Please PRINT your name FIN 351 Quiz 9 Capital Budgeting Pleasetedomnurchoicenteb
ID: 2798888 • Letter: P
Question
Please PRINT your name FIN 351 Quiz 9 Capital Budgeting Pleasetedomnurchoicenteblank before the question. Two points each and 10 points in total. 1. A news flash just appeared that caused about a dozen stocks to suddenly drop in value by 10 percent. What type of risk does this news flash best represent? a. Portfolio risk b Market risk c Unsystematic risk. d. Total risk 2. The principle of diversification tells us that: a. Concentrating an investment in two or three large stocks will eliminate all of the b. C. d. unsystematic risk. Spreading an investment across five diverse companies will not lower the total risk. Spreading an investment across many diverse assets will eliminate all of the systematic risk. Spreading an investment across many diverse assets will eliminate some of the total risk. 3. of the following statements is CORRECT? a. A stock with a beta equal to -1.0 has zero market risk b. A stock with a beta of 1 is a stock of average market risk. c Ifinvestors become less averse to risk, the slope of the Security Market Line will increase. d. A stocks beta measures its diversifiable risk relative to the diversifiable risks of other firms Which of the following statements is NOT CORRECT? a Investors expect a higher return by taking greater risk; here risk means market risk. b. Any change in the beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's price, other things held constant c The Capital Asset Pricing Model (CAPM)/SML dictates a positive relationship between risk and return. d. The slope and intercept of this Security Market Line can be influenced by a manager's actions. 5, which of the following statements about risk is CORRECT? a. Investors are risk averse, which means they would prefer bonds to stocks because the former is less risky than the latter.Explanation / Answer
1.
A flush just appeared that caused about a dozen stocks to suddenly drop in value by 10%. The flush best represents as Market risk. This is because the flush has affected the market not a single stock.
Option (B) is correct answer.
2. Diversification means spreading an investment across many diverse assets, so that total risk of an investment gets reduced.
Option (D) is correct answer.
3.
Beta of market is 1. So, if any stock has beta equal to 1, it means the stock has average market beta.
Option (B) is correct answer.
4.
Any change in the beta is likely to affect the required rate of return of company stock. It means that a change in beta will likely to have an impact on the stock price, other thing held constant.
Option (B) is correct answer.