Fundamentals Of Investing 13th Edition by Scott B. Smart - Test Bank

Fundamentals Of Investing 13th Edition by Scott B. Smart – Test Bank

 

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Sample Questions Are Posted Below

 

Fundamentals of Investing, 13e (Smart)

Chapter 5   Modern Portfolio Concepts

 

5.1   Learning Goal 1

 

1) Portfolio objectives should be established before beginning to invest.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

2) A portfolio that offers the lowest risk for a given level of return is known as an efficient portfolio.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

3) By plotting the efficient frontier, investors can find the unique portfolio that is ideal for all investors.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

4) Portfolio objectives should be established independently of tax considerations.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

5) If the actual rate of return on an investment portfolio is constant from year to year, the standard deviation of that portfolio is zero.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

6) An efficient portfolio maximizes the rate of return without consideration of risk.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

7) Melissa owns the following portfolio of stocks. What is the return on her portfolio?

 

 

8. A) 8.0%
9. B) 9.0%
10. C) 9.8%
11. D) 10.9%

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

8) Marco owns the following portfolio of stocks. What is the expected return on his portfolio?

 

 

5. A) 5.5%
6. B) 6.6%
7. C) 4.7%
8. D) 8.0%

Answer:  A

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 1

 

9) A portfolio consisting of four stocks is expected to produce returns of -9%, 11%, 13% and 17%, respectively, over the next four years. What is the standard deviation of these expected returns?

10. A) 10.05%
11. B) 11.60%
12. C) 8.00%
13. D) 33.42%

Answer:  B

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 1

 

10) The stock of a technology company has an expected return of 15% and a standard deviation of 20%  The stock of a pharmaceutical company has an expected return of 13% and a standard deviation of 18%.  A portfolio consisting of 50% invested in each stock will have an expected return of 14 % and a standard deviation

1. A) less than the average of 20% and 18%.
2. B) the average of 20% and 18%.
3. C) greater than the average of 20% and 18%.
4. D) the answer cannot be determined with the information given.

Answer:  A

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

11) The statement “A portfolio is less than the sum of its parts.” means

1. A) it is less expensive to buy a group of assets than to buy those assets individually.
2. B) portfolio returns will always be lower than the returns on individual stocks.
3. C) a diversified group of assets will be less volatile than the individual assets within the group.
4. D) for reasons that are not well understood, the value of a portfolio is less than the sum of the values of its components.

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

 

5.2   Learning Goal 2

 

1) Negatively correlated assets reduce risk more than positively correlated assets.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

2) Correlation is a measure of the relationship between two series of numbers.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

3) Most assets show a slight degree of negative correlation.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 2

 

4) Investing globally offers better diversification than investing only domestically.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

5) Studies have shown that investing in different industries as well as different countries reduces portfolio risk.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

 

6) Coefficients of correlation range from a maximum of +10 to a minimum of -10.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

7) Maximum international diversification can be achieved by investing solely in U.S. multinational corporations.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

8) In severe market downturns different asset classes become less correlated.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

9) Investing in emerging markets is an effective means of diversifying a U.S. portfolio.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

10) The transaction costs of investing directly in foreign-currency-denominated assets can be reduced by purchasing American Depositary Shares (ADSs).

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

 

11) If there is no relationship between the rates of return of two assets over time, these assets are

1. A) positively correlated.
2. B) negatively correlated.
3. C) perfectly negatively correlated.
4. D) uncorrelated.

Answer:  D

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

12) Combining uncorrelated assets will

1. A) increase the overall risk level of a portfolio.
2. B) decrease the overall risk level of a portfolio.
3. C) not change the overall risk level of a portfolio.
4. D) cause the other assets in the portfolio to become positively related.

Answer:  B

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

13) Two assets have a coefficient of correlation of -.4.

1. A) Combining these assets will increase risk.
2. B) Combining these assets will have no effect on risk.
3. C) Combining these assets may either raise or lower risk.
4. D) Combining these assets will reduce risk.

Answer:  D

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

 

14) In the real world, most of the assets available to investors

1. A) tend to be somewhat positively correlated.
2. B) tend to be somewhat negatively correlated.
3. C) tend to be uncorrelated.
4. D) tend to be either perfectly positively or perfectly negatively correlated.

Answer:  A

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

15) The risk of a portfolio consisting of two uncorrelated assets will be

1. A) equal to zero.
2. B) greater than the risk of the least risky asset but less than the risk level of the more risky asset.
3. C) greater than zero but less than the risk of the more risky asset.
4. D) equal to the average of the risk level of the two assets.

