Name:_________________________ Grade and Section:______________

Risk and Return

1. Investors are assumed to own common stocks in a portfolio, which means:

a. To keep the stock certificates in a small leather book bag.

b. To own just one stock and do not watch the stock performance.

c. To own several carefully selected stocks.

d. To trade their shares frequently.

2. Stock historical returns are ______ than bonds and have more_______________.

a. lower; risk as measured by level of return.

b. higher; variability of returns over time compared to bonds.

c. similar; dividends than bonds.

d. more taxable; after-tax income.

3. Rational investors will bear more risk if:

a. there are other investors close to share the risk.

b. there are limited returns.

c. the expected returns are adequate for the level of risk assumed.

d. they can be guaranteed a selling price later.

4. The risk of common stock investment is best noted as:

a. the chance of loss.

b. the chance of gain.

c. the extent of the variability of historical returns around an average return.

d. the average historical return.

5. While ________ returns on investments are anticipated returns on the investment, _________ returns of investors represent the minimum expected
return before making the investment.

a. required; expected.

b. expected; required.

c. annual; expected.

d. risky; annual.
6. Most investors are risk averse, meaning:

a. they will not take any investment risk.

b. they do not care about risk..

c. they seek the thrill of risk.

d. they will take risk only with higher expected returns.

7. A coin toss is a(n) ________ random probability distribution and the sum of all probabilities must equal ______________.

a. discrete; one.

b. continuous; one.

c. expected; less than one.

d. variable; more than one.

8. Stock annual investment returns may be represented as continuous distribution because:

a. one earns a return each year.

b. one can earn from – 100% to an infinite return.

c. one can earn only the return declared by the board of directors.

d. one can earn a return within a set range.

9. Two statistics commonly associated with a normal, random, continuous stock return distribution are:

a. beta and mean.

b. variance and risky.

c. mean and variance.

d. correlation and mean.

10. Which of the following is not associated with systematic (market) risk of stocks?

a. inflation. b. business cycle. c. work stoppage by union. d. interest rates.

11. Managers' decisions can impact _________ risk.

a. unsystematic or specific risk.

b. systematic.

c. inflation rate.

d. market.
12. Holding various stocks in a portfolio tends to eliminate or reduce:

a. market risk.

b. specific risk.

c. systematic risk.

d. the beta risk.

13. While the average expected return on a portfolio is the average of the expected returns; the risk of the portfolio may be less than the average risk
of the portfolio if:

a. stocks with perfect +1 correlation are selected.

b. the stocks selected have correlation less than +1.

c. are randomly selected.

d. the business cycle is favorable.

14. The relevant risk of a stock added to a portfolio is:

a. the specific risk of the stock.

b. the impact of the stock's return on the portfolio return.

c. the impact of the stock's risk as if owning the stock by itself.

d. the impact of the stock's risk on the risk of the portfolio.

15. A stock beta is the relationship between the:

a. managers and the board of directors.

b. stockholders and managers.

c. the historic return on the stock and the historic return on the market portfolio.

d. the expected return on the stock and the expected return on the market portfolio.
16 A stock beta of 1.2 means that:

a. the stock has had a 20% historic return.

b. the historic volatility of the stock is 20% less than the market portfolio.

c. the historic volatility of the stock is 20% greater than the market portfolio.

d. the future volatility of the stock is 20% greater than the market portfolio.
17. The Capital Asset Pricing Model (CAPM) predicts the required rate of return on a stock as:

a. the difference between the risk-free rate and the market risk premium.

b. the sum of the risk-free rate and the market risk premium.

c. the sum of the risk-free rate and the beta of the stock.

d. the sum of the risk-free rate and the stock beta times the market risk premium.
18. The slope of the Security Market Line (SML) is:

a. is always negative.

b. represents investors' risk-return tradeoff.

c. is a plot of returns over time.

d. represents a stock's return relative to the market return.

19. ABC Corp. has a beta of 1.2. The current risk-free rate is 5% and the market risk premium is estimated at 8%. What is the required rate of return
on the stock of ABC Corp.

a. 14.6%. b. 13.0%. c. 14.0%. d. 5.0%.

20. A stock's expected return is above the SML return of the market for the same risk. What is likely to happen quickly in the market?

a. The stock price will probably increase because expected returns always must be greater than required investor returns.

b. The stock price will probably decrease as investors move quickly to sell the stock.

c. The stock price will probably increase, lowering investors' expected returns equal to that equal to their required returns.

d. The stock price will probably decrease, lowering investors' expected returns to that equal to the required returns.