Exam 9: Characterizing Risk and Return

Total Risk Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 8 percent and standard deviation of 10 percent. The average return and standard deviation of Idol Staff are 10 percent and 20 percent; and of Poker-R-Us are 6 percent and 15 percent.

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Question 1

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Describe the diversification potential of two assets with a -0.7 correlation. What is the potential if the correlation is + 0.7?

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Question 2

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The diversification potential is very good with two assets that have a -0.7 correlation. Since these two assets tend to move in opposite directions, the combination will greatly reduce the risk or volatility an investor would experience with only one of the assets. There is not much diversification potential for two assets with a correlation close to one, like + 0.7.

Consider the risk-return relationship in T-bills during each decade since 1950. Given this data, which of the following statements is correct?

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Question 3

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Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an average return of 14 percent and standard deviation of 30 percent. The average return and standard deviation of WholeMart are 12 percent and 25 percent; and of Fruit Fly are 25 percent and 40 percent.

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Question 4

Consider the characteristics of the following three stocks: The correlation between Thumb Devices and Air Comfort is -0.12. The correlation between Thumb Devices and Sport Garb is 0.89. The correlation between Air Comfort and Sport Garb is -0.85. If you can pick only two stocks for your portfolio, which would you pick? Why?

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Question 5

Standard Deviation Compute the standard deviation of the five monthly returns for PG&E: 1.25 percent, -1.50 percent, 4.25 percent, 3.75 percent, and 1.98 percent

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Question 6

Which of the following statements is correct?

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Question 7

Which of the following is correct regarding the coefficient of variation?

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Question 8

What does diversification do to the risk and return characteristics of a portfolio?

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Question 9

You are a risk averse investor with a low-risk portfolio of bonds. How is it possible that adding some stocks (which are riskier than bonds) to the portfolio can lower the total risk of the portfolio?

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Question 10

The efficient frontier portfolios are __________________________.

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Question 11

Consider the following correlations: Given this data, which of the following is most preferable if an investor can only select one pair of companies?

(Multiple Choice)

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Question 12

Average Return The past five monthly returns for K and Company are 4.25 percent, 4.13 percent, -2.05 percent, 3.25 percent, and 7.25 percent. What is the average monthly return?

(Multiple Choice)

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Question 13

Which of the following statements is correct?

(Multiple Choice)

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Question 14

This includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment.

(Multiple Choice)

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Question 15

If you invested $1,000 in Disney and $5,000 in Oracle and the two companies returned 15% and 18% respectively, what was your portfolio's return?

(Multiple Choice)

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Question 16

Investment Return Rx Corp stock was $60.00 per share at the end of last year. Since then, it paid a $1.00 per share dividend last year. The stock price is currently $62.50. If you owned 400 shares of Rx, what was your percent return?

(Multiple Choice)

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Question 17

Portfolio Weights You have $15,040 to invest. You want to purchase shares of Company Air at $42.50, Company B at $51.50, and Company F at $9.75. How many shares of each company should you purchase so that your portfolio consists of 20 percent Company A, 40 percent Company B, and 40 percent Company F? Report only whole stock shares.

(Multiple Choice)

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Question 18

Which of the following is correct regarding the total risk of a company?

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Question 19

Dominant Portfolios Determine which one of these three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an expected return of 13 percent and risk of 17 percent. The expected return and risk of portfolio Yellow are 15 percent and 19 percent, and for the Purple portfolio are 12 percent and 18 percent.

(Multiple Choice)

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Question 20

Showing 1 - 20 of 113

Describe the diversification potential of two assets with a -0.7 correlation. What is the potential if the correlation is + 0.7?

Consider the risk-return relationship in T-bills during each decade since 1950. Given this data, which of the following statements is correct?

Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an average return of 14 percent and standard deviation of 30 percent. The average return and standard deviation of WholeMart are 12 percent and 25 percent; and of Fruit Fly are 25 percent and 40 percent.

Standard Deviation Compute the standard deviation of the five monthly returns for PG&E: 1.25 percent, -1.50 percent, 4.25 percent, 3.75 percent, and 1.98 percent

Which of the following statements is correct?

Which of the following is correct regarding the coefficient of variation?

What does diversification do to the risk and return characteristics of a portfolio?

You are a risk averse investor with a low-risk portfolio of bonds. How is it possible that adding some stocks (which are riskier than bonds) to the portfolio can lower the total risk of the portfolio?

The efficient frontier portfolios are __________________________.

Consider the following correlations: Given this data, which of the following is most preferable if an investor can only select one pair of companies?

Average Return The past five monthly returns for K and Company are 4.25 percent, 4.13 percent, -2.05 percent, 3.25 percent, and 7.25 percent. What is the average monthly return?

Which of the following statements is correct?

This includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment.

If you invested $1,000 in Disney and $5,000 in Oracle and the two companies returned 15% and 18% respectively, what was your portfolio's return?

Investment Return Rx Corp stock was $60.00 per share at the end of last year. Since then, it paid a $1.00 per share dividend last year. The stock price is currently $62.50. If you owned 400 shares of Rx, what was your percent return?

Which of the following is correct regarding the total risk of a company?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

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