Question 1

When investing for a long term, investors care about the volatility of ________ returns and not the volatility of ________ returns.

Accepted Answer

A) average, cumulative 
B) cumulative, average 
C) mean, cumulative 
D) mean, average 
A) average, cumulative 
B) cumulative, average 
C) mean, cumulative 
D) mean, average

Question 2

Which of the following investments offered the highest overall return over the past eighty years?

Accepted Answer

A) Treasury bills 
B) S&P 500 
C) small stocks 
D) corporate bonds 
A) Treasury bills 
B) S&P 500 
C) small stocks 
D) corporate bonds

Question 3

Which of the following is NOT a systematic risk?

Accepted Answer

A) the risk that oil prices rise, increasing production costs 
B) the risk that the economy slows, reducing demand for your firm's products 
C) the risk that your new product will not receive regulatory approval 
D) the risk that the Federal Reserve raises interest rates 
A) the risk that oil prices rise, increasing production costs 
B) the risk that the economy slows, reducing demand for your firm's products 
C) the risk that your new product will not receive regulatory approval 
D) the risk that the Federal Reserve raises interest rates

Question 4

Fluctuations of a stock's return that are due to market-wide news representing common risk is the ________.

Accepted Answer

A) idiosyncratic risk 
B) systematic risk 
C) unique risk 
D) unsystematic risk 
A) idiosyncratic risk 
B) systematic risk 
C) unique risk 
D) unsystematic risk

Question 5

Amazon.com stock prices gave a realized return of 15%, 15%, 15%, and 10% over four successive quarters. What is the annual realized return for Amazon.com for the year?

Accepted Answer

A) 60.57% 
B) 67.30% 
C) 53.84% 
D) 74.03% 
A) 60.57% 
B) 67.30% 
C) 53.84% 
D) 74.03%

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) Investments with higher volatility have rewarded investors with higher average returns. 
B) Investments with higher volatility should have a higher risk premium and, therefore, higher returns. 
C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities. 
D) Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on. 
A) Investments with higher volatility have rewarded investors with higher average returns. 
B) Investments with higher volatility should have a higher risk premium and, therefore, higher returns. 
C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities. 
D) Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on.

Question 7

In general, it is possible to eliminate ________ risk by holding a large portfolio of assets.

Accepted Answer

A) unsystematic 
B) systematic 
C) unsystematic and systematic 
D) market specific 
A) unsystematic 
B) systematic 
C) unsystematic and systematic 
D) market specific

Question 8

Rational investors may be willing to choose an investment that has additional risk but does not offer additional reward.

Accepted Answer

A) True 
 B)False

Question 9

If asset A's return is exactly two times asset B's return, then following risk return tradeoff, the standard deviation of asset A should be ________ times the standard deviation of asset B.

Accepted Answer

A) 3 
B) 2 
C) 1 
D) 4 
A) 3 
B) 2 
C) 1 
D) 4

Question 10

Consider the following average annual returns:   What is the excess return for Treasury bills?

Accepted Answer

A) 0% 
B) -9.1% 
C) -3.2% 
D) -2.4% 
A) 0% 
B) -9.1% 
C) -3.2% 
D) -2.4%

Question 11

What is the diversification achieved by an investor if he invests in Dell, IBM, and Microsoft?

Accepted Answer

There will not be much diversi

Question 12

Historical evidence on the returns of large portfolios of stock and bonds shows that investments with higher volatility have rewarded investors with higher returns.

Accepted Answer

A) True 
 B)False

Question 13

The average annual return over the period 1926-2009 for small stocks is 21.2%, and the standard deviation of returns is 21.2%. Based on these numbers, what is a 95% confidence interval for 2010 returns?

Accepted Answer

A) -10.6%, 31.8% 
B) 0%, 42.4% 
C) -21.2%, 42.4% 
D) -21.2%, 63.6% 
A) -10.6%, 31.8% 
B) 0%, 42.4% 
C) -21.2%, 42.4% 
D) -21.2%, 63.6%

Question 14

Stocks with high returns are expected to have ________.

