Question 1

Long-term U.S. government bonds have:

Accepted Answer

A)  Interest rate risk 
B)  Default risk 
C)  Market risk 
D)  None of the above 
A)  Interest rate risk 
B)  Default risk 
C)  Market risk 
D)  None of the above A

Question 2

Briefly explain how diversification reduces risk.

Accepted Answer

Diversification reduces risk because prices of different securities do not move exactly together. When you form portfolios using a large number of stocks the variability of the portfolio is much less than average variability of individual stocks.

Question 3

As the number of stocks in a portfolio is increased:

Accepted Answer

A)  Unique risk decreases and approaches to zero 
B)  Market risk decreases 
C)  Unique risk decreases and becomes equal to market risk 
D)  Total risk approaches to zero 
A)  Unique risk decreases and approaches to zero 
B)  Market risk decreases 
C)  Unique risk decreases and becomes equal to market risk 
D)  Total risk approaches to zero A

Question 4

Standard error measures:

Accepted Answer

A)  Nominal annual rate of return on a portfolio 
B)  Risk of a portfolio Reliability of an estimate 
C)  Reliability of an estimate 
D)  Real annual rate of return on a portfolio 
A)  Nominal annual rate of return on a portfolio 
B)  Risk of a portfolio Reliability of an estimate 
C)  Reliability of an estimate 
D)  Real annual rate of return on a portfolio

Question 5

Briefly explain the concept of value additivity.

Accepted Answer

If the capital market establishes a valu

Question 6

If the average annual rate of return for common stocks is 11.7%, and for treasury bills it is
4)0%, what is the market risk premium?

Accepted Answer

A)  15.8% 
B)  4.1% 
C)  7.7% 
D)  None of the above 
A)  15.8% 
B)  4.1% 
C)  7.7% 
D)  None of the above

Question 7

The correlation coefficient between stock A and the market portfolio is +0.6. The standard deviation of return of the stock is 30% and that of the market portfolio is 20%. Calculate the beta of the stock.

Accepted Answer

A)  1.1 
B)  1.0 
C)  0.9 
D)  0.6 
A)  1.1 
B)  1.0 
C)  0.9 
D)  0.6

Question 8

The annual return for three years for stock B comes out to be 0%, 10% and 26%. Annual returns for three years for the market portfolios are +6%, 18%, 24%. Calculate the beta for the stock.

Accepted Answer

A)  0.74 
B)  1.36 
C)  1.0 
D)  None of the above 
A)  0.74 
B)  1.36 
C)  1.0 
D)  None of the above

Question 9

For each additional 1% change in the market return, Amazon stock return on the average changes by:

Accepted Answer

A)  1.26% 
B)  1.59% 
C)  2.2% 
D)  None of the above 
A)  1.26% 
B)  1.59% 
C)  2.2% 
D)  None of the above

Question 10

The unique risk is also called the:

Accepted Answer

A)  Unsystematic risk 
B)  Diversifiable risk 
C)  Firm specific risk 
D)  All of the above 
A)  Unsystematic risk 
B)  Diversifiable risk 
C)  Firm specific risk 
D)  All of the above

Question 11

Explain why international stock may have high standard deviation but low betas.

Accepted Answer

Beta is traditionally measured relative

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

What has been the standard deviation of returns of common stocks during the period between 1900 and 2006?

Accepted Answer

A)  19.8% 
B)  33.4% 
C)  8.1% 
D)  7.8% 
A)  19.8% 
B)  33.4% 
C)  8.1% 
D)  7.8%

Question 14

Briefly explain how "beta" of a stock is estimated.

Accepted Answer

"Beta" of a stock can be estimated graph

Question 15

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 16

Standard error is estimated as:

Accepted Answer

A)  Average annual rate of return divided by the square root of the number of observations 
B)  Variance divided by the number of observations 
C)  Standard deviation of returns divided by the square root of the number of observations 
D)  None of the above 
A)  Average annual rate of return divided by the square root of the number of observations 
B)  Variance divided by the number of observations 
C)  Standard deviation of returns divided by the square root of the number of observations 
D)  None of the above

Question 17

For log-normally distributed returns the annul compound returns is equal to:

Accepted Answer

A)  the arithmetic average returns minus half the variance 
B)  the arithmetic average returns plus half the variance 
C)  the arithmetic average returns minus half the standard deviation 
D)  the arithmetic average returns plus half the standard deviation 
A)  the arithmetic average returns minus half the variance 
B)  the arithmetic average returns plus half the variance 
C)  the arithmetic average returns minus half the standard deviation 
D)  the arithmetic average returns plus half the standard deviation

Question 18

Which portfolio had the highest average annual return in real terms between 1900 and
2006?

Accepted Answer

A)  Portfolio of U.S. Common stocks 
B)  Portfolio of U.S. government bonds 
C)  Portfolio of Treasury bills 
D)  None of the given answers 
A)  Portfolio of U.S. Common stocks 
B)  Portfolio of U.S. government bonds 
C)  Portfolio of Treasury bills 
D)  None of the given answers

Question 19

For log-normally distributed returns the annual geometric average return is greater than the arithmetic average return.

Accepted Answer

A) True 
 B)False

Question 20

Macro Corporation has had the following returns for the past three years, -10%, 10%, and
30%) Calculate the standard deviation of the returns.

Accepted Answer

A)  10% 
B)  20% 
C)  30% 
D)  None of the above 
A)  10% 
B)  20% 
C)  30% 
D)  None of the above

Exam 7: Introduction to Risk and Return

Long-term U.S. government bonds have:

Briefly explain how diversification reduces risk.

As the number of stocks in a portfolio is increased:

Standard error measures:

Briefly explain the concept of value additivity.

If the average annual rate of return for common stocks is 11.7%, and for treasury bills it is 4)0%, what is the market risk premium?

The correlation coefficient between stock A and the market portfolio is +0.6. The standard deviation of return of the stock is 30% and that of the market portfolio is 20%. Calculate the beta of the stock.

The annual return for three years for stock B comes out to be 0%, 10% and 26%. Annual returns for three years for the market portfolios are +6%, 18%, 24%. Calculate the beta for the stock.

For each additional 1% change in the market return, Amazon stock return on the average changes by:

The unique risk is also called the:

Explain why international stock may have high standard deviation but low betas.

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

What has been the standard deviation of returns of common stocks during the period between 1900 and 2006?

Briefly explain how "beta" of a stock is estimated.

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

Standard error is estimated as:

For log-normally distributed returns the annul compound returns is equal to:

Which portfolio had the highest average annual return in real terms between 1900 and 2006?

For log-normally distributed returns the annual geometric average return is greater than the arithmetic average return.

Macro Corporation has had the following returns for the past three years, -10%, 10%, and 30%) Calculate the standard deviation of the returns.

Goals and Governance of the Firm

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

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

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

Filters