Exam 11: Risk and Return in Capital Markets

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 ________.

The risk premium of a stock is NOT affected by its ________.

Consider the following realized annual returns: The average annual return on IBM from 1996 to 2005 is closest to ________.

A stock whose return does not depend on overall economic conditions has a high systematic risk.

Which of the following statements is FALSE?

Consider the following average annual returns: What is the excess return for the portfolio of small stocks?

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?

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 at the closing price on December 30, 2005. Your realized annual return for the year 2005 is closest to ________.

The Ishares Bond Index fund (TLT) has a mean and annual standard deviation of returns of 5% and 10%, respectively. What is the 66% confidence interval for the returns on TLT?

A portfolio of stocks where each stock has a large component of independent risk benefits when such stocks are held in a portfolio, because the independent risks are averaged out. This is also referred to as diversification of risks.

Which of the following statements is FALSE?

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

Ford Motor Company had realized returns of 10%, 20%, -10%, and -10% over four quarters. What is the quarterly standard deviation of returns for Ford?

The risk that inflation rates are likely to increase in the next year is an example of common risk.

Independent risk is more closely related to ________.

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?

IGM Realty had stock prices of $33, $33, $38, $36, and $28 at the end of the last five quarters. If IGM pays a dividend of $1 at the end of each quarter, what is the annual realized return on IGM?

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

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.

Two slot machines offer to double your money 3 times out of 5. Machine A takes $10 bets and Machine B takes $100 bets on each occasion. A risk-averse investor prefers to bet on ________.