Answer Happy

Name Page 3 1-7 Which of the following would likely affect a firm's different types of risks? I Higher interest rates than expected II. Hiking in energy price, e.g., oil price III. Trial of the Martha Stewart case (a) Only I affects systematic risk. Only III affects the firm's idiosyncratic risk (b) Only II affects systematic risk. Only III affects the firm's idiosyncratic risk (c) Only III affects systematie risk. Only I & II affect the firm's idiosyncratic risk (d) Only I&III affect systematic risk. Only II affects the firm's idiosyncratic risk (eOnly I & II affect systematic risk. Only III affects the firm's idiosyncratic risk 1-8 Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2002 show that (a) stocks offered investors greater rates of return than bonds and bills. (b) stock returns were less volatile than those of bonds and bills. (e) bonds offered investors greater rates of return than stocks and bills. (d) treasury bills outperformed stocks and bonds. (e) treasury bills always offered a rate of return greater than inflation 1-9 The standard deviation of a portfolio (a) increases as the number of assets in the portfolio increases. (b) increases as the weight in any particular asset increases. (c) increases as the standard deviations of individual assets in the portfolio increase. (d) increases as the idiosyncratic volatility of assets in the portfolio increase. (c) increases as the assets' covariance increase. 1-10 The Capital Allocation Line (CAL) can be described as the (a) investment opportunity set formed with a risky asset and a risk-free asset. (b) investment opportunity set formed with two risky assets. (c) line on which lie all portfolios with the same expected rate of return and different standard deviations. (d) The CAL is also called the efficient frontier of risky assets in the absence of a risk-free asset. (e) The CAL is also called the Capital Market Line in the absence of a risk-free asset