Question

1. Which of the following statement is correct about systematic risk and non-systematic risk?

A. Systematic risk can be eliminated by proper diversification.

B. Fluctuation in oil price is a non-systematic risk.

C. Financial markets reward you for bearing systematic risk.

D. A stock’s systematic risk is measured by the standard deviation of its return.

2. As discussed in class, based on the CAPM, an electric utility will have the greater cost of equity capital than an airline company.

True or False.

3. A coupon bond pays annual interest, has a par value of $1,000, matures in 5 (five) years, has a coupon rate of 7.45%, and has a yield to maturity of 8.82%. The current yield on this bond is ________% (round to 2 decimal points.)

4. Today you purchase a coupon bond that pays an annual interest, has a par value of $1,000, matures in six years, has a coupon rate of 10%, and has a yield to maturity of 8%. One year later, you sell the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7%. Your annual total rate of return on holding the bond for that year is

A. 10%

B. 8.00%.

C. 7.00%.

D. 9.95%.

E. 11.95%.

Answer 1

A. Systematic risk can be eliminated by proper diversification. Incorrect

Systematic risk is considered to be non-diversifiable in nature as it has an impact on the entire market and not on individual securities or sectors.

B. Fluctuation in oil price is a non-systematic risk.

Correct

C. Financial markets reward you for bearing systematic risk. Incorrect

Financial markets reward you for bearing un-systematic risk. As un-systematic risk is sector/stock specific risk rewards/returns are generated for bearing such risk.

D. A stock’s systematic risk is measured by the standard deviation of its return. Incorrect

Stock Beta measures a stock’s systematic risk