Exam 7: Introduction to Risk and Return

Which portfolio had the highest average annual return in real terms between 1900 and 2017?

The average beta of all stocks in the market is zero.

Which of the following countries has had the highest risk premium?

The risk of a well-diversified portfolio depends on the market risk of the securities included in the portfolio.

Stock P and Stock Q have had annual returns of -10 percent, 12 percent, 28 percent; and 8 percent, 13 percent, 24 percent, respectively. Calculate the covariance of return between the securities. (Ignore the correction for the loss of a degree of freedom set out in the text.)

What range of values can correlation coefficients take?

Briefly explain how diversification reduces risk.

Briefly explain the concept of value additivity.

Briefly explain the difference between beta as a measure of risk and variance as a measure of risk.

Stock X has a standard deviation of return of 10 percent. Stock Y has a standard deviation of return of 20 percent. The correlation coefficient between the two stocks is 0.5. If you invest 60 percent of your funds in stock X and 40 percent in stock Y, what is the standard deviation of your portfolio?

Which of the following countries has had the lowest risk premium?

Which of the following provides a correct measure of the opportunity cost of capital regardless of the timing of cash flows?

For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between the two stocks equals

The variability of a well-diversified portfolio mostly reflects the contributions to risk from the standard deviations of the stocks within that portfolio.

What is the beta of a security where the expected return is double that of the stock market, there is no correlation coefficient relative to the U.S. stock market, and the standard deviation of the stock market is 0.18?

Which portfolio has had the lowest average annual nominal rate of return during the 1900-2017 periods?

Stock M and Stock N have had the following returns for the past three years: 12 percent, -10 percent, 32 percent; and 15 percent, 6 percent, 24 percent, respectively. Calculate the covariance between the two securities. (Ignore the correction for the loss of a degree of freedom set out in the text.)

A portfolio with a beta of one offers an expected return equal to the market risk premium.

Market risk is also called

Briefly explain what the beta of a stock means.