🧩 Chapter 14: Security Risk & Return Concepts — Mock Questions

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 Q1. Return on an investment primarily measures:

A. Market volatility
B. Profit earned relative to investment
C. Dividend payout only
D. NAV of mutual fund

Answer: B
✔ Return = gain/loss relative to initial investment.

Q2. If a stock price rises from ₹100 to ₹120 and pays ₹5 dividend, the total return is:

A. 20%
B. 25%
C. 15%
D. 5%

Answer: B
✔ Return = (120−100 + 5) / 100 = 25%.

Q3. Risk-free rate typically refers to returns on:

A. Corporate bonds
B. Equity mutual funds
C. Government securities
D. Bank fixed deposits

Answer: C
✔ Government securities considered nearly risk-free.

Q4. Standard deviation measures:

A. Average return
B. Market capitalization
C. Volatility of returns
D. Amount of dividends

Answer: C
✔ Higher SD = higher volatility.

Q5. Higher variance in returns indicates:

A. Lower volatility
B. Higher volatility
C. No change
D. Better stability

Answer: B
✔ Variance and volatility move together.

Q6. Sharpe ratio evaluates:

A. Total return only
B. Return per unit of total risk
C. Return minus inflation
D. Dividend yield

Answer: B
✔ Sharpe = (Return − Risk-free rate) / Standard deviation.

Q7. A higher Sharpe ratio indicates:

A. Poor risk-adjusted performance
B. Better risk-adjusted performance
C. High absolute returns only
D. Low returns

Answer: B
✔ Higher ratio = more return for each unit of risk.

Q8. Systematic risk is also known as:

A. Company risk
B. Market risk
C. Accounting risk
D. Management risk

Answer: B
✔ Cannot be diversified away.

Q9. Unsystematic risk refers to:

A. Economy-wide risk
B. Industry risk
C. Company-specific risk
D. Market risk

Answer: C
✔ Diversifiable through portfolio diversification.

Q10. Portfolio beta is a measure of:

A. Total portfolio return
B. Weighted average systematic risk
C. Coupon payments
D. Liquidity risk

Answer: B
✔ Beta = measure of systematic risk for the whole portfolio.

Q11. CAPM calculates expected return using:

A. Book value and beta
B. Risk-free rate, beta, and market risk premium
C. Dividend payout
D. Debt-to-equity ratio

Answer: B
✔ CAPM: Re = Rf + β (Rm − Rf).

Q12. If beta = 1, the stock has:

A. No risk
B. Same volatility as market
C. Higher volatility than market
D. Lower volatility

Answer: B
✔ Beta of 1 means moves in line with market.

Q13. Stock A β = 1.2, Stock B β = 0.8.

Which is more defensive?
A. Stock A
B. Stock B
C. Both equal
D. Cannot say

Answer: B
✔ β < 1 = lower market sensitivity → defensive.

Q14. The market risk premium equals:

A. Market return − Risk-free rate
B. Beta − Inflation
C. Risk-free rate − Market return
D. Market return × beta

Answer: A
✔ Extra return demanded over risk-free rate.

Q15. If a portfolio has high unsystematic risk, an investor should:

A. Diversify more stocks
B. Buy more high-beta stocks
C. Increase leverage
D. Reduce cash holdings

Answer: A
✔ Diversification eliminates company-specific risk.

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