Chapter 8--Risk and Rates o - Copy

# Chapter 8--Risk and Rates o - Copy - Chapter 8-Risk and...

This preview shows pages 1–3. Sign up to view the full content.

Chapter 8--Risk and Rates of Return Chapter 8--Risk and Rates of Return Student: ___________________________________________________________________________ 1. If we develop a weighted average of the possible return outcomes, multiplying each outcome or "state" by its respective probability of occurrence for a particular stock, we can construct a payoff matrix of expected returns. True False 2. 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 it will have a beta which is greater than 1.0. True False 3. A firm cannot change its beta through any managerial decision because betas are completely market determined. True False 4. In the real world, the type of security that generates a return that is nearest to a risk-free rate of return is a Treasury bill. True False 5. Risk is defined as the chance (probability) of actually observing outcomes that are less than expected, or unfavorable. Outcomes that are greater than expected are not considered when evaluating risk because such occurrences are desirable. True False 6. Risk is defined as the chance (probability) of actually observing outcomes that are greater than expected, or favorable. Such outcomes are more desirable than observing less-than-expected events, so the possibility that positive outcomes will occur must be emphasized when evaluating risk. True False

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
7. Risk really should not be a significant factor when making financial decision because all business decisions involve predictions about the future, which is unknown. As a result, all decisions automatically include some consideration of risk. True False 8. Risk is indicated by variability, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk because all unexpected possibilities should be examined, even the positive ones. True False 9. A listing of all possible outcomes, or events, with a probability assigned to each is called a probability distribution. True False 10. The expected rate of return of an asset will always equal one of the possible rates of return for that asset. True False 11. Because of differences in the expected returns of different securities, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation always will allow an investor to properly compare the relative risks of any two securities. True False 12. Assume Stock A has a standard deviation of 0.21 while Stock B has a standard deviation of 0.10. If both Stock A and Stock B must be held in isolation, and if investors are risk averse, we can conclude that Stock A will have a greater required return. However, if the assets could be held in portfolios, it is conceivable that the required return could be higher on the low standard deviation stock. True False
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 01/18/2011 for the course FIN 3604 taught by Professor Patterson during the Spring '10 term at University of South Florida.

### Page1 / 36

Chapter 8--Risk and Rates o - Copy - Chapter 8-Risk and...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online