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

16) The returns on the stock of DEF and GHI companies over a 4 year period are shown below:

 

Year	DEF	GHI
	8%	11%
	12%	9%
	-5%	-9%
	6%	13%

 

From this limited data you should conclude that returns on

1. A) DEF and GHI are negatively correlated.
2. B) DEF and GHI are somewhat positively correlated.
3. C) DEF and GHI are perfectly positively correlated.
4. D) DEF and GHI are uncorrelated.

Answer:  B

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 2

 

 

17) Which one of the following will provide the greatest international diversification?

1. A) directly purchasing a foreign stock
2. B) purchasing stock of a U.S. multinational firm
3. C) purchasing an ADS
4. D) purchasing shares of an international mutual fund

Answer:  D

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

18) American investors have several alternatives available to diversify their portfolios internationally.  In terms of transaction costs, which of the alternatives below is least attractive?

1. A) mutual funds with an international focus
2. B) stocks of U.S. based companies with extensive foreign sales and/or operations
3. C) direct investment in foreign stocks
4. D) American Depositary Shares

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

19) American depositary shares (ADS) are

1. A) shares of foreign companies traded on the U.S. markets.
2. B) shares of American companies traded on foreign markets.
3. C) foreign currency deposits in American banks.
4. D) American currency deposits in foreign banks.

Answer:  A

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

20) Explain the relationship between correlation, diversification, and risk reduction.

Answer:  Correlation is a statistic that measures the relationship between returns on assets.  Positively correlated assets move together; negatively correlated opposites move in opposite directions.  Diversification reduces risk most effectively when the assets have low or negative coefficients of correlation.

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

21) Returns on the stock of First Boston and Midas Metals for the years 2010-2013 are shown below.

 

	First Boston	Midas Metals	Portfolio
2010	-18.00%	26.00%
2011	32.00%	-5.00%
2012	18.00%	3.00%
2013	1.00%	10.00%

 

1. Compute the average annual return for each stock and a portfolio consisting of 50% First Boston and 50% Midas.
2. Compute the standard deviation for each stock and the portfolio.
3. Are the stocks positively or negatively correlated and what is the effect on risk?

Answer:

	First Boston	Midas Metals	Portfolio
2010	-18.00%	26.00%	4.00%
2011	32.00%	-5.00%	13.50%
2012	18.00%	3.00%	10.50%
2013	1.00%	10.00%	5.50%
a. Avg.	8.25%	8.50%	8.38%
b. St. Dev.	21.61%	13.18%	4.40%

 

1. The two stocks are negatively correlated. The return on the 50/50 portfolio is half way between the returns for each stock, but the standard deviation is much lower than for either stock, indicating that the portfolio has much less risk than the individual stocks.

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

 

5.3   Learning Goal 3

 

1) Diversifiable risk is also called systematic risk.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

2) Standard deviation is a measure that indicates how the price of an individual security responds to market forces.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

3) Market return is estimated from the average return on a large sample of stocks such as those in the Standard & Poor’s 500 Stock Composite Index.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

4) Betas for actively traded stocks. are readily available from online sources.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

5) A negative beta means that on average a stock moves in the opposite direction of the market.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

 

6) A beta of 0.5 means that a stock is half as risky the overall market.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

7) The index used to represent market returns is always assigned a beta of 1.0.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

8) The betas of most stocks are constant over time.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

9) A stock with a beta of 1.3 is less risky than a stock with a beta of 0.42.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

10) For stocks with positive betas, higher risk stocks will have higher beta values.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

 

11) Adding stocks with higher standard deviations to a portfolio will necessarily increase the portfolio’s risk.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

12) Beta measures diversifiable risk while standard deviation measures systematic risk.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

13) By design, half of all stocks betas are positive betas and half are negative.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 3

14) Which of the following represent unsystematic risks?

 

1. the president of a company suddenly resigns
2. the economy goes into a recessionary period

III. a company’s product is recalled for defects

1. the Federal Reserve unexpectedly changes interest rates

 

1. A) I, II and IV only
2. B) II and IV only
3. C) I and III only
4. D) I, II and III only

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

 

15) Which of the following represent systematic risks?

 

1. the president of a company suddenly resigns
2. the economy goes into a recessionary period

III. a company’s product is recalled for defects

1. the Federal Reserve unexpectedly changes interest rates

 

1. A) I, II and IV only
2. B) II and IV only
3. C) I and III only
4. D) I, II and III only

Answer:  B

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

16) Estimates of a stock’s beta may vary depending on

 

1. when the estimate was made.
2. the risk-free rate of interest used.

