C The ___________________ tells us that the expected return on a risky asset depends only on that

asset's systematic risk.

A) Efficient Markets Hypothesis (EMH)
B) systematic risk principle
C) Open Markets Theorem
D) Law of One Price
E) principle of diversification
Answer: B

7. The amount of systematic risk present in a particular risky asset, relative to the systematic risk
present in an average risky asset, is called the particular asset's:
A) Beta coefficient.
B) Reward to risk ratio.
C) Law of One Price.
D) Diversifiable risk.
E) Treynor index.
Answer: A

8. The linear relation between an asset's expected return and its beta coefficient is the:
A) Reward to risk ratio.
B) Portfolio weight.
C) Portfolio risk.
D) Security market line.
E) Market risk premium.
Answer: D

9. Diversification works because:

A) Unsystematic risk exists.
B) Forming stocks into portfolios reduces the standard deviation of returns for each stock.
C) Firm-specific risk can be never be reduced.
D) Stocks earn higher returns than bonds.
E) Portfolios have higher returns than individual assets.
Answer: A

10. A security has an unexpected negative news announcement specific to that security. Most likely,
the ______________________________.
A) security's required return on investment will increase.
B) security's required return on investment will remain unchanged.
C) security's required return on investment will decrease.
D) market risk premium will increase.
E) security's market price will remain unchanged.