Exercise for chapter 6

# Exercise for - 1 The capital asset pricing model a provides a risk-return trade off in which risk is measured in terms of the market volatility b

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1. The capital asset pricing model: a. provides a risk-return trade off in which risk is measured in terms of the market volatility. b. provides a risk-return trade off in which risk is measured in terms of beta. c. measures risk as the coefficient of variation between security and market rates of return d. depicts the total risk of a security Answer: b; Difficulty: 2; Keywords: Capital Asset Pricing Model, Beta, Risk-Return Trade Off 2. Investment A has an expected return of 15% per year, while investment B has an expected return of 12% per year. A rational investor will choose a. investment A because of the higher expected return b. investment B because a lower return means lower risk c. investment A if A and B are of equal risk d. investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B. Answer: c; Difficulty: 2; Keywords: Expected Rate of Return, Standard Deviation, Risk-Return Trade Off 3. Investment A has an expected return of 14% with a standard deviation of 4%, while investment B has an expected return of 20% with a standard deviation of 9%. Therefore, a. a risk averse investor will definitely select investment A because the standard deviation is lower b. a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A (\$14% - 4%) c. it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A’s, but the return is not twice as big d. rational investors could pick either A or B, depending on their level of risk aversion Answer: d; Difficulty: 2; Keywords: Expected Return, Standard Deviation, Risk-Return Trade Off 4. Which of the following statements is most correct concerning diversification and risk? a. Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry. b. Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk. c.

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## This note was uploaded on 11/09/2010 for the course ACCT 301 taught by Professor Lynn during the Spring '10 term at University of Baltimore.

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Exercise for - 1 The capital asset pricing model a provides a risk-return trade off in which risk is measured in terms of the market volatility b

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