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# Risk

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Question 1: Company XYZ has an R-squared and b of 0.5 and 1.2, respectively. Company ABC has an R-squared and b of 0.7 and 0.8, respectively. This suggests:

a. Company ABC has a larger risk premium than Company XYZ
b. Company XYZ has a higher correlation coefficient with the market than Company ABC
c. Company ABC has a lower percentage of its variability explained by the variability in the market's return
d. Company XYZ has lower systematic risk and greater unsystematic risk than ABC
e. Company XYZ has greater systematic and unsystematic risk than Company ABC

Question 3: Alexis determines that the standard deviation of her SafeBet stock is 25% per year. She knows the standard deviation of a broad market index is 10% per year. If the correlation coefficient between SafeBet and the market index is 0.4, Alexis will find that, on average:

a. SafeBet provides a much greater return than the market for a given positive increase in market return
b. SafeBet provides a reduction in negative returns when the market as a whole declines
c. SafeBet's return will move by 0.4 percent when the market moves by 1 percent
d. SafeBet's return will move by 1 percent when the market moves by 1 percent
e. SafeBet's return will move by 40 percent when the market moves by 1 percent

Question 5

a. an indicator of the uncertainty associated with return dispersion
b. a measure of the unsystematic risk component of stock return variance
c. the amount a risk averse investor would pay for stocks in comparison to bonds
d. the difference between annual returns on common stock and the inflation rate
e. the difference in annual returns between common stocks and Treasury bills

#### Solution Preview

Question 1
Company XYZ has an R-squared and b of 0.5 and 1.2, respectively. Company ABC has an R-squared and b of 0.7 and 0.8, respectively. This suggests:

a. Company ABC has a larger risk premium than Company XYZ
b. Company XYZ has a higher correlation coefficient with the market than Company ABC
c. Company ABC has a lower percentage of its variability explained by the variability in the market's return
d. Company XYZ has lower systematic risk and greater unsystematic risk than ABC
e. Company XYZ has greater systematic and unsystematic risk than Company ABC

Answer: e. Company XYZ has greater systematic and unsystematic risk than Company ABC

a) Company ABC has a larger risk premium than Company XYZ

Company ABC has a lower return (because of lower beta and hence lower risk premium). Hence this statement is not correct

b) Company XYZ has a higher correlation coefficient with the market than Company ...

#### Solution Summary

Answers multiple choice questions on risk: systematic and unsystematic risk, standard deviation, equity risk premium.

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