Part 2 (ch10) Questions T/F & Multiple Choice
Last updated: 17/02/2025
Below you find many questions to this chapter.
As this link is continuously updated with new questions, you might expect some changes from time to time.
The Questions are based or inspired on either Berk & DeMarzo, Corporate Finance, 5th ed. 2020 or Brealey & Myers, Principles of Corporate Finance, 13th ed. 2020.
If you are interest in getting a .pdf version of your answers, hit Ctrl + P to print
Mark T (True) or F (False) in each of the following sentences.
1 Historically, over long horizons, investments in stocks is expected to outperform investments in bonds.
2 The expected, or mean, return is the return we expect to earn on average.
3 The realized or total return for an investment is the total return of the dividend yield and the capital gain rate.
4 The market risk premium is the expected average return of the market portfolio.
5 The total risk of a security represents only its systematic risk.
6 Because investors can eliminate idiosyncratic risk, they do not require a risk premium for taking it on.
7 Investors typically demand a higher return for investments with higher levels of risk.
8 Systematic risk can be diversified away by holding a well-diversified portfolio of assets.
9 Standard deviation is a measure of the total risk of an investment.
10 Diversification involves spreading investment across different assets to reduce risk.
11 Systematic risk is specific to individual assets and can be diversified away by holding a diversified portfolio.
12 The risk-return tradeoff suggests that higher returns are associated with higher levels of risk.
13 Investors always prefer investments with lower risk, even if it means sacrificing potential returns.
14 In finance, risk refers to the uncertainty that an investment’s actual return will differ from its expected return.
15 The market risk premium represents the excess return that investors expect to earn from investing in the market over the risk-free rate.
16 Systematic risk, also known as market risk, is the risk that is inherent to the entire market or an entire market segment.
17 Systematic risk cannot be eliminated through diversification because it affects the entire market.
18 Systematic risk is specific to individual assets and can be diversified away by holding a diversified portfolio.
19 The following risk is an example of firm-specific risk: The risk that the founder and CEO retires
20 The following risk is an example of firm-specific risk: The risk that oil prices rise, increasing production costs
21 The following risk is an example of firm-specific risk: The risk that a product design is faulty and the product must be recalled
22 The following risk is an example of firm-specific risk: The risk that the economy slows, reducing demand for the firm’s products.
23 A value-weighted portfolio is an equal-ownership portfolio: the investors holds an equal fraction of the total number of shares outstanding of each security in the portfolio.
24 If investors have homogeneous expectations, then each investor will identify the same portfolio as having the highest Sharpe ratio in the economy.
25 An assumption of the CAPM is that investors are rational and will always prefer a higher over a lower Sharpe ratio.
26 An assumption of the CAPM is that only informed investors are allowed to borrow or lend at the risk-free rate.
27 Beta measures a stock’s sensitivity to market movements.
28 A stock with a beta of zero has the same expected return as the market portfolio.
29 A stock with a beta greater than 1 is considered more volatile than the market.
30 The risk-free rate is the theoretical return of an investment with zero risk.
31 Systematic risk affects the entire market and cannot be eliminated through diversification.
32 Events like recessions, inflation, and interest rate changes are sources of systematic risk.
33 Systematic risk is measured using beta, which indicates how a stock moves relative to the market.
34 Government policies, wars, and natural disasters can contribute to systematic risk.
35 Systematic risk impacts all securities in the market, though to varying degrees.
36 Systematic risk refers only to the risk associated with large-cap stocks.
37 Unsystematic risk is also known as firm-specific or idiosyncratic risk.
38 Unsystematic risk affects all companies in the market equally.
39 Unsystematic risk can be reduced or eliminated through portfolio diversification.
40 Examples of unsystematic risk include management decisions, product recalls, and labor strikes.
41 Even a well-diversified portfolio cannot reduce unsystematic risk.
42 Unlike systematic risk, unsystematic risk is unique to a specific company or industry.
43 Investors holding a single stock are more exposed to unsystematic risk compared to those holding a diversified portfolio.
44 A company’s bankruptcy due to poor financial management is an example of unsystematic risk.
45 Unsystematic risk includes risks from changes in interest rates and inflation.