Exam 11: Introduction to Risk, Return, and the Opportunity Cost of Capital

An investor is analyzing the risk two stocks A and B within three expected states of the economy.If a boom economy occurs, stock A will provide an 8% return, while stock B will provide a 10% return; if an average economy transpires, stock A will provide a 5 return, while stock B will provide a 5% return; if a bust economy transpires, stock A will provide a -11% return and stock B will provide a -15% return.It is expected that there will be a 60% probability of an average return.Boom and Bust states have an equal chance of occurring.Determine which stock is riskier given the state information.

Which of the following would you expect to represent the broadest-based index of Canadian stocks?

How is the standard deviation of returns for individual common stocks or for a stock portfolio calculated?

A stock is held one year, during which time its dividend yield was greater than its capital gains yield.For this stock, the percentage return:

Which of the following risks is most important to a well-diversified investor in common stocks?

How much is an investor's tolerance for risk worth over a long horizon? Calculate the difference in accumulation in real terms for an investor who initially invests $25,000 and ignores it for 20 years in either a long-term Treasury bond portfolio or a portfolio of diversified common stocks.Assume the historic real returns of 2.1 percent annually for bonds and 9.3 percent for common stocks.

The primary difference between Canadian Treasury bills and Canadian Treasury bonds is that the bills:

What is the approximate standard deviation of returns if over the past four years an investment returned 8.0%, -12.0%, -12% and 15.0%?

Systematic risk is faced by all common stock investors.

Define the term "risk" and explain how it is related to the expected return.

The incremental risk to a portfolio from adding another stock:

Justify the historic ranking of returns for the following three categories of investment, listed from highest to lowest return: Common stocks, long-term Treasury bonds, and Treasury bills.

Which of the following firms is likely to exhibit the least macro risk exposure?

Which of the following statements seems most appropriate when the TSX 300 increases by 2 percent?

The risk that remains in a stock portfolio after efforts to diversify is known as unique risk.

One common reason for reporting standard deviations rather than variances is that standard deviations:

Average returns on high-risk assets are higher than those on low-risk assets.

Although several stock indexes are available to inform U.S.investors of market changes, the Dow Jones Industrial Average:

Which of the following statements is incorrect concerning stock indexes?

The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that: