Market Risk and Return

1. Market risk is also called __________ and __________.

A. systematic risk, diversifiable risk

B. systematic risk, nondiversifiable risk
C. unique risk, nondiversifiable risk
D. unique risk, diversifiable risk

2. A measure of the riskiness of an asset held in isolation is _____________.

A. beta
B. standard deviation
C. covariance
D. semi-variance

3. The systematic risk of a security __________.

A. is likely to be higher in a rising market

B. results from its own unique factors
C. depends upon market volatility
D. cannot be diversified away

4. The variability of the rate of return on a security depends on ______________.

A. uncertainty common to the entire market

B. uncertainty due to firm specific factors
C. Both a and b above
D. None of the above answers is correct

5. The security characteristic line is ________________.

A. the trend line representing the security's tendency to advance or decline in the market over
some period of time
B. the "best fit" line representing the regression of the security's excess returns on
market excess returns over some period of time
C. another term for the capital allocation line representing the set of complete portfolios that
can be constructed by combining the security with T-bill holdings

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6. The market value weighted average beta of firms included in the market index will always
be ______________.

A. 0
B. between 0 and 1
C. 1
D. There is no particular rule concerning the average beta of firms included in the market index

11. Investing in two assets with a correlation coefficient of 1.0 will reduce which kind of risk?

A. Market risk
B. Unique risk
C. Unsystematic risk
D. None of the above

12. A portfolio of stocks fluctuates when the treasury yields change. Since this risk can not be
eliminated through diversification, it is called

A. Firm specific risk

B. Systematic risk
C. Unique risk
D. None of the above

13. In a well diversified portfolio, __________ risk is negligible.

A. nondiversifiable
B. market
C. systematic
D. unsystematic

14. According to the capital asset pricing model, a well-diversified portfolio's rate of return is a
function of __________.

A. market risk
B. unsystematic risk
C. unique risk
D. reinvestment risk

15. According to the capital asset pricing model, a security with a __________.

A. negative alpha is considered a good buy

B. positive alpha is considered overpriced
C. positive alpha is considered underpriced
D. zero alpha is considered a good buy

16. Arbitrage is based on the idea that __________.

A. assets with identical risks must have the same expected rate of return
B. securities with similar risk should sell at different prices
C. the expected returns from equally risky assets are different
D. none of the above
 17. The portion of a security's average return that is not explained by market risk is usually
called ____________.

A. alpha
B. beta
C. epsilon
D. None of the above

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18. The difference between a security's actual return and the return predicted by the
characteristic line associated with the security's past returns is ___________.

A. alpha
B. beta
C. gamma
D. residual

19. The beta, of a security is equal to __________.

A. the covariance between the security and market returns divided by the variance of
the market's returns
B. the covariance between the security and market returns divided by the standard deviation of
the market's returns
C. the variance of the security's returns divided by the covariance between the security and
market returns
D. the variance of the security's returns divided by the variance of the market's returns

20. Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of
13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return
is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short
position in portfolio __________ and a long position in portfolio __________.

A. A, A
B. A, B
C. B, A
D. B, B