III. how many months of returns were used to estimate the beta.

1. the index used to represent market returns.

 

1. A) I, II and IV only
2. B) II and IV only
3. C) I, III and IV only
4. D) I, II and III only

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

17) Which one of the following conditions can be effectively eliminated through portfolio diversification?

1. A) a general price increase nationwide
2. B) an interest rate reduction by the Federal Reserve
3. C) increased government regulation of auto emissions
4. D) change in the political party that controls Congress

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

18) Which one of the following types of risk cannot be effectively eliminated through portfolio diversification?

1. A) inflation risk
2. B) labor problems
3. C) materials shortages
4. D) product recalls

Answer:  A

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

19) Which one of the following conditions can be effectively eliminated through portfolio diversification?

1. A) a general price increase nationwide
2. B) an interest rate reduction by the Federal Reserve
3. C) increased government regulation of auto emissions
4. D) change in the political party that controls Congress

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

 

20) Systematic risks

1. A) can be eliminated by investing in a variety of economic sectors.
2. B) are forces that affect all investment categories.
3. C) result from random firm-specific events.
4. D) are unique to certain types of investment.

Answer:  B

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

21) A measure of systematic risk is

1. A) standard deviation.
2. B) correlation coefficient.
3. C) beta.
4. D) variance.

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

22) Beta can be defined as the slope of the line that explains the relationship between

1. A) the return on a security and the return on the market.
2. B) the returns on a security and various points in time.
3. C) the return on stocks and the returns on bonds.
4. D) the risk free rate of return versus the market rate of return.

Answer:  A

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

23) In designing a portfolio, relevant risk is

1. A) total risk.
2. B) unsystematic risk.
3. C) event risk.
4. D) nondiversifiable risk.

Answer:  D

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

24) Which of the following best describes the relationship between a stock’s beta and the standard deviation of the stock’s returns?

1. A) The higher the standard deviation, the higher the beta.
2. B) The higher the standard deviation, the lower the beta.
3. C) The relationship depends on the correlation between the stock’s returns and the market’s returns.
4. D) Standard deviation and beta are different ways of measuring the same thing.

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

25) A stock’s beta value is a measure of

1. A) interest rate risk.
2. B) total risk.
3. C) systematic risk.
4. D) diversifiable risk.

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

26) The beta of the market is

1. A) -1.0.
2. B) 0.0.
3. C) 1.0.
4. D) undefined.

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

 

27) When the stock market has bottomed out and is beginning to recover, the best portfolio to own is the one with a beta of

1. A) 0.0.
2. B) +0.5.
3. C) +1.5.
4. D) +2.0.

Answer:  D

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

28) The best stock to own when the stock market is at a peak and is expected to decline in value is one with a beta of

1. A) +1.5.
2. B) +1.0.
3. C) -1.0.
4. D) -0.5.

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

29) Stock of Gould and Silber Inc. has a beta of -1.  If the market declines by 10%, Gould and Silber would be expected to

1. A) decline by 10%.
2. B) rise by 10%.
3. C) not respond to market fluctuations.
4. D) decline by 1%.

Answer:  B

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 3

 

 

30) Beta is the slope of the best fit line for the points with coordinates representing the ________ and the ________ for each one of several years.

1. A) rate of return; level of risk for an individual security
2. B) rate of inflation; rate of return for an individual security
3. C) risk level of a stock; market rate of return
4. D) market rate of return; security’s rate of return

Answer:  D

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

31) The stock of ABC, Inc. has a beta of .80. The market rate of return is expected to increase by by 5%.  Beta predicts that ABC stock should

6. A) increase in value by 6.25%.
7. B) increase in value by 4.0%.
8. C) decrease in value by 1.0%.
9. D) increase in value by .8%.

Answer:  B

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 3

 

32) Analysts commonly use the ________ to measure market return.

1. A) the Dow Jones Industrial Average
2. B) the rate of return on 10 year Treasury bonds
3. C) some large, mainstream company such as General Electric
4. D) the Standard & Poor’s 500 Index

Answer:  D

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

33) The market rate of return increased by 8% while the rate of return on XYZ stock increased by 4%. The beta of XYZ stock is

2. A) -2.0.
3. B) -0.40.
4. C) 0.50.
5. D) 2.0.

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

34) Which of the following statements concerning beta are correct?

