Exam 11: Risk and Return in Capital Markets

Comment on the accuracy of the statement that as we put more stocks in a portfolio, its risk gets eliminated to zero.

Which of the following investments had the largest fluctuations overall return over the past eighty years?

The S&P 500 index delivered a return of 10%, 15%, 15%, and -30% over four successive years. What is the arithmetic average annual return for four years?

The S&P 500 index delivered a return of 20%, -10%, 20%, and 5% over four successive years. What is the arithmetic average annual return for four years?

You purchased Alpha Innovative Inc. stock at a price of $25 per share. Its price was $15 after six months and the company declared bankruptcy at the end of the next six months. The realized return over the last year is ________.

Suppose you invested $79 in the Ishares Dividend Stock Fund (DVY)a month ago. It paid a dividend of $0.41 today and then you sold it for $66. What was your return on the investment?

Which of the following statements is FALSE?

Rational investors ________ fluctuations in the value of their investments.

There is an overall relationship between ________ and ________. Larger stocks have a lower volatility overall.

If returns on stock A are more volatile than the returns on stock B, the geometric average return of stock A will be ________ the geometric average return of stock B when their arithmetic average returns are same.

Consider the following price and dividend data for Quicksilver Inc.: Assume that you purchased Quicksilver's stock at the closing price on December 31, 2004 and sold it after the dividend had been paid at the closing price on January 26, 2005. Your total return rate (yield)for this period is closest to ________.

The excess return is the difference between the average return on a security and the average return for ________.

Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY)a month ago. It paid a dividend of $0.63 today and then you sold it for $65. What was your return on the investment?

Consider the following realized annual returns: The average annual return on the S&P 500 from 1996 to 2005 is closest to ________.

Many former employees at AlphaEnergy, an energy trading and supply company, had a large part of their portfolio invested in AlphaEnergy's stock. These employees were bearing a high degree of ________ risk.

Ford Motor Company had realized returns of 20%, 30%, 30%, and 20% over four quarters. What is the quarterly standard deviation of returns for Ford calculated from this sample?

Independent risk is more closely related to ________.

Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA)waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $50 million in net income. The probability of the FDA approving a drug is 50%. What is the expected payoff for Little Cure's ten drugs?

What care, if any, should be taken when selecting stocks for an investment portfolio?

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return. The standard deviation for the return on an portfolio of 20 type S firms is closest to ________.