# Test Bank Chap 2 Fin400 Essay

RISK AND RETURN: PART I

(Difficulty: E = Easy, M = Medium, and T = Tough)

True-False

Easy:

(2.2) Payoff matrix Answer: a Diff: E

[i]. If we develop a weighted average of the possible return outcomes, multiplying each outcome or "state" by its respective probability of occurrence for a particular stock, we can construct a payoff matrix of expected returns.

a. True b. False

(2.2) Standard deviation Answer: a Diff: E

[ii]. The tighter the probability distribution of expected future returns, the smaller the risk of a given investment as measured by the standard deviation.

a. True b. False

(2.2) Coefficient of variation Answer: a Diff: E

[iii]. The coefficient of variation,

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(2.3) CAPM and risk Answer: a Diff: E

[viii]. According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the isolated risks of individual stocks. Thus, the relevant risk is an individual stock's contribution to the overall riskiness of the portfolio.

a. True b. False

(2.3) Portfolio risk Answer: b Diff: E

[ix]. When adding new securities to an existing portfolio, the higher or more positive the degree of correlation between the new securities and those already in the portfolio, the greater the benefits of the additional portfolio diversification.

a. True b. False

(2.3) Portfolio risk Answer: b Diff: E

[x]. Portfolio diversification reduces the variability of the returns on each security held in the portfolio.

a. True b. False

(2.3) Portfolio return Answer: b Diff: E

[xi]. The realized portfolio return is the weighted average of the relative weights of securities in the portfolio multiplied by their respective expected returns.

a. True b. False

(2.3) Market risk Answer: a Diff: E

[xii]. Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and it will definitely have a beta which is greater than 1.0.

a. True b. False

(2.3) Market risk Answer: b Diff: E

[xiii]. Diversifiable