FM14e-TB-CHAPTER 6 RISK AND RETURN
TRUE/FALSE
1. The tighter the probability distribution of its expected future returns, the greater the
risk of a
... [Show More] given investment as measured by its standard deviation.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 6-2 NAT: BUSPROG: Reflective Thinking STA: DISC: Risk and return
LOC: TBA TOP: Standard deviation KEY: Bloom’s: Knowledge
2. Risk-averse investors require higher rates of return on investments whose returns are
highly uncertain, and most investors are risk averse.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 6-6 NAT: BUSPROG: Reflective Thinking STA: DISC: Risk and return
LOC: TBA TOP: Risk aversion KEY: Bloom’s: Knowledge
3. When adding a randomly chosen new stock to an existing portfolio, the higher (or
more positive) the degree of correlation between the new stock and stocks already in the portfolio, the
less the additional stock will reduce the portfolio's risk.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 6-5 NAT: BUSPROG: Reflective Thinking STA: DISC: Risk and return
LOC: TBA TOP: Portfolio risk KEY: Bloom’s: Knowledge
4. Diversification will normally reduce the riskiness of a portfolio of stocks.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 6-5 NAT: BUSPROG: Reflective Thinking STA: DISC: Risk and return
LOC: TBA TOP: Portfolio risk KEY: Bloom’s: Knowledge
5. In portfolio analysis, we often use ex post (historical) returns and standard deviations,
despite the fact that we are really interested in ex ante (future) data.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 6-5 NAT: BUSPROG: Reflective Thinking STA: DISC: Risk and return
LOC: TBA TOP: Portfolio risk KEY: Bloom’s: Knowledge
6. The realized return on a stock portfolio is the weighted average of the expected returns
on the stocks in the portfolio.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 6-5 NAT: BUSPROG: Reflective Thinking STA: DISC: Risk and return
LOC: TBA TOP: Portfolio return KEY: Bloom’s: Knowledge
7. Market risk refers to the tendency of a stock to move with the general stock market. A
stock with above-average market risk will tend to be more volatile than an average stock, and its beta
will be greater than 1.0.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 6-6 NAT: BUSPROG: Reflective Thinking STA: DISC: Risk and return
LOC: TBA TOP: Market risk KEY: Bloom’s: Knowledge [Show Less]