Test Bank
Chapter 9: RISK AND RETURN: STOCKS
EFS
I. True or False (Definitions and Concepts)
F
1.
The variability in security returns is the best way to measure risk (FALSE:
Should be
is not always the best way
instead of is the best way.)
T
2.
A realized return–the rate of return actually earned on an investment–has little
meaning without knowing the holding period.
T
3.
Intuitively, the risk of an asset is the likelihood its realized return will vary
substantially from its expected return.
F
4.
A security that has high specific risk when is considered in isolation will have
low market risk when placed in the portfolio. (FALSE: Should be
can have
instead of will have.)
T
5.
The mean of a random variable is its longrun average.
F
6.
Covariance is typically shown using a Greek letter, as σ
2
, sometimes with an
identifying subscript. (FALSE: Should be
Variance
instead of covariance.)
F
7.
Like a mean, a variance provides plentiful insight without other information.
(FALSE: Should be
limited
instead of plentiful.)
T
8.
A positive covariance indicates that when one random variable has an outcome
above its mean, the other also tends to be above its mean.
F
9.
Although covariance can take on any value, the correlation coefficient can be
only between 0 and +1. (FALSE: Should be minus
–1
instead of zero.)
T
10.
An asset’s expected return is the mean of its future possible returns.
T
11.
An investment’s specific risk is its standard deviation.
F
12.
An
efficient portfolio
is one that provides the lowest expected return for a given
amount of risk. (FALSE: Should be
highest
instead of lowest.)
F
13.
It’s unrealistic to find two assets that have perfect positive correlation between
their returns. (FALSE: Should be
realistic
instead of unrealistic.)
F
14.
When asset returns are perfectly positively correlated, diversification can
increase the ratio of the portfolio’s expected return to its risk. (FALSE: Should be
not
perfectively
instead of perfectly.)
T
15.
Borrowing is like having a negative investment in the riskless asset.
II. Multiple Choice (Definitions and Concepts)
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Documentc
16.
One problem with using negative values for
w
1
(the proportion invested in the
riskless asset) to represent a borrowed amount is that the implied borrowing rate of interest is the
same as
.
a.
the prime rate of interest.
b.
the current rate of interest.
c.
the lending rate of interest.
d.
the nominal rate of interest.
a
17.
Investing in the riskless asset is really simply lending the money. The opposite,
borrowing, is like having a negative investment in the
asset.
a.
riskless
b.
risky
c.
underlying
d.
fixed
b
18.
Using a single rate for borrowing and lending is essentially equivalent to
assuming
transactions.
a.
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '10
 Mr.Cula
 Accounting, Standard Deviation, Variance, CML

Click to edit the document details