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Question;10.7 Measuring Systematic Risk;Use the;following information to answer the question(s) below.;Suppose that the;market portfolio is equally likely to increase by 24% or decrease by 8%.;Security "X" goes up on average by 29% when the market goes up and;goes down by 11% when the market goes down. Security "Y" goes down on;average by 16% when the market goes up and goes up by 16% when the market goes;down. Security "Z" goes up on average by 4% when the market goes up;and goes up by 4% when the market goes down.;1) The beta for;security "X" is closest to;A) 0;B) 0.80;C) 1.00;D) 1.25;2) The beta for;security "Y" is closest to;A) -1.00;B) -0.25;C) 0.00;D) 0.25;3) The beta for;security "Z" is closest to;A) -1.00;B) -0.25;C) 0.00;D) 0.25;4) The risk-free;rate is closest to;A) 0%;B) 4%;C) 8%;D) 16%;5) The expected;return on the market rate is closest to;A) 0%;B) 4%;C) 8%;D) 16%;6) The expected;return on security "Y" is closest to;A) 0%;B) 4%;C) 10%;D) 15%;7) The expected;return on security with a beta of 0.8 is closest to;A) 0.0%;B) 3.2%;C) 6.4%;D) 7.2%;8) The expected;return on security with a beta of 1.2 is closest to;A) 4.8%;B) 8.0%;C) 8.8%;D) 9.6%;9) The expected;return on security with a beta of 0 is closest to;A) -4.0%;B) 0.0%;C) 3.2%;D) 4.0%;10) The expected;return on security with a beta of 1 is closest to;A) -4.0%;B) 3.2%;C) 4.0%;D) 8.0%;11) Which of the;following statements is false?;A) In exchange;for bearing systematic risk, investors want to be compensated by earning a;higher return.;B) A key step to;measuring systematic risk is finding a portfolio that contains only;unsystematic risk.;C) When;evaluating the risk of an investment, an investor will care about its systematic;risk, which cannot be eliminated through diversification.;D) To measure;the systematic risk of a stock, we must determine how much of the variability;of its return is due to systematic, market-wide risks versus diversifiable;firm specific risks.;12) Which of the;following statements is false?;A) Beta differs;from volatility.;B) The risk;premium investors can earn by holding the market portfolio is the difference;between the market portfolio's expected return and the risk-free interest rate.;C) Stocks in;cyclical industries, in which revenues tend to vary greatly over the business;cycle, are likely to be more sensitive to systematic risk and have higher betas;than stocks in less sensitive industries.;D) If we assume;that the market portfolio (or the S&P 500) is efficient, then changes in;the value of the market portfolio represent unsystematic shocks to the economy.;13) Which of the;following statements is false?;A) Beta measures;the sensitivity of a security to market wide risk factors.;B) Volatility;measures total risk, while beta measures only systematic risk.;C) The beta is;the expected percentage change in the excess return of the market portfolio for;a 1% change in the excess return of a security.;D) Utilities;tend to be stable and highly regulated, and thus are insensitive to;fluctuations in the overall market.;14) Which of the;following statements is false?;A) Because;diversification improves with the number of stocks held in a portfolio an;efficient portfolio should be a large portfolio containing many different;stocks.;B) The beta of a;security is the sensitivity of the security's return to the return of the;overall market.;C) An efficient;portfolio cannot be diversified further, that is there is no way to reduce the;risk of the portfolio without lowering its expected return.;D) We call a;portfolio that contains only unsystematic risk an efficient portfolio.

 

Paper#51012 | Written in 18-Jul-2015

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