Question 1

The covariance between the returns on two stocks equals the correlation coefficient multiplied by the standard deviations of the two stocks.

Accepted Answer

A) True 
 B)False

Question 2

Briefly explain how individual securities affect portfolio risk.

Accepted Answer

The risk of a well-diversified portfolio

Question 3

A standard error measures

Accepted Answer

A) nominal annual rate of return on a portfolio. 
B) risk of a portfolio. 
C) reliability of an estimate. 
D) real annual rate of return on a portfolio. 
A) nominal annual rate of return on a portfolio. 
B) risk of a portfolio. 
C) reliability of an estimate. 
D) real annual rate of return on a portfolio.

Question 4

The standard deviation of a two-stock portfolio generally equals the value-weighted average of the standard deviations of the two stocks.

Accepted Answer

A) True 
 B)False

Question 5

The beta of a well-diversified portfolio is equal to the value weighted average beta of the securities included in the portfolio.

Accepted Answer

A) True 
 B)False

Question 6

Beta is a measure of

Accepted Answer

A) unique risk. 
B) total risk. 
C) market risk. 
D) liquidity risk. 
A) unique risk. 
B) total risk. 
C) market risk. 
D) liquidity risk.

Question 7

The correlation coefficient between a stock and the market portfolio is +0.6. The standard deviation of return of the stock is 30 percent and that of the market portfolio is 20 percent. Calculate the beta of the stock.

Accepted Answer

A) 1.1 
B) 1.0 
C) 0.9 
D) 0.6 
A) 1.1 
B) 1.0 
C) 0.9 
D) 0.6

Question 8

By purchasing U.S. government bonds, an investor can achieve both a risk-free nominal rate of return and a risk-free real rate of return.

Accepted Answer

A) True 
 B)False

Question 9

For log normally distributed returns, the annual geometric average return is greater than the arithmetic average return.

Accepted Answer

A) True 
 B)False

Question 10

The covariance between Amazon stock and the S&P 500 is 0.05. The standard deviation of the stock market is 20%. What is the beta of Amazon?

Accepted Answer

A) 0.00 
B) 1.00 
C) 1.25 
D) 1.42 
A) 0.00 
B) 1.00 
C) 1.25 
D) 1.42

Question 11

Which of the following portfolios will have the highest beta?

Accepted Answer

A) Portfolio of U.S. Treasury bills 
B) Portfolio of U.S. government bonds 
C) Portfolio containing 50 percent U.S. Treasury bills and 50 percent U.S. government bonds 
D) Portfolio of U.S. common stocks 
A) Portfolio of U.S. Treasury bills 
B) Portfolio of U.S. government bonds 
C) Portfolio containing 50 percent U.S. Treasury bills and 50 percent U.S. government bonds 
D) Portfolio of U.S. common stocks

Question 12

A risk premium is the difference between a security's return and the Treasury bill return.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following portfolios has the least risk?

Accepted Answer

A) A portfolio of Treasury bills 
B) A portfolio of long-term U.S. government bonds 
C) A portfolio of U.S. common stocks of small firms 
D) A portfolio of U.S. common stocks of large firms 
A) A portfolio of Treasury bills 
B) A portfolio of long-term U.S. government bonds 
C) A portfolio of U.S. common stocks of small firms 
D) A portfolio of U.S. common stocks of large firms

Question 14

Discuss the importance of beta as a measure of risk.

Accepted Answer

Beta is a measure of market risk. It is

Question 15

What has been the average annual nominal rate of return on a portfolio of U.S. common stocks over the past 117 years (from 1900 to 2017)?

Accepted Answer

A) Less than 2% 
B) Between 2% and 5% 
C) Between 5% and 11% 
D) Greater than 11% 
A) Less than 2% 
B) Between 2% and 5% 
C) Between 5% and 11% 
D) Greater than 11%

Question 16

According to the authors, a reasonable range for the risk premium in the United States is 5 percent to 8 percent.

Accepted Answer

A) True 
 B)False

Question 17

Mega Corporation has the following returns for the past three years: 7 percent, 13 percent, and 10 percent. Use the following formulas to calculate the variance of the returns and the standard deviation of the returns:
Variance (  
 
m)= expected value of (  
 
m - rm)2
Standard deviation of  
 
m =  
.

Accepted Answer

A) 64.00 and 8.00 percent 
B) 124.00 and 11.10 percent 
C) 6.00 and 2.45 percent 
D) 30.00 and 10.00 percent 
A) 64.00 and 8.00 percent 
B) 124.00 and 11.10 percent 
C) 6.00 and 2.45 percent 
D) 30.00 and 10.00 percent

Question 18

The standard deviation of U.S. returns, from 1995 to the financial crisis years later had increased (approximately)by:

Accepted Answer

A) 20%. 
B) 30%. 
C) 40%. 
D) 60%. 
A) 20%. 
B) 30%. 
C) 40%. 
D) 60%.

Question 19

The portfolio risk that cannot be eliminated by diversification is called market risk.

Accepted Answer

A) True 
 B)False

Question 20

If the standard deviation of annual returns is 19.8 percent and the number of years of observation is 107, what is the standard error?

Accepted Answer

A) 4.23 percent 
B) 1.91 percent 
C) 0.47 percent 
D) 19.8 percent 
A) 4.23 percent 
B) 1.91 percent 
C) 0.47 percent 
D) 19.8 percent

Exam 7: Introduction to Risk and Return

The covariance between the returns on two stocks equals the correlation coefficient multiplied by the standard deviations of the two stocks.

Briefly explain how individual securities affect portfolio risk.

A standard error measures

The standard deviation of a two-stock portfolio generally equals the value-weighted average of the standard deviations of the two stocks.

The beta of a well-diversified portfolio is equal to the value weighted average beta of the securities included in the portfolio.

Beta is a measure of

The correlation coefficient between a stock and the market portfolio is +0.6. The standard deviation of return of the stock is 30 percent and that of the market portfolio is 20 percent. Calculate the beta of the stock.

By purchasing U.S. government bonds, an investor can achieve both a risk-free nominal rate of return and a risk-free real rate of return.

For log normally distributed returns, the annual geometric average return is greater than the arithmetic average return.

The covariance between Amazon stock and the S&P 500 is 0.05. The standard deviation of the stock market is 20%. What is the beta of Amazon?

Which of the following portfolios will have the highest beta?

A risk premium is the difference between a security's return and the Treasury bill return.

Which of the following portfolios has the least risk?

Discuss the importance of beta as a measure of risk.

What has been the average annual nominal rate of return on a portfolio of U.S. common stocks over the past 117 years (from 1900 to 2017)?

According to the authors, a reasonable range for the risk premium in the United States is 5 percent to 8 percent.

Mega Corporation has the following returns for the past three years: 7 percent, 13 percent, and 10 percent. Use the following formulas to calculate the variance of the returns and the standard deviation of the returns: Variance ( m)= expected value of ( m - rm)2 Standard deviation of m = .

The standard deviation of U.S. returns, from 1995 to the financial crisis years later had increased (approximately)by:

The portfolio risk that cannot be eliminated by diversification is called market risk.

If the standard deviation of annual returns is 19.8 percent and the number of years of observation is 107, what is the standard error?

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

Mega Corporation has the following returns for the past three years: 7 percent, 13 percent, and 10 percent. Use the following formulas to calculate the variance of the returns and the standard deviation of the returns: Variance ( _m)= expected value of ( _m - r_m)² Standard deviation of _m = .