Missouri Southern State University

ECON 350

Financial Management

Chapter 8 Quiz

1)If a person's required return does not change when risk increases, that person is said to be

1. 1. risk-seeking.

B) risk-neutral.

3. risk-averse.
4. risk-aware.

2. The                              is the extent of an asset's risk. It is found by subtracting the pessimistic outcome from the optimistic outcome.
   1. return
   2. standard deviation
   3. probability distribution

D) range

3. The                              is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.

A) coefficient of variation

2. chi square
3. mean
4. standard deviation

4. Given the following expected returns and standard deviations of assets B, M, Q, and D, which asset should the prudent financial manager select?

A) Asset B

2. Asset M
3. Asset Q
4. Asset D

5. The goal of an efficient portfolio is to
   1. maximize risk for a given level of return.
   2. maximize risk in order to maximize profit.
   3. minimize profit in order to minimize risk.

D) minimize risk for a given level of return.

6. Perfectly                              correlated series move exactly together and have a correlation coefficient of

                           , while perfectly                               correlated series move exactly in opposite directions and have a correlation coefficient of                             .

1. 1. negatively; -1; positively; +1
   2. negatively; +1; positively; -1
   3. positively; -1; negatively; +1

D) positively; +1; negatively; -1

7. In general, the lower (less positive and more negative) the correlation between asset returns,
   1. the less the potential diversification of risk.

B) the greater the potential diversification of risk.

3. the lower the potential profit.
4. the less the assets have to be monitored.

8. The portion of an asset's risk that is attributable to firm-specific, random causes is called

A) unsystematic risk.

2. non-diversifiable risk.
3. systematic risk.
4. none of the above.

9. A beta coefficient of +1 represents an asset that
   1. is more responsive than the market portfolio.

B) has the same response as the market portfolio.

3. is less responsive than the market portfolio.
4. is unaffected by market movement.

10. An investment banker has recommended a $100,000 portfolio containing assets B, D, and F. $20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a beta of 2.0; and $30,000 will be invested in asset F, with a beta of .5. The beta of the portfolio is                                                    .

A) 1.25

B) 1.33

C) 1.45

D) unable to be determined from the information provided

TABLE 8.2

You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows:

11. Given the information in Table 8.2, what is the expected annual return of this portfolio?

A) 11.3%

B) 10.0%

C) 11.0%

D) 11.7%

12. Asset Y has a beta of 1.2. The risk-free rate of return is 6 percent, while the return on the market portfolio of assets is 12 percent.  The asset's required return is
    1. 7.2 percent.
    2. 6.0 percent.

C) 13.2 percent.

D) 10 percent.

13. An increase in the beta of a corporation indicates                                  , and, all else being the same, results in

                           .

1. 1. a decrease in risk; a higher required rate of return and hence a lower share price.

B) an increase in risk; a higher required rate of return and hence a lower share price.

3. a decrease in risk; a lower required rate of return and hence a higher share price.
4. an increase in risk; a lower required rate of return and hence a higher share price.

14. In the capital asset pricing model, the beta coefficient is a measure of
    1. economic risk.
    2. diversifiable risk.

C) nondiversifiable risk.

D) unsystematic risk.

15. Strikes, lawsuits, regulatory actions, and increased competition are all examples of

A) diversifiable risk.

2. nondiversifiable risk.
3. economic risk.
4. systematic risk.