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    MBA Risk Concepts

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    Risk that can be eliminated through diversification is called ______ risk.

    a. unique
    b. firm-specific
    c. diversifiable
    d. all of the above

    Asset A has an expected return of 20% and a standard deviation of 25%. The risk free rate is 10%. What is the reward-to-variability ratio?

    a. .40
    b. .50
    c. .75
    d. .80

    Diversification is most effective when security returns are _________.

    a. high
    b. negatively correlated
    c. positively correlated
    d. uncorrelated

    A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35% while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is 0.45. Stock A comprises 40% of the portfolio while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________.

    a. 23.00%
    b. 19.76%
    c. 18.45%
    d. 17.67%

    Which risk can be diversified away as additional securities are added to a portfolio?
    a. market risk
    b. Systematic risk
    c. Firm specific risk
    d. Capital Allocation Risk

    Which of the following provides the best example of a systematic risk event?
    a. A strike by union workers hurts a firm's quarterly earnings.
    b. Mad Cow disease in Montana hurts local ranchers and buyers of beef.
    c. The Federal Reserve increases interest rates 50 basis points.
    d. A senior executive at a firm embezzles $10 million and escapes to South America.

    You are considering adding two stocks to your portfolio. Stock ALP has an expected return of 10% and a standard deviation of 15%. Stock BET has an expected return of 15% and a standard deviation of 20%. Which stock is a riskier addition to your portfolio? Please explain.

    Briefly explain the difference between systematic risk and non-systematic risk. Please provide an example of each risk. Which risk can be eliminated through diversification?

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    Solution Preview

    2. Excess return/standard deviation = 10/25 = 40% or 0.40
    3.b. negatively correlated
    (0.4*0.4)(0.35*0.35) + (0.6*0.6)(0.15*0.15) + 2(0.4)(0.35)(0.6)(0.15)(0.45)
    = 0.0196+0.0081+0.01134 = ...

    Solution Summary

    The following posting answers a variety of multiple choice questions about financial risk.