Question 1

Which of the following is correct?

Accepted Answer

A) Total risk is measured by the standard deviation. 
B) There is a positive relationship between risk and return. 
C) If you observe a high variability in a stock's returns you can infer that the stock is very risky. 
D) All of these choices are correct.

Question 2

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 3

The past five monthly returns for PG&E are 12.14 percent, -11.37 percent, 3.77 percent, 6.47 percent, and 3.58 percent. What is the average monthly return?

Accepted Answer

A) 2.92 percent 
B) 1.21 percent 
C) (-3.46 percent) 
D) 3.17 percent

Question 4

Sprint Nextel Corp. stock ended the previous year at $25.00 per share. It paid a $2.57 per share dividend last year. It ended last year at $18.89. If you owned 650 shares of Sprint, what was your dollar return and percent return?

Accepted Answer

A) $2,960, 11.13 percent 
B) (-$4,960, -16.13 percent) 
C) (-$3,960, -15.13 percent) 
D) (-$2,301, -14.16 percent)

Question 5

FedEx Corp. stock ended the previous year at $113.39 per share. It paid a $0.40 per share dividend last year. It ended last year at $126.69. If you owned 300 shares of FedEx, what was your dollar return and percent return?

Accepted Answer

A) $3,990, 11.73 percent 
B) $4,110, 12.08 percent 
C) $4,250, 12.29 percent 
D) $2,009, 9.13 percent

Question 6

An investor owns $10,000 of Adobe Systems stock, $15,000 of Dow Chemical, and $25,000 of Office Depot. What are the portfolio weights of each stock?

Accepted Answer

A) Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333 
B) Adobe System = 0.2, Dow Chemical = 0.3, Office Depot = 0.5 
C) Adobe System = 0.3, Dow Chemical = 0.2, Office Depot = 0.5 
D) Adobe System = 0.2667, Dow Chemical = 0.3333, Office Depot = 0.4

Question 7

Modern portfolio theory is

Accepted Answer

A) a concept and procedure for combining securities into a portfolio to minimize risk. 
B) a concept and procedure for combining securities into a portfolio to maximize return. 
C) a concept and procedure for combining securities into a portfolio to maximize volatility. 
D) a concept and procedure for combining securities into a portfolio to maximize dollar return.

Question 8

If you own 400 shares of Air Line Inc. at $44.50, 500 shares of BuyRite at $52.90, and 100 shares of MotorCity at $9.25, what are the portfolio weights of each stock?

Accepted Answer

A) Air Line = 0.3333, BuyRite = 0.3333, MotorCity = 0.3333 
B) Air Line = 0.40, BuyRite = 0.50, MotorCity = 0.10 
C) Air Line = 0.3940, BuyRite = 0.5855, MotorCity = 0.0205 
D) Air Line = 0.4173, BuyRite = 0.4960, MotorCity = 0.0867

Question 9

Which of the following is correct regarding the total risk of a company?

Accepted Answer

A) A company can change its risk level over time. 
B) Some firms are riskier because they offer many different products and/or services. 
C) Companies can change their risk by reducing the amount of money they have borrowed. 
D) None of these choices are correct.

Question 10

If you own 600 shares of Alaska Corporation at $23.25, 450 shares of Best Company at $34.50, and 150 shares of Motor Company at $6.95, what are the portfolio weights of each stock?

Accepted Answer

A) Alaska = 0.6000, Best = 0.4500, Motor = 0.1500 
B) Alaska = 0.3594, Best = 0.5332, Motor = 0.1074 
C) Alaska = 0.4571, Best = 0.5087, Motor = 0.0342 
D) Alaska = 0.2325, Best = 0.3450, Motor = 0.0695

Question 11

Sharif's portfolio generated returns of 10 percent, 9 percent, -2 percent, and 6 percent over four years. What was his average return over this period?

Accepted Answer

A) 5.75 percent 
B) 6.75 percent 
C) 23 percent 
D) 27 percent

Question 12

Which of the following is an index that tracks 500 companies, which allows for a great deal of diversification?

Accepted Answer

A) Nasdaq 
B) Fortune 500 
C) S&P 500 
D) Wall Street Journal

Question 13

Which of the following 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 14

Which of the following is a measurement of the co-movement between two variables that ranges between -1 and +1?

Accepted Answer

A) coefficient of variation 
B) correlation 
C) standard deviation 
D) total risk

Question 15

Compute the standard deviation of the five monthly returns for PG&E: 1.25 percent, -1.50 percent, 4.25 percent, 3.75 percent, and 1.98 percent.

Accepted Answer

A) 1.876 percent 
B) 1.946 percent 
C) 2.046 percent 
D) 2.287 percent

Question 16

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 17

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 18

The past five monthly returns for PG Company are 3.25 percent, -1.45 percent, 4.35 percent, 6.49 percent, and 3.75 percent. What is the average monthly return?

Accepted Answer

A) 1.366 percent 
B) 1.608 percent 
C) 3.278 percent 
D) 3.858 percent

Question 19

You have $15,040 to invest. You want to purchase shares of Company Air at $42.50, Company B at $51.50, and Company F at $9.75. How many shares of each company should you purchase so that your portfolio consists of 20 percent Company A, 40 percent Company B, and 40 percent Company F? Report only whole stock shares.

Accepted Answer

A) Company A = 20 shares, Company B = 40 shares, Company F = 40 shares 
B) Company A = 85 shares, Company B = 21shares, Company F = 39 shares 
C) Company A = 71 shares, Company B = 117 shares, Company F = 617 shares 
D) Company A = 353 shares, Company B = 291 shares, Company F = 1538 shares

Question 20

Sharif's portfolio generated returns of 12 percent, 15 percent, -15 percent, 19 percent, and -12 percent over five years. What was his average return over this period?

Accepted Answer

A) 19 percent 
B) 3.8 percent 
C) 17 percent 
D) 2.1 percent

Exam 9: Characterizing Risk and Return