Bus 320 Financial Management

Name:_______________________

BUS 320 Spring 2011 Section 5

FINANCIAL MANAGEMENT

EXAM 2

1. (8-3) Portfolio risk F N Answer: a

. 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.

a. True

b. False

2.(8-3) Market risk F N Answer: a

. An individual stock's idiosyncratic risk can be lowered by adding more stocks to the portfolio in which the stock is held.

a. True

b. False

3. (8-2) CV vs. SD F N Answer: b

. The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

a. True

b. False

4.(8-3) Beta coefficients C N Answer: e

. Stock A's beta is 2.3 and Stock B's beta is 1.2. Which of the following statements must be true about these securities? (Assume market equilibrium.)

a. Stock A must be a more desirable addition to a portfolio than B.

b. When held in isolation, Stock A has more risk than Stock B.

c. Stock B must be a more desirable addition to a portfolio than A.

d. The expected return on Stock B should be greater than that on A.

e. The expected return on Stock A should be greater than that on B.

5.(8-3) Market risk C N Answer: b

. Inflation, recession, and high interest rates are economic events that are best characterized as being

a. systematic risk factors that can be diversified away.

b. among the factors that are responsible for market risk.

c. company-specific risk factors that can be diversified away.

d. risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.

e. irrelevant except to governmental authorities like the Federal Reserve.

6. (8-2) Coefficient of variation C N Answer: a

. Bae Inc. is considering an investment that has...