 

1. Stock with high standard deviations of returns will always high betas.
2. The higher the beta, the higher the expected return.

III. A beta can be positive, negative, or equal to zero.

1. A beta of .35 indicates a lower rate of risk than a beta of -0.50.

 

1. A) II and III only
2. B) I and IV only
3. C) II, III and IV only
4. D) I, II, III and IV

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Revised

Learning Goal:  Learning Goal 3

 

35) Explain what beta measures and how investors can use beta.

Answer:  Students should mention some or all of the following.

• Beta measures nondiversifiable (market) or systematic risk.
• Beta measures how a security will perform in relation to the market.
• The higher the beta, the riskier the security.
• The beta for the market is 1; stocks may have positive or negative betas.
• Stocks with betas greater than 1 are more responsive to changes in the market than is the market.
• Beta is derived from the slope of the “characteristic line.”

 

The CAPM shows that as beta increases, the required return for an investment increases.

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

5.4   Learning Goal 4

 

1) The basic theory linking portfolio risk and return is the Capital Asset Pricing Model.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

2) The CAPM estimates the required rate of return on a stock held as part of a well diversified portfolio.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

3) The Dow Jones Industrial Average of thirty stocks is customarily used to represent market returns in the CAPM.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

4) In the Capital Asset Pricing Model, beta measures a stock’s sensitivity to overall market returns.

Answer:  TRUE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

5) According to the CAPM, the required rate of a return on a stock can be estimated using only beta and the risk-free rate.

Answer:  FALSE

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

 

6) The risk premium to be used in the Capital Asset Pricing Model is calculated as (rrf-rm).

Answer:  FALSE

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 4

7) You have gathered the following information concerning a particular investment and conditions in the market.

 

 

According to the Capital Asset Pricing Model, the required return for this investment is

8. A) 8.85%.
9. B) 11.48%.
10. C) 13.98%.
11. D) 14.85%.

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

8) OKAY stock has a beta of 0.8. The market as a whole is expected to decline by 12% thereby causing OKAY stock to

9. A) decline by 9.6%.
10. B) decline by 12.5%.
11. C) increase by 9.6%.
12. D) increase by 12%.

Answer:  A

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 4

 

 

9) The Capital Asset Pricing Model (CAPM) is a mathematical model that depicts the

1. A) positive relationship between risk and return.
2. B) standard deviation between a risk premium and an investment’s expected return.
3. C) exact price that an investor should be willing to pay for any given investment.
4. D) difference between a risk-free return and the expected rate of inflation.

Answer:  A

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

10) When the Capital Asset Pricing Model is depicted graphically, the result is the

1. A) standard deviation line.
2. B) coefficient of variation line.
3. C) security market line.
4. D) alpha-beta line.

Answer:  C

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

11) Which of the following factors comprise the CAPM?

 

1. dividend yield
2. risk-free rate of return

III. the expected rate of return on the market

1. risk premium for the firm

 

1. A) I and III only
2. B) II and IV only
3. C) III and IV only
4. D) II, III and IV only

Answer:  D

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

 

12) The Franko Company has a beta of 1.90. By what percent will the required rate of return on the stock of Franko Company increase if the expected market rate of return rises by 3%?

1. A) 1.91%
2. B) 2.75%
3. C) 3.27%
4. D) 5.70%

Answer:  D

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 4

13) What is the expected return on a stock with a beta of 1.09, a market risk premium of 8%, and a risk-free rate of 4%?

4. A) 4.36%
5. B) 8.36%
6. C) 8.72%
7. D) 12.72%

Answer:  D

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

14) According to MSN money, the stock of Orange Corporation has a beta of 1.5, but according to Yahoo Finance it is 1.75. The expected rate of return on the market is 12% and the risk free rate is 2%.  What is the difference between the required rates of return calculated using each of these betas?

1. A) 1.50%
2. B) 1.75%
3. C) 2.0%
4. D) 2.5%

Answer:  D

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

 

15) The Capital Asset Pricing Model (CAPM) includes which of the following in its base assumptions?

 

1. Investors should earn a minimum return equal to the risk-free rate.
2. Investors in the market should earn a return greater than the return on the overall market.

III. Investors should be rewarded for the amount of risk they assume.

1. Investors should earn a return located above the Security Market Line.

 

1. A) I and III only
2. B) II and IV only
3. C) I, II and III only
4. D) I, III and IV only

Answer:  A

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

16) Small company stocks are yielding 10.7% while the U.S. Treasury bill has a 1.3% yield and a bank savings account is yielding 0.8%. What is the risk premium on small company stocks?

