Question 1

Risk versus Return Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 10 percent and standard deviation of 15 percent. The average return and standard deviation of Idol Staff are 15 percent and 25 percent; and of Poker-R-Us are 12 percent and 35 percent.

Accepted Answer

A)  Rail Haul, Idol Staff, Poker-R-Us 
B)  Idol Staff, Poker-R-Us, Rail Haul 
C)  Poker-R-Us, Idol Staff, Rail Haul 
D)  Idol Staff, Rail Haul, Poker-R-Us

Question 2

This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification.

Accepted Answer

A)  firm specific risk 
B)  market risk 
C)  modern portfolio risk 
D)  total risk

Question 3

The optimal portfolio for you will be ______________________.

Accepted Answer

A)  the one that offers the lowest correlation 
B)  the one that offers the highest returns 
C)  the one that reflects the amount of risk that you are willing to take 
D)  the one that offers the most diversification

Question 4

Portfolio Return At the beginning of the month, you owned $6,000 of Company G, $8,000 of Company S, and $1,000 of Company N. The monthly returns for Company G, Company S, and Company N were 7.25 percent, -1.50 percent, and -0.23 percent. What is your portfolio return?

Accepted Answer

A)  1.84% 
B)  2.09% 
C)  3.71% 
D)  5.52%

Question 5

Portfolio Weights If you own 1000 shares of Alaska Corporation at $19.95, 250 shares of Best Company at $17.50, and 250 shares of Motor Company at $2.50, what are the portfolio weights of each stock?

Accepted Answer

A)  Alaska = .1000, Best = .2500, Motor = .2500 
B)  Alaska = .4994, Best = .4380, Motor = .0626 
C)  Alaska = .7996, Best = .1754, Motor = .0250 
D)  Alaska = .1995, Best = .1750, Motor = .0250

Question 6

If you own 300 shares of Alaska Air at $15.88, 250 shares of Best Buy at $151.00, and 1,150 shares of Ford Motor at $3.51, what are the portfolio weights of each stock?

Accepted Answer

A)  Weight of Alaska Air: 10.23%; Weight of Best Buy: 81.09%; Weight of Ford Motor: 8.67% 
B)  Weight of Alaska Air: 6.23%; Weight of Best Buy: 71.09%; Weight of Ford Motor: 22.67% 
C)  Weight of Alaska Air: 15.23%; Weight of Best Buy: 81.09%; Weight of Ford Motor: 3.67% 
D)  Weight of Alaska Air: 20.23%; Weight of Best Buy: 76.09%; Weight of Ford Motor: 3.67%

Question 7

Which of these statements is true?

Accepted Answer

A)  When people purchase a stock, they know exactly what their dollar and percent return are going to be. 
B)  Many people purchase stocks as they find comfort in the certainty for this safe form of investing. 
C)  When people purchase a stock, they know the short-term return, but not the long term return. 
D)  When people purchase a stock, they do not know what their return is going to be - either short term or in the long run.

Question 8

Risk, Return, and Their Relationship Consider the following stocks' annual average return, standard deviation, and coefficient of variation. Which stock appears better? Why?

Accepted Answer

The answer of Risk, Return, and Their Relationship Consider the...

Question 9

Which of the following statements is correct regarding total risk?

Accepted Answer

A)  The coefficient of variation is a measure of the firm's total risk. 
B)  All firms have the same amount of total risk because they are all exposed to the same market risk. 
C)  Conglomerates will have less total risk than a firm that has one line of business. 
D)  None of these statements are correct.

Question 10

Consider the following annual returns of Estee Lauder and Lowe's Companies:  Compute each stock's average return, standard deviation, and coefficient of variation.

