Exam 6: The Meaning and Measurement of Risk and Return

Assume that you expect to hold a $40,000 investment for one year.It is forecasted to have a year end value of $42,000 with a 30% probability; a year end value of $48,000 with a 45% probability; and a year end value of $60,000 with a 25% probability.What is the expected holding period return for this investment?

Historically,investments with the highest returns have the lowest standard deviations because investors do not like risk.

Beginning with an investment in one company's securities,as we add securities of other companies to our portfolio,which type of risk declines?

Anchor Incorporated has a beta of 1.0.If the expected return on the market is 15%,what is the expected return on Anchor Incorporated's stock?

A well-diversified portfolio includes investments in 50 securities.The portfolio's systematic risk is likely to be about

You are considering a security with the following possible rates of return: a.Calculate the expected rate of return. b.Calculate the standard deviation of the returns.

The beta of ABC Co.stock is the slope of

Which of the following types of risk is diversifiable?

Stock A has the following returns for various states of the economy: Stock A's expected return is

If we are able to fully diversify,what is the appropriate measure of risk to use?

Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?

The rate on T-bills is currently 2%.Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%.According to CAPM,determine the return on the market portfolio.

White Company stock has a beta of 2 and a required return of 23%,while Black Company stock has a beta of 1.0 and a required return of 14%.The standard deviation of returns for White Company is 10% more than the standard deviation for Black Company.The risk-free rate of return according to the CAPM is

Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio?

The appropriate measure for risk according to the capital asset pricing model is

Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________.

What is the name given to the equation that financial managers use to measure an investor's required rate of return?

Define systematic and unsystematic risk.What method is used to measure a firm's market risk?

Negative historical returns are not possible during periods of high volatility (high standard deviations of returns)due to the risk-return trade-off.

The prices for the National Gasworks Corporation for the second quarter of 2012 are given below.The price of the stock on April 1,2012 was $130.Find the holding period return for an investor who purchased the stock on April 1,2012 and sold it the last day of June 2012.