Question

26 The systematic risk principle implies that the expected return on an asset depends only on that asset’s:

unsystematic risk

systematic risk

credit risk

interest rate risk

Answer #1

Systematic risk, also known as "market risk" or
"un-diversifiable risk", is the uncertainty inherent to the entire
market or entire market segment. Also, referred to as volatility,
systematic risk consists of the day-to-day fluctuations in a
stock's price. **Beta coefficient** is measure of
systematic risk.

The systematic risk principle implies that the expected return on an asset depends only on that asset’s systematic risk that is beta.

Option (B) is correct answer.

Which of the following is true about diversification?
a. The expected return on a risky asset depends on that asset’s
unsystematic risk
b. Portfolio diversification is the investment in several but
same asset classes or sectors/industry
c. Beta is a measure of systematic risk
d. There is a large portion of unsystematic risk in a well
diversified portfolio

True or False
Higher risk equals higher returns only holds true for systematic
risk,but not necessarily for unsystematic risk.
Why?

DISCUSS THE CAPITAL ASSET PRICING MODEL, INCLUDING SYSTEMATIC
RISK, BETA, THE RELATIONSHIP BETWEEN RISK AND RETURN, HOW TO AVOID
RISK, AND THE RELATIONSHIP BETWEEN OF BETA TO STOCK PRICES

A project has a level of systematic risk of 1.25. The expected
return on the market portfolio is 12%, and the risk free rate is
5%. If an investment’s internal rate of return is 12%
a.
The project should be accepted
b.
The project should be rejected because IRR is less than the
required rate of return
c.
The project should be rejected because it is over-priced.
d.
Both b and c are correct
e.
Not enough information to tell

Consider a risky asset with an expected return of 12% and
standard deviation of 16%. Assume that the risk free rate is 3%,
and that you allocate 70% in the risky asset and the remaining in
risk-free T-Bill. Calculate the following: show all
formulas and calculations
Complete Portfolio’s Expected Return:
Complete Portfolio’s Standard Deviation:
Risky asset’s Sharpe ratio:
Complete Portfolio’s Sharpe ratio:

1) The systematic risk of an investment:
A. is likely to be higher in a rising
market
B. results from its own unique factors
C. depends upon market volatility
D. cannot be reduced by diversification
2) Consider the CAPM. The risk-free rate is 5% and the
expected return on the market is 15%. What is the beta on a stock
with an expected return of 12%?
A. 0.5
B. 0.7
C. 1.2
D. 1.4
3) An asset with a negative...

The volatility of an asset’s return can be broken into
diversifiable (i.e., unsystematic or firm-specific) and
non-diversifiable (i.e., systematic) components. Investors who hold
the asset should be compensated only for the
non-diversifiable risk, which is measured by the “beta” of the
asset. A stock that has a zero beta has no systematic risk and its
expected rate of return should equal the risk-free rate. Suppose
that you have two different stocks:
S&P 500, which has a beta of 1.00 and...

The risk-free rate is 3%. Asset A has beta of 0.8 and expected
return of 11%. If asset B has expected return 15%, what must be the
beta for Asset B?

A portfolio that combines the risk-free asset and the market
portfolio has an expected return of 7.4 percent and a standard
deviation of 10.4 percent. The risk-free rate is 4.4 percent, and
the expected return on the market portfolio is 12.4 percent. Assume
the capital asset pricing model holds.
What expected rate of return would a security earn if it had a .49
correlation with the market portfolio and a standard deviation of
55.4 percent? Enter your answer as a percent...

What is the expected risk-free rate of return if Asset X, with a
beta of 1.2, has an expected return of 17 percent, and the expected
market return is 15 percent? A. 4% B. 6% C. 5% D. 4.5%

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