Test Bank for Investment Analysis and Portfolio Management

10th Edition Multiple Choice Questions P1

1. The basic trade-off in the investment process is

1. between the anticipated rate of return for a given investment

instrument and its degree of risk.
2. between understanding the nature of a particular investment and
having the opportunity to purchase it.
3. between high returns available on single instruments and the
diversification of instruments into a portfolio.
4. between the desired level of investment and possessing the resources
necessary to carry it out.
5. None of the above.
2. The rate of exchange between future consumption and current consumption
is

1. The nominal risk-free rate.

2. The coefficient of investment exchange.
3. The pure rate of interest.
4. The consumption/investment paradigm.
5. The expected rate of return.
3. The ____ the variance of returns, everything else remaining constant, the ____
the dispersion of expectations and the ____ the risk.

1. Larger, greater, lower

2. Larger, smaller, higher
3. Larger, greater, higher

4. Smaller, greater, lower

5. Smaller, greater, greater
4. The coefficient of variation is a measure of

1. Central tendency.
2. Absolute variability.
3. Absolute dispersion.
4. Relative variability.
5. Relative return.
5. The nominal risk free rate of interest is a function of

1. The real risk free rate and the investment`s variance.

2. The prime rate and the rate of inflation.
3. The T-bill rate plus the inflation rate.
4. The tax free rate plus the rate of inflation.
5. The real risk free rate and the rate of inflation.
6. In the phrase "nominal risk free rate," nominal means

1. Computed.
2. Historical.
3. Market.
4. Average.
5. Risk adverse.
7. If a significant change is noted in the yield of a T-bill, the change is most likely
attributable to

1. A downturn in the economy.

2. A static economy.
3. A change in the expected rate of inflation.
4. A change in the real rate of interest.
5. A change in risk aversion.
8. The real risk-free rate is affected by a two factors;

1. The relative ease or tightness in capital markets and the expected rate
of inflation.
2. The expected rate of inflation and the set of investment opportunities
available in the economy.
3. The relative ease or tightness in capital markets and the set of
investment opportunities available in the economy.
4. Time preference for income consumption and the relative ease or
tightness in capital markets.
5. Time preference for income consumption and the set of investment
opportunities available in the economy.

9. Which of the following is not a component of the risk premium?

1. Business risk
2. Financial risk
3. Liquidity risk
4. Exchange rate risk
5. Unsystematic market risk

10. The ability to sell an asset quickly at a fair price is associated with

1. Business risk.
2. Liquidity risk.
3. Exchange rate risk.
4. Financial risk.
5. Market risk.
11. The variability of operating earnings is associated with

1. Business risk.
2. Liquidity risk.
3. Exchange rate risk.
4. Financial risk.
5. Market risk.
12. The uncertainty of investment returns associated with how a firm finances its
investments is known as

1. Business risk.
2. Liquidity risk.
3. Exchange rate risk.
4. Financial risk.
13.

Market risk.

14. What will happen to the security market line (SML) if the following events
occur, other things constant: (1) inflation expectations increase, and (2)
investors become more risk averse?

1. Shift up and keep the same slope

2. Shift up and have less slope

3. Shift up and have a steeper slope
4. Shift down and keep the same slope
5. Shift down and have less slope
15. A decrease in the market risk premium, all other things constant, will cause
the security market line to

1. Shift up
2. Shift down
3. Have a steeper slope
4. Have a flatter slope
5. Remain unchanged
16. A decrease in the expected real growth in the economy, all other things
constant, will cause the security market line to

1. Shift up
2. Shift down
3. Have a steeper slope
4. Have a flatter slope
5. Remain unchanged
17. Unsystematic risk refers to risk that is

1. Undiversifiable
2. Diversifiable
3. Due to fundamental risk factors

4. Due to market risk

5. None of the above
18. The security market line (SML) graphs the expected relationship between

1. Business risk and financial risk

2. Systematic risk and unsystematic risk
3. Risk and return
4. Systematic risk and unsystematic return
5. None of the above

19. Two factors that influence the nominal risk-free rate are;

1. The relative ease or tightness in capital markets and the expected rate
of inflation.
2. The expected rate of inflation and the set of investment opportunities
available in the economy.
3. The relative ease or tightness in capital markets and the set of
investment opportunities available in the economy.
4. Time preference for income consumption and the relative ease or
tightness in capital markets.
5. Time preference for income consumption and the set of investment
opportunities available in the economy.
20. Measures of risk for an investment include

1. Variance of returns and business risk

2. Coefficient of variation of returns and financial risk
3. Business risk and financial risk
4. Variance of returns and coefficient of variation of returns
5. All of the above
21. Sources of risk for an investment include

1. Variance of returns and business risk

2. Coefficient of variation of returns and financial risk
3. Business risk and financial risk
4. Variance of returns and coefficient of variation of returns
5. All of the above