10. A) 10.7%
11. B) 9.4%
12. C) 12.0%
13. D) 9.9%

Answer:  B

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 4

 

17) The risk-free rate of return is 2% while the market rate of return is 12%.  Parson Company has a historical beta of .85. Today, the beta for Delta Company was adjusted to reflect internal changes in the structure of the company. The new beta is 1.38. What is the amount of the change in the expected rate of return for Delta Company based on this revision to beta?

8. A) 8.5%
9. B) 5.3%
10. C) 12.2%
11. D) 14.0%

Answer:  B

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

18) Which of the following statements about the Security Market Line are correct?

 

1. The intercept point is the risk-free rate of return.
2. The slope of the line is beta.

III. An investor should accept any return located above the SML line.

1. A beta of 1.0 indicates the risk-free rate of return.

 

1. A) I and II only
2. B) III and IV only
3. C) II, III and IV only
4. D) I,II and III only

Answer:  D

Learning Outcome:  F-12 Discuss the implications of systematic risk in financial markets and its role in shaping investment choices

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

5.5   Learning Goal 5

 

1) Both the efficient frontier and beta are important aspects of MPT.

Answer:  TRUE

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

2) Portfolios located on the efficient frontier are preferable to all other portfolios in the feasible set.

Answer:  TRUE

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

3) Portfolios C and X each have expected rates of return of 12%.  C’s beta is .9; X’s beta is 1.1, therefore C dominates X.

Answer:  TRUE

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

 

4) Modern portfolio theory seeks to minimize risk and maximize return by combining highly correlated assets.

Answer:  FALSE

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

5) Traditional portfolio management

1. A) concentrates on only the most recent “hot” sectors of the market.
2. B) typically centers on interindustry diversification.
3. C) uses portfolio betas and standard deviations to minimize risk.
4. D) is based on statistical measures to develop the portfolio plan.

Answer:  B

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

6) Traditional portfolio managers prefer well-known companies because

 

1. stocks of well-known firms tend to be less risky than stocks of lesser-known firms.
2. individuals are more apt to purchase a mutual fund if it contains stocks of well-known firms.

III. window dressing encourages the purchase of well-known stocks.

1. institutional investors tend to exhibit “herd-like” behavior.

 

1. A) I only
2. B) I and II only
3. C) II and III only
4. D) I, II , III and IV

Answer:  D

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

7) Which of the following measures or concepts are deliberately used by modern portfolio theory?

 

1. beta
2. inter industry diversification

III. efficient frontier

1. correlation

 

1. A) II and III only
2. B) I and IV only
3. C) I, III and IV only
4. D) I, II, III and IV

Answer:  C

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

8) Portfolios falling to the left of the efficient frontier

1. A) have too much risk for the expected return.
2. B) would be desirable if only they were possible.
3. C) do not use all of the assets in the portfolio.
4. D) fall within the set of feasible portfolios.

Answer:  B

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

9) The efficient frontier

1. A) is represented by the rightmost boundary of the feasible set of portfolios.
2. B) represents the best attainable tradeoff between risk and return.
3. C) includes all feasible sets of portfolios based on risk and return characteristics.
4. D) provides the highest level of risk for the lowest level of return.

Answer:  B

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

10) Investors are rewarded for assuming

1. A) total risk.
2. B) diversifiable risk.
3. C) nondiversifiable risk.
4. D) any type of risk.

Answer:  C

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

11) Large, professionally managed portfolios tend to

1. A) lie on or near the efficient frontier.
2. B) exhibit very little overlap in their stock holdings.
3. C) hold many of the same large, well-known companies.
4. D) be constructed to result in array of portfolio betas allowing investors to choose a position on the efficient frontier.

Answer:  C

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

12) Modern portfolio theory does not consider diversifiable risk relevant because

1. A) it is easy to eliminate.
2. B) it is impossible to eliminate.
3. C) its effects are unpredictable.
4. D) its effects are too small to make a difference in portfolio returns.

Answer:  A

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

13) Explain the differences in how modern and traditional theories of portfolio management approach the issue of diversification.

Answer:  The modern approach to portfolio diversification uses computers to analyze a large number of investment alternatives, mathematically seeking minimum correlation and maximum return.  Ideally these methods identify portfolios on the efficient frontier with minimum portfolio betas or standard deviations for the expected level of return.