Accepted Answer

A) high variability 
B) low variability 
C) no relation to variability 
D) inverse relationship with variability 
A) high variability 
B) low variability 
C) no relation to variability 
D) inverse relationship with variability

Question 15

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 60% probability that the firm will have a 20% return and a 40% probability that the firm will have a -30% return. The standard deviation for the return on a portfolio of 20 type I firms is closest to ________.

Accepted Answer

A) 0.00% 
B) 12.25% 
C) 5.48% 
D) 24.49% 
A) 0.00% 
B) 12.25% 
C) 5.48% 
D) 24.49%

Question 16

The risk that is linked across outcomes is called ________.

Accepted Answer

A) diversifiable risk 
B) common risk 
C) uncorrelated risk 
D) independent risk 
A) diversifiable risk 
B) common risk 
C) uncorrelated risk 
D) independent risk

Question 17

The average annual return for the S&P 500 from 1886 to 2006 is 5%, with a standard deviation of 15%. Based on these numbers, what is a 95% confidence interval for 2007's returns?

Accepted Answer

A) -12.5%, 17.5% 
B) -15%, 25% 
C) -25%, 35% 
D) -25%, 25% 
A) -12.5%, 17.5% 
B) -15%, 25% 
C) -25%, 35% 
D) -25%, 25%

Question 18

As we increase the number of stocks in a portfolio, the standard deviation of returns of the portfolio ________.

Accepted Answer

A) increases 
B) remains unchanged 
C) decreases 
D) doubles 
A) increases 
B) remains unchanged 
C) decreases 
D) doubles

Question 19

The average annual return for the S&P 500 from 1886 to 2006 is 9.5%, with a standard deviation of 18%. Based on these numbers, what is a 95% confidence interval for 2007's returns?

Accepted Answer

A) -13.25%, 22.75% 
B) -16.5%, 35.5% 
C) -26.5%, 45.5% 
D) -11.5%, 30.5% 
A) -13.25%, 22.75% 
B) -16.5%, 35.5% 
C) -26.5%, 45.5% 
D) -11.5%, 30.5%

Question 20

What are the two components of realized return from a stock investment?

Accepted Answer

The total realized return earn

Exam 11: Risk and Return in Capital Markets

When investing for a long term, investors care about the volatility of ________ returns and not the volatility of ________ returns.

Which of the following investments offered the highest overall return over the past eighty years?

Which of the following is NOT a systematic risk?

Fluctuations of a stock's return that are due to market-wide news representing common risk is the ________.

Amazon.com stock prices gave a realized return of 15%, 15%, 15%, and 10% over four successive quarters. What is the annual realized return for Amazon.com for the year?

Which of the following statements is FALSE?

In general, it is possible to eliminate ________ risk by holding a large portfolio of assets.

Rational investors may be willing to choose an investment that has additional risk but does not offer additional reward.

If asset A's return is exactly two times asset B's return, then following risk return tradeoff, the standard deviation of asset A should be ________ times the standard deviation of asset B.

Consider the following average annual returns: What is the excess return for Treasury bills?

What is the diversification achieved by an investor if he invests in Dell, IBM, and Microsoft?

Historical evidence on the returns of large portfolios of stock and bonds shows that investments with higher volatility have rewarded investors with higher returns.

The average annual return over the period 1926-2009 for small stocks is 21.2%, and the standard deviation of returns is 21.2%. Based on these numbers, what is a 95% confidence interval for 2010 returns?

Stocks with high returns are expected to have ________.

The risk that is linked across outcomes is called ________.

The average annual return for the S&P 500 from 1886 to 2006 is 5%, with a standard deviation of 15%. Based on these numbers, what is a 95% confidence interval for 2007's returns?

As we increase the number of stocks in a portfolio, the standard deviation of returns of the portfolio ________.

The average annual return for the S&P 500 from 1886 to 2006 is 9.5%, with a standard deviation of 18%. Based on these numbers, what is a 95% confidence interval for 2007's returns?

What are the two components of realized return from a stock investment?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

When investing for a long term, investors care about the volatility of returns and not the volatility of returns.