Exam 7: Introduction to Risk and Return

The correlation coefficient between stock B and the market portfolio is 0.8. The standard deviation of stock B is 35 percent and that of the market is 20 percent. Calculate the beta of the stock.

If the correlation coefficient between the returns on stock C and stock D is +1.0, the standard deviation of return for stock C is 15 percent, and that for stock D is 30 percent, calculate the covariance between stock C and stock D.

What has been the approximate standard deviation of returns of U.S. common stocks during the period between 1900 and 2017?

Sun Corporation has had returns of -6 percent, 16 percent, 18 percent, and 28 percent for the past four years. Calculate the standard deviation of the returns using the correction for the loss of a degree of freedom shown below. When variance is estimated from a sample of observed returns, we add the squared deviations and divide by N -1, where N is the number of observations. We divide by N -1 rather than N to correct for a loss of a degree of freedom. The formula is Variance( _m )= Where _m is the market return in period t and r_m is the mean of the values of r_mt.

Diversification reduces the risk of a portfolio because the prices of different securities do not move exactly together.

How can individual investors diversify?

For the most part, stock returns tend to move together. Thus, pairs of stocks tend to have both positive covariances and correlations.

One dollar invested in a portfolio of long-term U.S. government bonds in 1900 would have grown in nominal value by the end of year 2017 to:

Assume the following data: Risk-free rate = 4.0 percent; average risk premium = 7.7 percent. Calculate the required rate of return for the risky asset.

What has been the average annual real rate of interest on Treasury bills over the past 117 years (from 1900 to 2017)?

What has been the average annual nominal rate of interest on Treasury bills over the past 117 years (1900-2017)?

A stock having a covariance with the market that is higher than the variance of the market will always have a beta above 1.0.

The beta of the market portfolio is

Treasury bills typically provide higher average returns, both in nominal terms and in real terms, than long-term government bonds.

In the formula for calculating the variance of an N-stock portfolio, how many covariance and variance terms are there?

The portfolio risk that cannot be eliminated by diversification is called unique risk.

Macro Corporation has had the following returns for the past three years: -10 percent, 10 percent, and 30 percent. Use the following formulas to calculate the standard deviation of the returns: Variance ( _m)= expected value of ( _m - r_m)² Standard deviation of _m = .

The annual returns for three years for stock B were 0 percent, 10 percent, and 26 percent. Annual returns for three years for the market portfolio were +6 percent, 18 percent, and 24 percent. Calculate the beta for the stock.

Which portfolio has had the highest average risk premium during the period 1900-2017?

Unique risk is also called