Question 1

Stocks with high standard deviations will necessarily also have high betas.

Accepted Answer

A) True 
 B)False  False

Question 2

If the average annual rate of return for common stocks is 11.7 percent, and 4.0 percent for U.S. Treasury bills, what is the average market risk premium?

Accepted Answer

A) 15.7 percent 
B) 4.0 percent 
C) 7.7 percent 
D) Not enough information is provided. 
A) 15.7 percent 
B) 4.0 percent 
C) 7.7 percent 
D) Not enough information is provided. C

Question 3

Explain why international stocks may have high standard deviations but low betas.

Accepted Answer

Beta is traditionally measured relative to the S&P 500 index. As such, there may be a weaker statistical relationship between the S&P 500 and an international stock. If these two assets are mostly independent of one another, there is little chance they will have a statistically significant covariance. With a low covariance, by definition, the stock will have a low beta. This could occur even if the standard deviation of the beta is very high. This answer assumes that the market risk in domestic stocks is largely independent of the market risk in international stocks.

Question 4

One can easily calculate the estimated risk premium on stocks via the statistical analysis of historical stock returns.

Accepted Answer

A) True 
 B)False

Question 5

What is the beta of a portfolio with a large number of randomly selected stocks?

Accepted Answer

The beta of a portfolio with a

Question 6

If the standard deviation of returns on the market is 20 percent, and the beta of a well-diversified portfolio is 1.5, calculate the standard deviation of this portfolio.

Accepted Answer

A) 30 percent. 
B) 20 percent. 
C) 15 percent. 
D) 10 percent. 
A) 30 percent. 
B) 20 percent. 
C) 15 percent. 
D) 10 percent.

Question 7

Spill Drink Company's stocks had -8 percent, 11 percent, and 24 percent rates of return, respectively, during the last three years; calculate the (arithmetic)average rate of return for the stock.

Accepted Answer

A) 8 percent per year 
B) 9 percent per year 
C) 10 percent per year 
D) 11 percent per year 
A) 8 percent per year 
B) 9 percent per year 
C) 10 percent per year 
D) 11 percent per year

Question 8

Which portfolio had the highest standard deviation during the period between 1900 and 2014?

Accepted Answer

A) Common stocks 
B) Government bonds 
C) Treasury bills 
D) None of the answers is correct. 
A) Common stocks 
B) Government bonds 
C) Treasury bills 
D) None of the answers is correct.

Question 9

Briefly explain how the beta of a stock is estimated.

Accepted Answer

One can estimate the beta of a stock by

Question 10

The historical nominal returns for stock A were -8 percent, +10 percent, and +22 percent. The nominal returns for the market portfolio were +6 percent, +18 percent, and 24 percent during this same time. Calculate the beta for stock A.

Accepted Answer

A) 1.64 
B) 0.61 
C) 1.00 
D) 0.50 
A) 1.64 
B) 0.61 
C) 1.00 
D) 0.50

Question 11

For a portfolio of N-stocks, the formula for portfolio variance contains

Accepted Answer

A) N variance terms. 
B) N(N - 1)/2 variance terms. 
C) N2 variance terms. 
D) N - 1 variance terms. 
A) N variance terms. 
B) N(N - 1)/2 variance terms. 
C) N2 variance terms. 
D) N - 1 variance terms.

Question 12

Stock A has an expected return of 10 percent per year and stock B has an expected return of 20 percent. If 40 percent of a portfolio's funds are invested in stock A and the rest in stock B, what is the expected return on the portfolio of stock A and stock B?

Accepted Answer

A) 10 percent 
B) 20 percent 
C) 16 percent 
D) 14 percent 
A) 10 percent 
B) 20 percent 
C) 16 percent 
D) 14 percent

Question 13

As the number of stocks in a portfolio is increased,

Accepted Answer

A) unique risk decreases and approaches zero. 
B) market risk decreases. 
C) unique risk decreases and becomes equal to market risk. 
D) total risk approaches zero. 
A) unique risk decreases and approaches zero. 
B) market risk decreases. 
C) unique risk decreases and becomes equal to market risk. 
D) total risk approaches zero.

