Question 1

Stock market indexes are found in several countries outside the U.S.

Accepted Answer

A) True 
 B)False

Question 2

Discuss the relationship between risk and return.

Accepted Answer

The answer of Discuss the relationship between risk and return....

Question 3

You are considering two stocks for investment.Your analysis has determined that three potential economic states may occur.A matrix of economic probabilities and potential return of each stock has been provided to you.Given this information, calculate the correlation for the stock

Accepted Answer

The answer of You are considering two stocks for investment.Your...

Question 4

What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks?

Accepted Answer

A) Individual stock's standard deviation will be lower 
B) Individual stock's standard deviation will be higher 
C) The standard deviations should be equal 
D) There is no way to predict this relationship

Question 5

What is the standard deviation of a portfolio's returns if the mean return is 15 percent, the variance of returns is 184, and there are three stocks in the portfolio?

Accepted Answer

A) 7.83 percent 
B) 13.56 percent 
C) 41.00 percent 
D) 225.00 percent standard deviation =

Question 6

An investor is considering purchasing two stocks for a portfolio.Stock A will comprise of 40% of the portfolio and Stock B 60%.It is expected that three economic states may occur, with a 40% probability of a boom economy, 50% probability of an average economy and a 10% probability of a bust economy.If a boom economy transpires, stock A will yield an 11% return and stock B 15%.An average economy will see a 7% and 11% returns for stocks A and B respectively.In a bust economy, stock A will have return of -20% and stock B -5%.Given the above information, calculate the portfolio standard deviation.

Accepted Answer

The answer of An investor is considering purchasing two stocks...

Question 7

An investor is considering purchasing an auto stock (A) and a gold stock (B).If the auto stock is purchased, it is expected that it will provide an -8%, 5% and 18% potential returns during recessionary, normal or boom economies.If a gold stock is purchased, it is expected that it will provide 20%, 3% or -20% returns during the three economic states.All economic states have equal chance of occurring.Based on the above information, determine the correlation between the two stocks.

Accepted Answer

The answer of An investor is considering purchasing an auto...

Question 8

Calculate the inflation rate, given a nominal rate of 10.2% and a real rate of 8.05%

Accepted Answer

A) 2.99% 
B) 2.49% 
C) 1.99% 
D) 1.06%

Question 9

In a year in which common stocks offered an average return of 18 percent, Treasury bonds offered 10 percent and Treasury bills offered 7 percent, the risk premium for common stocks was:

Accepted Answer

A) 1 percent 
B) 3 percent 
C) 8 percent 
D) 11 percent

Question 10

If a project's expected return is 15 percent, which represents a 35 percent return in a booming economy and a 5 percent return in a stagnant economy, what is the probability of a booming economy?

Accepted Answer

A) 18.33 percent 
B) 25.00 percent 
C) 33.33 percent 
D) 50.00 percent 15% = 35 %(X) + 5%(1 - X)
10% = 30%X

Question 11

Which of the following guarantees is offered to common stock investors?

Accepted Answer

A) Guaranteed to receive dividends 
B) Guaranteed to receive capital gains 
C) Guaranteed only to receive a refund of principal 
D) No guarantees of any form

Question 12

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:

Accepted Answer

A) Offer higher returns 
B) Have more systematic risk 
C) Have no diversification of risk 
D) Do not have unique risk

Question 13

When viewing the long-term trend of volatility in U.S.stocks, it is readily apparent that:

Accepted Answer

A) Volatility has continually increased 
B) Volatility has continually decreased 
C) Volatility has offered little discernable trend 
D) Volatility has remained constant for years

Question 14

The covariance of two stocks was calculated at -.01733.If the standard deviation of the first stock is .106 and .164 for the second, determine the covariance.

Accepted Answer

A) -.997 
B) -.887 
C) -.687 
D) -.587

Question 15

What is the variance of a three-stock portfolio that produced returns of 20 percent, 25 percent and 30 percent?

Accepted Answer

A) 16.67 
B) 33.33 
C) 50.00 
D) 100.00

Question 16

A market index is used to measure performance of a broad-based portfolio of stocks.

Accepted Answer

A) True 
 B)False

Question 17

The variance of an investment's returns is a measure of the:

Accepted Answer

A) Volatility of the rates of return 
B) Probability of a negative return 
C) Historic return over long periods 
D) Average value of the investment

Question 18

If when a coin is tossed the observance of a head rewards you with a dollar and the observance of a tail costs you fifty cents, how much would you expect to gain after twenty tosses?

Accepted Answer

A) $5.00 
B) $7.50 
C) $10.00 
D) $15.00 Expected return = 20 x [($1.00 x .5) - (.50 x .5)]
= 20 x ($.25)

Question 19

Averaging the deviations from the mean for a portfolio of securities will:

Accepted Answer

A) Compute the standard deviation 
B) Compute the variance 
C) Equal zero 
D) Equal the number of securities in the portfolio

Question 20

From a historical perspective (1926-2000), what would you expect to be the approximate return on a diversified portfolio of common stocks in a year that Treasury bills offered 7.5 percent?

Accepted Answer

A) 8.5 percent 
B) 12.5 percent 
C) 14.5 percent 
D) 19.5 percent

Exam 11: Introduction to Risk, Return, and the Opportunity Cost of Capital