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 40% probability that the firm will have a 20% return and a 60% probability that the firm will have a -30% return. The standard deviation for the return on an individual firm is closest to ________.

Is volatility a reasonable measure of risk when evaluating large portfolios?

Which of the following statements is FALSE?

A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are ________.

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 dividend yield for this period is closest 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?

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?

Which type of investment has historically had the highest volatility?

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

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 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?

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 ________.

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

Suppose that a stock gave a realized return of 20% over a two-year time period and a 10% return over the third year. The geometric average annual return is ________.

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

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?

Historically, stocks have delivered a ________ return on average compared to Treasury bills but have experienced ________ fluctuations in values.

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 20% probability that they will have a 20% return and a 80% probability that they will have a -30% return. What is the expected return for an individual firm?

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