True/False Quiz

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Chapter 5:   Risk and Return

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1. Buying common stock is no more risky than buying a U.S. Treasury bill.

2. The one-period return on common stock is a combination of income paid to the shareholder plus any appreciation in stock price, divided by the beginning price.

3. Combining securities that are not perfectly positively correlated helps to reduce the risk of a portfolio.

4. The expected return on a risk-free security is zero.

5. You can reduce systematic risk by adding more common stocks to your portfolio.

6. Investors can expect to be compensated with higher returns for bearing avoidable or unsystematic risk.

7. The opposite of "risk seeking" is "risk neutral".

8. The one-period rate of return on a security that was bought a year ago for $50, that paid a dividend of $2 for the year, and is now selling at $55, is 14%.

9. The security market line (SML) describes the relationship between a security's expected return and systematic risk.

10. Beta is an index measure of systematic risk.

11. Beta is the slope of a security's characteristic line.

12. There appears to be a tendency for measured betas of individual securities to revert toward the beta of the market portfolio or the beta of the industry of which the company is a part.

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