Question 14

If returns on two stocks tended to move in opposite directions, then the covariances and correlations on the two stocks would be negative.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is an estimate of the standard error of the mean?

Accepted Answer

A) The average annual rate of return divided by the square root of the number of observations 
B) The variance divided by the number of observations 
C) The standard deviation of returns divided by the square root of the number of observations 
D) The variance of returns divided by the square root of the number of observations 
A) The average annual rate of return divided by the square root of the number of observations 
B) The variance divided by the number of observations 
C) The standard deviation of returns divided by the square root of the number of observations 
D) The variance of returns divided by the square root of the number of observations

Question 16

Regarding stock returns, briefly explain the term variance.

Accepted Answer

Variance is a standard statistical measu

Question 17

The type of the risk that can be eliminated by diversification is called

Accepted Answer

A) market risk. 
B) unique risk. 
C) interest rate risk. 
D) default risk. 
A) market risk. 
B) unique risk. 
C) interest rate risk. 
D) default risk.

Question 18

For a portfolio of N-stocks, the formula for portfolio variance contains

Accepted Answer

A) N covariance terms. 
B) N(N - 1)/2 different covariance terms. 
C) N2 covariance terms. 
D) N - 1 covariance terms. 
A) N covariance terms. 
B) N(N - 1)/2 different covariance terms. 
C) N2 covariance terms. 
D) N - 1 covariance terms.

Question 19

A risk premium generated by comparing stocks to 10-year U.S. Treasury bonds will be smaller than a risk premium generated by comparing stocks to U.S. Treasury bills.

Accepted Answer

A) True 
 B)False

Question 20

A statistical measure of the degree to which securities' returns move together is called a

Accepted Answer

A) variance. 
B) correlation coefficient. 
C) standard deviation. 
D) geometric average. 
A) variance. 
B) correlation coefficient. 
C) standard deviation. 
D) geometric average.

Exam 7: Introduction to Risk and Return

Stocks with high standard deviations will necessarily also have high betas.

If the average annual rate of return for common stocks is 11.7 percent, and 4.0 percent for U.S. Treasury bills, what is the average market risk premium?

Explain why international stocks may have high standard deviations but low betas.

One can easily calculate the estimated risk premium on stocks via the statistical analysis of historical stock returns.

What is the beta of a portfolio with a large number of randomly selected stocks?

If the standard deviation of returns on the market is 20 percent, and the beta of a well-diversified portfolio is 1.5, calculate the standard deviation of this portfolio.

Spill Drink Company's stocks had -8 percent, 11 percent, and 24 percent rates of return, respectively, during the last three years; calculate the (arithmetic)average rate of return for the stock.

Which portfolio had the highest standard deviation during the period between 1900 and 2014?

Briefly explain how the beta of a stock is estimated.

The historical nominal returns for stock A were -8 percent, +10 percent, and +22 percent. The nominal returns for the market portfolio were +6 percent, +18 percent, and 24 percent during this same time. Calculate the beta for stock A.

For a portfolio of N-stocks, the formula for portfolio variance contains

Stock A has an expected return of 10 percent per year and stock B has an expected return of 20 percent. If 40 percent of a portfolio's funds are invested in stock A and the rest in stock B, what is the expected return on the portfolio of stock A and stock B?

As the number of stocks in a portfolio is increased,

If returns on two stocks tended to move in opposite directions, then the covariances and correlations on the two stocks would be negative.

Which of the following is an estimate of the standard error of the mean?

Regarding stock returns, briefly explain the term variance.

The type of the risk that can be eliminated by diversification is called

For a portfolio of N-stocks, the formula for portfolio variance contains

A risk premium generated by comparing stocks to 10-year U.S. Treasury bonds will be smaller than a risk premium generated by comparing stocks to U.S. Treasury bills.

A statistical measure of the degree to which securities' returns move together is called a

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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