 

The traditional approach to diversification uses human judgement and experience to choose a diversified combination of stocks and other securities across industry lines and possibly national borders.  When done well, this approach also reduces risk without excessively sacrificing return.  The traditional approach may lead to overinvestment in the stocks of large, well-known companies because they most readily come to mind for the manager, because the manager fears criticism for omitting them, or wants to avoid blame for less conventional choices (window dressing).

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

5.6   Learning Goal 6

 

1) An investment portfolio should be built around the needs of the individual investor.

Answer:  TRUE

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

2) Beta is more useful in explaining an individual security’s return fluctuations than a large portfolio’s return fluctuations.

Answer:  FALSE

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

3) A portfolio with a beta of 1.5 will be 50% more volatile than the market portfolio.

Answer:  TRUE

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

 

4) Both modern portfolio theory and traditional portfolio management result in diversified portfolios, but they take different approaches to diversification.

Answer:  TRUE

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

5) Portfolio betas will always be lower than the weighted average betas of the securities in the portfolio.

Answer:  FALSE

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

6) Jonathan has the following portfolio of assets.

 

 

What is the beta of Jonathan’s portfolio?

1. A) 1.04
2. B) 1.11
3. C) 1.13
4. D) 1.00

Answer:  A

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 6

 

 

7) Amanda has the following portfolio of assets.

 

 

What is the beta of Amanda’s portfolio?

1. A) 0.62
2. B) 0.733
3. C) 1.13
4. D) 2.20

Answer:  A

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

8) A portfolio with a beta of 1.26

1. A) is 126% more risky than the overall market.
2. B) has less risk than the lowest risk security held within that portfolio.
3. C) is 26% more risky than a risk-free asset.
4. D) is considerably more risky than the overall market.

Answer:  D

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

9) Which of the following will always lower a portfolio’s beta?

 

1. Diversify among different types of securities and across industry and geographic lines.
2. Add investments with low betas to the portfolio.

III. Hold more cash or Treasury Bills in the portfolio.

1. Reduce the percentage of the portfolio invested in high beta securities.

 

1. A) I, II and IV only
2. B) II, III and IV only
3. C) I, II and III only
4. D) I, II, III and IV

Answer:  B

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

 

10) Which of the following guidelines are appropriate for inclusion in a portfolio management policy?

 

1. Diversify among different types of securities and across industry and geographic lines.
2. Determine the risk level and financial situation of the individual investor.

III. Utilize beta to help align the portfolio to the risk level of the investor.

1. Minimize the standard deviation of each security in the portfolio.

 

1. A) I, II and IV only
2. B) II, III and IV only
3. C) I, II and III only
4. D) I, II, III and IV

Answer:  C

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

11) Alexis has inherited $120,000 from her grandmother’s estate.  She has decided to invest $10,000 in each of 12 different industries.  Because she has lower than average risk tolerance, she carefully seeks out stocks so that her portfolio will have a weighted average beta of .80.

1. A) Alexis is using traditional portfolio management techniques.
2. B) Alexis is using modern portfolio management techniques.
3. C) Alexis is using a combination of modern and traditional portfolio management techniques.
4. D) Alexis seems to be unaware of modern portfolio management techniques.

Answer:  C

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 6

 

12) Dr. Zweibel’s portfolio consists of four stocks: AZMN, 35%, beta 2.4; MKR, 20%, beta 1.6; ABDE, 25%, beta 1.8; and SBUK, 20%, beta 2.1.  Compute Dr. Z’s portfolio beta.  Does he seem to be a conservative or aggressive investor?

Answer:  Portfolio beta = (.35 × 2.4) + (.20 × 1.6) + .25 × 1.8) + (.20 × 2.1) = 2.03.  A beta higher than 2 would make Dr. Z either a very aggressive investor, or one who is very confidently optimistic about the future direction of the market.

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

 

13) How can individuals who manage their own portfolios reconcile some of the most useful aspects of traditional portfolio management and modern portfolio theory?

Answer:  Students should include these key points:

 

Investors should carefully consider how much risk they are willing to bear when seeking higher returns.

 

They should diversify across industry lines, not necessarily limiting themselves to well-known or U.S. based companies.

 

While some aspects of modern portfolio theory might require mathematical training and computing power beyond the reach of most individual investors, they should pay attention to the betas of assets within their portfolio and their effect on the overall portfolio beta.

 

They should evaluate alternative portfolios and keep choices in line with their desired level of risk.

Learning Outcome:  F-11 Explain the relationship between risk and return in capital markets

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5