The risk that remains in a stock portfolio after efforts to diversify is known as unique risk. False

9. Cyclical stocks tend to perform well when other stocks are performing well also. True 10. Average returns on high-risk assets are higher than those on low-risk assets. True

11. The historical record fails to show that investors have received a risk premium for holding risky assets. False 12. Since 1926 the average annual difference between the returns on value and growth stocks has been 3.8%. True

2 13. The capital asset pricing model (CAPM) assumes that the stock market is dominated by well-diversified investors who are concerned only with market risk. True

14. The CAPM states that the expected risk premium on any security equals its beta times the market risk premium. True 15. There is little doubt that the CAPM captures everything that is going on in the market. False

16. The security market line displays the relationship between expected return and beta. True 17. The security market line sets a standard for other investments—investors will be willing to hold other investments only if they offer equally good prospects as shown by the points on the line. True

18. The required risk premium for any investment is given by the security market line: Risk premium on investment = beta  expected market risk premium. True 19. Empirical evidence suggested that over a long period of time returns did indeed increase with beta. True 20. If a low-risk company invests in a high-risk project, those cash flows should be discounted at a high cost of capital. True 21. Beta measures a stock's sensitivity to market risks. True 22. The project cost of capital depends on how the capital is used. True 23. Investors expect aggressive stocks to outperform the market in periods of strong economic activity. True 24. Defensive stocks typically provide better returns during periods of economic downturn since they are not very sensitive to market fluctuations. True 25. Diversification decreases the variability of both unique and market risk. False

3 26. Market risk premium, also known as the risk premium of market portfolio, is defined as the difference between market return and return on risk-free Treasury bills. True

27. According to the CAPM, a stock's expected return is positively related to its beta. True

28. The stock of Newmont Mining, the world's largest gold producer, has above-average volatility but relatively low beta. True

29. According to the capital asset pricing model, expected rates of return for all securities and all portfolios lie on the capital market line. False

30. As a project's beta increases, the project's opportunity cost of capital increases. True 31. A project should be accepted if its return plots above the security market line. True

32. The security market line shows how expected rate of return depends on beta. True

33. The required risk premium for any investment is given by the security market line. True 34. Project cost of capital and company cost of capital are synonymous terms. False 35. The project cost of capital depends on the use to which that capital is put. Therefore, it depends on the risk of the project and also on the risk of the company. False

Thank you...