1. Which of the following statements about an investment\'s financial risk is fa
ID: 2770220 • Letter: 1
Question
1. Which of the following statements about an investment's financial risk is false? Select one: a. Stand-alone risk is relevant only for investments held in isolation b. Corporate risk generally is most relevant for not-for-profit firms. c. Market risk generally is most relevant for investor-owned firms. d. Even though an investment may have high stand-alone risk, portfolio effects often drive its corporate risk to zero. e. The portfolio risk of an individual investment is defined as the contribution of the investment to the overall riskiness of the portfolio.
2. Which of the following statements concerning financial risk is false? Select one: a. Generically, financial risk is related to the probability of a return that is less than expected. b. If the returns on two investments move in unison (are perfectly positively correlated), combining the two into a portfolio will lower risk. c. If the returns on two investments move in unison (are perfectly positively correlated), combining the two into a portfolio will not affect risk. d. In the real world, it is not possible to create a riskless portfolio because all investment returns, to a greater or lesser extent, move with the overall economy. e. Assume you know for certain that an investment will return negative 10 percent. (In other words, the probability of a negative 10 percent return is 100 percent.) Although the expected return is negative, the investment is riskless.
3. The security market line (SML) provides the relationship between risk and required rate of return. Which of the following statements about the SML is most correct? Select one: a. The relevant risk is portfolio risk, which is measured by beta. b. The relevant risk is total risk, which is measured by standard deviation. c. The relevant risk is mutual risk, which is measured by coefficient of variation. d. The SML is an equation, but it cannot be graphed. e. The SML is a graphed line, but it cannot be expressed as an equation.
4. Assume that the risk-free rate is 8 percent, the required rate of return on the market (or an average-risk stock) is 13 percent, and the required rate of return on Acme Healthcare stock is 15 percent. What is the implied beta coefficient of the stock? (Hint: Use the SML equation with beta as the unknown.) Select one: a. 1.50 b. 1.40 c. 1.20 d. 1.00 e. 0.80
Explanation / Answer
Option B is correct
Corporate risk is the total amount of risk a company possess with its assets and investments. Basically is the weighted average of all standalone risks of the project. It is relevant for both corporate entities incorporated to make profit and not for profit firms.
Therefore, statement b which talks only about not for profit entities is incorrect.
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