Chapter 12: Financial Returns and Risk Concepts
Multiple Choice
1. The monthly (dollar) return equals the stock price at the end of the month minus the stock
price at the beginning of the month plus ___________________________.
a. percentage return
b. dividends
c. price changes
d. a dividend of 4 cents
Answer: b
Level: medium
Section: Historical Return and Risk for a Single Financial Asset
2. The square root of the variance is also known as _____________________.
a. standard deviation
b. VAR
c. acceptable variance
d. arithmetic average return
Answer: a
Level: difficult
Section: Historical Return and Risk for a Single Financial Asset
3. Business risk leads to _______________ in a firm’s operating income over time.
a. changes in quantity sold
b. changes in the firm’s mark up on its sales
c. variation
d. changes in a firm’s level of fixed costs
Answer: c
Level: medium
Section: Where Does the Risk Come From?
4. Financial risk occurs because _____________________ do no change when operating income
rises or falls.
a. tax expenses
b. overhead expenses
c. fixed interest expenses
d. wage expenses
Answer: c
Level: medium
Section: Where Does the Risk Come From?
5. A boom economy, normal conditions, and recession all include the three scenarios that are
found in the state of _______________.
a. nature
b. business risk
c. expected risk
d. financial risk
Answer: a
Level: easy
Section: Expected Measures of Return and Risk
6. Rather than using a limited number of states of nature with specific values for inflation and
economic growth, _______________ allows many different combinations of the important
variables that may determine stock returns.
a. reticence
b. replication
c. simulation
d. affectation
Answer: c
Level: medium
Section: Expected Measures of Return and Risk
7. Which of the following is not a component of the required rate of return?
a. real risk-free rate of return
b. inflation expectations
c. risk premium
d. appropriate discount rate
Answer: d
Level: difficult
Section: Historical Returns and Risks of Different Assets
8. Securities prices change over time. Therefore, any change in price must reflect a change in
________________.
a. asset prices
b. expected cash flows, the discount rate, or both
c. how to interpret market data
d. overseas market conditions
Answer: b
Level: difficult
Section: Efficient Capital Markets
9. A market in which prices reflect all public and private knowledge including past and current
information is called a _________________________.
a. non-efficient market
b. semi-strong form efficient market
c. weak form efficient market
d. strong form efficient market
Answer: d
Level: medium
Section: Efficient Capital Markets
10. A _______________________ is a market in which all publicly available information, both
current and past, is reflected in asset prices.
a. weak form efficient market
b. semi-strong form efficient market
c. strong form efficient market
d. non-efficient market
Answer: b
Level: medium
Section: Efficient Capital Markets
11. The total risk of a portfolio can be measured by its ________________.
a. combined return
b. changes in the level of interest rates
c. variance or the standard deviation of its returns
d. weighted average of asset variances
Answer: c
Level: easy
Section: Portfolio Returns and Risk
12. A positive correlation ___________________________.
a. is a statistical concept that relates movements in one set of returns to movements in another
set over time.
b. occurs when two time series tend to move in conjunction with each other.
c. occurs when two time series tend to move in opposite directions.
d. occurs when we invest in several different assets rather than just a single one.
Answer: b
Level: difficult
Section: Portfolio Returns and Risk
13. The Capital Asset Pricing Model (CAPM) states that the expected return on an asset depends
on
a. the standard deviation of its historical returns.
b. the risk-free rate.
c. its level of diversifiable risk.
d. its level of systematic risk.
Answer: d
Level: medium
Section: Capital Asset Pricing Model
14. What kind of portfolio contains all risky assets?
a. human capital portfolio
b. market portfolio
c. beta portfolio
d. capital asset portfolio
Answer: b
Level: easy
Section: Capital Asset Pricing Model
15. Much of the long standing regulations in U.S. markets resulted from the situation
surrounding __________________________.
a. the stock market crash of 1929.
b. the Sarbanes-Oxley Act of 2002.
c. the Securities Act of 1933.
d. the Securities Act of 1934.
Answer: a
Level: easy
Section: Ethics and Job Opportunities in Investments