Corp.fin, Test 5solultion

Corp.fin, Test 5solultion - Test 5 Name _ 1. The principle...

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Test 5 Name __________________ 1. The principle of diversification tells us that a. concentrating an investment in two or three large stocks will eliminate all of your risk. b. concentrating an investment in three companies all within the same industry will greatly reduce your overall risk. c. spreading an investment across five diverse companies will not lower your overall risk at all. d. spreading an investment across many diverse assets will eliminate all of the risk. e. spreading an investment across many diverse assets will eliminate some of the risk. 2. The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the particular asset’s a. beta coefficient. b. reward-to-risk ratio. c. total risk. d. diversifiable risk. e. Treynor index. 3. The beta of a security is calculated by a. dividing the covariance of the security with the market by the variance of the market. b. dividing the correlation of the security with the market by the variance of the market.
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c. dividing the variance of the market by the covariance of the security with the market. d. dividing the variance of the market by the correlation of the security with the market. e. None of the above. 4. You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock? a. 5.00% b. 6.45% c. 7.30% d. 7.65% e. 8.30% 5. The expected return on a stock that is computed using economic probabilities is a. guaranteed to equal the actual average return on the stock for the next five years.
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This note was uploaded on 06/18/2010 for the course MBA MBA 5131 taught by Professor Mm during the Summer '10 term at Cumberland TN.

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Corp.fin, Test 5solultion - Test 5 Name _ 1. The principle...

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