Risk and Return Multiple Choice Questions and Answers for Practice

16. The market risk premium is the difference between:

1. The expected return and the risk-free rate
2. The risk-free rate and the market rate
3. The market return and the stock return
4. The risk-free rate and the bond return

17. A higher beta value in a stock indicates:

1. Higher risk than the market
2. Lower risk than the market
3. No risk
4. Equal risk to the market

18. The systematic risk of a portfolio is determined by:

1. The correlation of the assets
2. The beta of the portfolio
3. The diversification of the portfolio
4. The standard deviation of the portfolio

19. Which of the following is true about the Security Market Line (SML)?

1. It represents the risk-return tradeoff
2. It is the same as the CML
3. It shows the market rate of return
4. It represents a diversified portfolio

20. A portfolio's total risk is the combination of:

1. Systematic risk and portfolio risk
2. Unsystematic risk and total risk
3. Systematic risk and unsystematic risk
4. Market risk and specific risk

21. Which of the following is NOT a method of measuring portfolio risk?

1. Standard deviation
2. Beta
3. Capital gain tax
4. Correlation coefficient

22. The efficient frontier is a graphical representation of:

1. The highest return possible
2. A portfolio's expected risk and return
3. The lowest possible risk
4. The return on the market portfolio

23. Which of the following is an example of systematic risk?

1. Risk due to changes in interest rates
2. Risk of a company's management
3. Risk due to natural disasters
4. Risk specific to a single stock

24. What is the expected return of a portfolio?

1. A weighted average of the returns of its assets
2. The return on the risk-free asset
3. The return of the market portfolio
4. The return on the least risky asset

25. Which of the following best describes "diversification"?

1. Investing in a single asset
2. Investing in similar types of assets
3. Spreading investments across multiple assets
4. Investing only in safe assets

26. Which of the following is an example of a non-diversifiable risk?

1. Company-specific risk
2. Risk from inflation
3. Risk from diversification
4. Risk due to corporate management

27. The CAPM assumes that all investors have:

1. Different risk preferences
2. The same risk preferences
3. No risk preferences
4. A diversified portfolio

28. Which of the following risks can be reduced through diversification?

1. Systematic risk
2. Unsystematic risk
3. Both A and B
4. Neither A nor B

29. What does the risk-free rate typically represent in financial theory?

1. Return on government bonds
2. Return on risky assets
3. Return on equity
4. Return on a diversified portfolio

30. Which of the following is the primary factor that affects the total return of an asset?

1. The risk-free rate
2. The asset's expected volatility
3. The asset's expected market return
4. The correlation with other assets