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Multiple Choice Quiz
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1

It is NOT possible to construct a portfolio with zero variance of expected returns from assets whose expected returns have positive variance individually.
A)True
B)False
2

You believe that the possible returns on stock A will be either 25 percent or -15 percent over the coming year, depending on whether the economy does well or does poorly. Given some probabilities of the future state of the economy, you compute the standard deviation of the possible returns. To get the dispersion of the possible outcomes in the same units as the outcomes themselves (i.e., in percent), you must then compute the variance.
A)True
B)False
3

If you invest in stocks with higher-than-average betas, you are certain to earn higher-than-average returns over the next year.
A)True
B)False
4

If world events cause investors to become more risk-averse, we would expect the market risk premium to increase.
A)True
B)False
5

The projected risk premium is defined as the sum of the expected return on a risky investment and the return on a risk-free investment.
A)True
B)False
6

The realized return on an asset can be broken down into an expected component and a discounted component.
A)True
B)False
7

A firm in South Dakota announces a revolutionary way to make auto airbags in a way that decreases their risk to automobile occupants. This is a type of surprise that would be characterized as unsystematic risk.
A)True
B)False
8

An example of systematic risk would be if the stock of airlines dropped after two airplanes crashed on the same day making many passengers too nervous to fly.
A)True
B)False
9

Some of the riskiness associated with individual assets can be eliminated by forming portfolios.
A)True
B)False
10

There is a minimum level of risk that cannot be eliminated simply by diversifying.
A)True
B)False





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