Essentials of Corporate Finance 9th Edition By Ross – Test Bank

Chapter 11 Test Bank – Static Key

1. Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?

1. Expected return
2. Real return
3. Market rate
4. Systematic return
5. Risk premium

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 11-01 Calculate expected returns.

Section: 11.1 Expected Returns and Variances

Topic: Expected return

2. A portfolio is:

1. a single risky security.
2. any security that is equally as risky as the overall market.
3. any new issue of stock.
4. a group of assets held by an investor.
5. an investment in a risk-free security.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 11-01 Calculate expected returns.

Section: 11.2 Portfolios

Topic: Portfolio return

3. Stock A comprises 28 percent of Susan’s portfolio. Which one of the following terms applies to the 28 percent?

1. Portfolio variance
2. Portfolio standard deviation
3. Portfolio weight
4. Portfolio expected return
5. Portfolio beta

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 11-01 Calculate expected returns.

Section: 11.2 Portfolios

Topic: Portfolio weights

4. Systematic risk is defined as:

1. any risk that affects a large number of assets.
2. the total risk of an individual security.
3. diversifiable risk.
4. asset-specific risk.
5. the risk unique to a firm’s management.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 11-03 Define the systematic risk principle.

Section: 11.4 Risk: Systematic and Unsystematic

Topic: Systematic and unsystematic risk

5. Unsystematic risk can be defined by all of the following except:

1. unrewarded risk.
2. diversifiable risk.
3. market risk.
4. unique risk.
5. asset-specific risk.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 11-03 Define the systematic risk principle.

Section: 11.4 Risk: Systematic and Unsystematic

Topic: Systematic and unsystematic risk

6. Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

1. Systematic
2. Unsystematic
3. Diversification
4. Security market line
5. Capital asset pricing model

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 11-02 Explain the impact of diversification.

Section: 11.5 Diversification and Portfolio Risk

Topic: Diversification concepts and measures

7. The systematic risk principle states that the expected return on a risky asset depends only on the asset’s ___ risk.

1. unique
2. diversifiable
3. asset-specific
4. market
5. unsystematic

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 11-03 Define the systematic risk principle.

Section: 11.6 Systematic Risk and Beta

Topic: Systematic and unsystematic risk

8. The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the:

1. squared deviation.
2. beta coefficient.
3. standard deviation.
4. mean.
5. variance.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 11-03 Define the systematic risk principle.

Section: 11.6 Systematic Risk and Beta

Topic: Beta

9. The security market line is a linear function that is graphed by plotting data points based on the relationship between the:

1. risk-free rate and beta.
2. market rate of return and beta.
3. market rate of return and the risk-free rate.
4. risk-free rate and the market rate of return.
5. expected return and beta.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 11-04 Discuss the security market line and the risk-return trade-off.

Section: 11.7 The Security Market Line

Topic: Security market line

10. The slope of the security market line represents the:

1. risk-free rate.
2. market risk premium.
3. beta coefficient.
4. risk premium on an individual asset.
5. market rate of return.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 11-04 Discuss the security market line and the risk-return trade-off.

Section: 11.7 The Security Market Line

Topic: Security market line

11. The security market line is defined as a positively sloped straight line that displays the relationship between the:

1. beta and standard deviation of a portfolio.
2. systematic and unsystematic risks of a security.
3. nominal and real rates of return.
4. expected return and beta of either a security or a portfolio.

E.  risk premium and beta of a portfolio.