1) The amount of extra compensation an investor should expect to receive for acc
ID: 2708808 • Letter: 1
Question
1) The amount of extra compensation an investor should expect to receive for accepting the non-diversifiable risk associated with a risky security is equal to:
A. the security
The amount of extra compensation an investor should expect to receive for accepting the non-diversifiable risk associated with a risky security is equal to: the security's beta multiplied by the market return. B. the market risk premium. the security's beta multiplied by the market risk premium. D. the risk-free rate of return. E. zero. The expected return on a security is currently based on a 0.42 chance of a 12 percent return given an economic boom, and a 0.58 chance of a 7 percent return given a normal economy. Which of the following changes will reduce the expected return on this security? I. the probability of an economic boom decreases II. the rate of return given an economic boom increases III. the probability of a normal economy increases IV. the rate of return given a normal economy increases I and II only B. II and IV only C. III and IV only D. I and III only E. I, II, III, and IV You have computed the expected return on a security based on multiple economic states that have unequal probabilities of occurrence. Which of the following statements is correct regarding the variance of this security? The variance will remain constant if the probabilities of occurrence are changed. The variance ignores the probabilities of occurrence. The variance will be negative if there is a big probability that an economic state creates a very negative return. The variance will be negative only when the overall expected rate of return on the security is negative. The variance depends on both the rates of return and the probability of occurrence for each economic state. The Capital Asset Pricing Model: assumes the market has a beta of zero. computes the compensation an investor should receive based on the total risk of an individual security. has limited use because it ignores the pure time value of money. is applicable to both individual securities and security portfolios. assumes the market risk premium is constant over time.Explanation / Answer
1) The amount of extra compensation an investor should expect to receive for accepting the non-diversifiable risk associated with a risky security is equal to:
C. the security
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