Accepted Answer

A)  Estee Lauder: 9.02%; 17.99%; 2.00 Lowe's Companies: 10.66%; 18.99%; 1.78 
B)  Estee Lauder: 9.02%; 30.69%; 3.4 Lowe's Companies: 10.66%; 18.99%; 1.78 
C)  Estee Lauder: 9.02%; 30.69%; 3.4 Lowe's Companies: 10.66%; 25.46%; 2.39 
D)  Estee Lauder: 10.7%; 17.79%; 1.66 Lowe's Companies: 12.64%; 18.99%; 1.50

Question 11

A stock has an expected return of 15% and a standard deviation of 20%. Long-term Treasury bonds have an expected return of 9% and a standard deviation of 11%. Given this data, which of the following statements is correct?

Accepted Answer

A)  The two assets have the same coefficient of variation. 
B)  The stock investment has a better risk-return trade-off. 
C)  The bond investment has a better risk-return trade-off. 
D)  Both investments have the same diversifiable risk.

Question 12

An investor owns $8,000 of Adobe Systems stock, $5,000 of Dow Chemical, and $3,000 of Office Depot. What are the portfolio weights of each stock?

Accepted Answer

A)  Adobe: 0.5; Dow Chemical: 0.31; Office Depot: 0.19 
B)  Adobe: 0.5; Dow Chemical: 0.32; Office Depot: 0.18 
C)  Adobe: 0.5; Dow Chemical: 0.13; Office Depot: 0.27 
D)  Adobe: 0.5; Dow Chemical: 0.19; Office Depot: 0.31

Question 13

Risk, Return, and Their Relationship Consider the following annual average return, standard deviation, and coefficient of variation for Companies E and L. Which stock appears better? Why?

Accepted Answer

The answer of Risk, Return, and Their Relationship Consider the...

Question 14

Rank the following three stocks by their risk-return relationship, best to worst. Night Ryder has an average return of 33 percent and standard deviation of 40 percent. The average return and standard deviation of WholeMart are 10 percent and 20 percent; and of Fruit Fly are 19 percent and 33 percent.

Accepted Answer

A)  Night Ryder, WholeMart, Fruit Fly 
B)  WholeMart, Fruit Fly, Night Ryder 
C)  Night Ryder, Fruit Fly, WholeMart 
D)  Fruit Fly, WholeMart, NightRyder

Question 15

From 1950 to 2007, the average return in the stock market, as measured by the S&P500, was 13.2% and a standard deviation of 17%. Given this information, which of the following statements is correct?

Accepted Answer

A)  With an average return this high, it is unlikely that an investor will lose money in the stock market in the next year or two. 
B)  With a standard deviation this high, it is likely that an investor will lose money in some years over a 25-year investment period. 
C)  This investment is not very good since the standard deviation is greater than the average return. 
D)  All of these statements are correct.

Question 16

Risk versus Return Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 8 percent and standard deviation of 10 percent. The average return and standard deviation of Idol Staff are 10 percent and 20 percent; and of Poker-R-Us are 6 percent and 15 percent.

Accepted Answer

A)  Rail Haul, Idol Staff, Poker-R-Us 
B)  Idol Staff, Rail Haul, Poker-R-Us 
C)  Poker-R-Us, Idol Staff, Rail Haul 
D)  Idol Staff, Poker-R-Us, Rail Haul

Question 17

JoJo's portfolio's return is 12%. She is invested in Cisco and IBM which had returns of 15% and 9% respectively. What percentage of JoJo's assets are invested in each firm?

Accepted Answer

A)  40% in Cisco and 60% in IBM 
B)  50% in Cisco and 50% in IBM 
C)  30% in Cisco and 70% in IBM 
D)  Unable to determine with the data provided

Question 18

Risk versus Return in Bonds Assess the risk-return relationship of the following bonds:

Accepted Answer

The answer of Risk versus Return in Bonds Assess the...

Question 19

This is a measure of risk to reward earned by an investment over a specific period of time.

Accepted Answer

A)  coefficient of variation 
B)  market deviation 
C)  standard deviation 
D)  total variation

Question 20

The total risk of the S&P500 Index is equal to ____________________.

Accepted Answer

A)  diversifiable risk 
B)  nondiversifiable risk 
C)  modern portfolio risk 
D)  efficient frontier risk

Exam 9: Characterizing Risk and Return