Question 1

You are considering investing in a share of ASX Ltd and you know that the share returns tend to be normally distributed, and you have calculated the expected return on the share to be 10% and the standard deviation to be around 15%. Based on those statistics, within what range would you expect the return on this share to fall during next year (calculate the range at 99% level of confidence).

Accepted Answer

A)   - 28.625% and 10%.
B)   - 28.625% and 48.625%.
C)   10% and 38.625%.
D)   10% and 48.625%. B

Question 2

If returns are normally distributed, the expected return plus or minus one standard deviation will cover what percentage of all possible returns?

Accepted Answer

A)   68%.
B)   90%.
C)   95%.
D)   99%. A

Question 3

Domino's shares have an expected return of 9 per cent and a variance of 0.25 per cent. What is the coefficient of variation for Domino's?

Accepted Answer

A)   0.0278.
B)   0.0556.
C)   2.7778.
D)   5.5556. B

Question 4

Given only information on beta, which of the following stocks is considered the least risky:

Accepted Answer

A)   stock A beta = 1.37.
B)   stock B beta = 2.16.
C)   stock C beta = 0.56.
D)   stock D beta = 0.85.

Question 5

Share A has an expected return of 8% and a risk level of 10%. Share B has an expected return of 8% and a risk level of 14%. Which would you choose?

Accepted Answer

A)   A.
B)   B.
C)   Indifferent as expected return is the same.
D)   Neither as risk is too high.

Question 6

Correlation is a measure of:

Accepted Answer

A)   dispersion.
B)   central tendency.
C)   the equity risk premium (ERP) .
D)   the way two variables move relative to each other.

Question 7

Risk is less effectively reduced through diversifying into different investments when the different investments:

Accepted Answer

A)   are in the same country.
B)   are in the same industry.
C)   have zero correlation with the market.
D)   have negatively correlated returns.

Question 8

Which of the following is false?

Accepted Answer

A)   Treasury bonds are viewed as risk-free.
B)   Investing in the market will not earn compensation for taking on risk.
C)   Assets with a beta of 1.2 have more risk than the market.
D)   None of the above.

Question 9

Using the CAPM, calculate the expected rate of return for a share that has a beta of 2.3. The expected return on the market and risk-free rate are 6% and 5% respectively.

Accepted Answer

A)   2.3%.
B)   2.7%.
C)   7.3%.
D)   6.3%.

Question 10

When choosing between two investments that have the same level of risk, investors prefer the investment with the ____________ return.

Accepted Answer

A)   more predictable return.
B)   lower.
C)   higher.
D)   none of the above.

Question 11

Share A has an expected return of 12% and risk level of 10%. Share B has an expected return of 12% and risk level of 14%. Share C has an expected return of 10% and risk level of 14%. Rank them in order of your preference.

Accepted Answer

A)   A, B, C.
B)   B, C, A.
C)   C, B, A.
D)   B, A, C.

Question 12

A share is priced to return 10% but according to the CAPM its expected return is 7%. According to CAPM theory, we can expect the price of this share to:

Accepted Answer

A)   fall.
B)   rise.
C)   uncertain.
D)   stay the same.

Question 13

What does a beta of greater than one mean if you hold a bond?

Accepted Answer

A)   The bond has greater systematic risk than the market.
B)   The bond has the same systematic risk as the market.
C)   The bond has greater non-diversifiable risk than the market.
D)   The bond has greater unsystematic risk than the market.

Question 14

Beef Stock returns have exhibited a standard deviation of 0.57, whereas Sheep Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns?

Accepted Answer

A)   0.028025.
B)   0.217327.
C)   0.359100.
D)   0.993094.

Question 15

There are two probabilities of returns for Stock A. If the probability of a 10% return is 60%, what is the probability of a 12% return?

Accepted Answer

A)   40%.
B)   60%.
C)   100%.
D)   insufficient information provided.

Question 16

Given that a stock has generated returns of 6%, 18%, -5% and 20% over the last four years, the variance of stock returns was:

Accepted Answer

A)   0.013492.
B)   0.017423.
C)   0.024930.
D)   0.028970.

Question 17

Suppose a particular stock's return is perfectly characterised by the normal distribution. This stock has a mean return of 10% and standard deviation of 3%. Within what range will approximately 95% of all possible returns on this stock lie:

Accepted Answer

A)   -2% to 22%.
B)   2% to 18%.
C)   4% to 16%.
D)   4% to 10%.

Question 18

The sum of the probabilities of returns must be:

Accepted Answer

A)   more than 100 per cent.
B)   less than 100 per cent.
C)   equal to 100 per cent.
D)   none of the above.

Question 19

If the expected returns on an investment are uncorrelated with the market, its beta value is:

Accepted Answer

A)   -1.
B)   0.
C)   1.
D)   equal to that of the market.

Question 20

A treasury bond has a systematic risk of:

Accepted Answer

A)   1.5.
B)   0.
C)   1.
D)   insufficient information provided.

Exam 4: Risk and Return