Investment Risk and Portfolio Management Paper 4

1

The risk to which all investment securities are subject is known as






2

One type of risk to which investment securities are subject can be offset through portfolio diversification. This type of risk is referred to as






3

A company holds industrial development bonds issued by a county in another state. The county commission has announced that its financial condition has changed drastically and that it is considering defaulting on the next interest and principal payment on these bonds. This situation exposes the company to all of the following types of risk except






4

Which one of the following lists properly ranks financial instruments in order from the highest risk/opportunity for return to the lowest risk/opportunity for return?






5

In theory, which of the following coefficients of correlation would eliminate risk in an investment portfolio?






6

Listed below are four numbers. Which of these numbers represents the coefficient of correlation of a stock portfolio with the least risk?






7

The incremental benefits of portfolio diversification initially decrease as the number of different securities held increases. The benefits become extremely small when more than about __________ different securities are held.






8

OldTime, Inc., is a mature firm operating in a very stable market. Earnings growth has averaged about 3.2% for the last dozen years, just staying in line with inflation. The firm’s weighted-average cost of capital is 8%, much lower than most firms. John Storms has just been hired as OldTime’s new CEO and wants to turn what he calls a “cash cow” into a “growth company.” Storms wants to reduce the dividend pay-out and use the resulting retained earnings to fund the firm’s expansion into new product lines. OldTime’s historical beta has been about . . With the CEO’s changes, what will most likely happen to OldTime’s beta and the required return on investment in its shares?






9

If the return on the market portfolio is 10% and the risk-free rate is 5%, what is the effect on a company’s required rate of return on its stock of an increase in the beta coefficient from 1.2 to 1.5?






10

The common stock of Wisconsin’s Finest Cheese has a beta coefficient of . . The following information about overall market conditions is available.
Expected return on U.S. Treasury bonds 6%
Expected return on the market portfolio 8.5%
Using the capital asset pricing model (CAPM), what is the risk premium on the market?






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