Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 US stock market and the standard deviation of the stock market is .18?

Accepted Answer

A)  0.00 
B)  1.00 
C)  1.25 
D)  2.00 
A)  0.00 
B)  1.00 
C)  1.25 
D)  2.00

Question 3

Mega Corporation has the following returns for the past three years: 8%, 12% and 10%. Calculate the variance of the return and the standard deviation of the returns.

Accepted Answer

A)  64 and 8% 
B)  124 and 11.1% 
C)  4 and 2% 
D)  None of the above 
A)  64 and 8% 
B)  124 and 11.1% 
C)  4 and 2% 
D)  None of the above

Question 4

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

Accepted Answer

A)  1.0 
B)  1.4 
C)  0.8 
D)  0.7 
A)  1.0 
B)  1.4 
C)  0.8 
D)  0.7

Question 5

Risk premium is the difference between the security return and the Treasury bill return.

Accepted Answer

A) True 
 B)False

Question 6

A stock with a covariance with the market higher than the variance of the market will always high a beta above 1.0.

Accepted Answer

A) True 
 B)False

Question 7

High standard deviation always translates into high beta.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

In the formula for calculating

Question 9

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 10

Given the following data: risk-free rate = 4%, average risk premium = 7.7%. Calculate the required rate of return:

Accepted Answer

A)  5.6% 
B)  7.6% 
C)  11.7% 
D)  None of the given answers 
A)  5.6% 
B)  7.6% 
C)  11.7% 
D)  None of the given answers

Question 11

Sun Corporation has had returns of -6%, 16%, 18%, and 28% for the past four years. Calculate the standard deviation of the returns.

Accepted Answer

A)  11.6% 
B)  14.3% 
C)  13.4 % 
D)  None of the above 
A)  11.6% 
B)  14.3% 
C)  13.4 % 
D)  None of the above

Question 12

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

Accepted Answer

A)  10% 
B)  20% 
C)  12.2% 
D)  None of the above 
A)  10% 
B)  20% 
C)  12.2% 
D)  None of the above

Question 13

In the case of a portfolio of N-stocks, the formula for portfolio variance contains:

Accepted Answer

A)  N covariance terms 
B)  N(N - 1)/2 covariance terms 
C)  N2 covariance terms 
D)  None of the above 
A)  N covariance terms 
B)  N(N - 1)/2 covariance terms 
C)  N2 covariance terms 
D)  None of the above

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Stock M and Stock N have had the following returns for the past three years of -12%,
10%, 32%; and 15%, 6%, 24% respectively. Calculate the covariance between the two securities.

Accepted Answer

A)  -99 
B)  +99 
C)  +250 
D)  None of the above 
A)  -99 
B)  +99 
C)  +250 
D)  None of the above

Question 17

Stock A has an expected return of 10% per year and stock B has an expected return of
20%) If 40% of the 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% 
B)  20% 
C)  16% 
D)  None of the above 
A)  10% 
B)  20% 
C)  16% 
D)  None of the above

Question 18

Discuss the importance of "beta" as a measure of risk.

Accepted Answer

"Beta" is a measure of market risk. It i

Question 19

What has been the average annual nominal rate of interest on Treasury bills over the past
107 years (1900 - 2006)?

Accepted Answer

A)  Less than 1% 
B)  Between 1% and 2% 
C)  Between 2% and 3% 
D)  Greater than 3% 
A)  Less than 1% 
B)  Between 1% and 2% 
C)  Between 2% and 3% 
D)  Greater than 3%

Question 20

Which portfolio has had the highest average risk premium during the period 1900-2006?

Accepted Answer

A)  Common stocks 
B)  Government bonds 
C)  Treasury bills 
D)  None of the given answers 
A)  Common stocks 
B)  Government bonds 
C)  Treasury bills 
D)  None of the given answers

Exam 7: Introduction to Risk and Return

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

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 US stock market and the standard deviation of the stock market is .18?

Mega Corporation has the following returns for the past three years: 8%, 12% and 10%. Calculate the variance of the return and the standard deviation of the returns.

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

Risk premium is the difference between the security return and the Treasury bill return.

A stock with a covariance with the market higher than the variance of the market will always high a beta above 1.0.

High standard deviation always translates into high beta.

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

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

Given the following data: risk-free rate = 4%, average risk premium = 7.7%. Calculate the required rate of return:

Sun Corporation has had returns of -6%, 16%, 18%, and 28% for the past four years. Calculate the standard deviation of the returns.

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

In the case of a portfolio of N-stocks, the formula for portfolio variance contains:

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

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

Stock M and Stock N have had the following returns for the past three years of -12%, 10%, 32%; and 15%, 6%, 24% respectively. Calculate the covariance between the two securities.

Stock A has an expected return of 10% per year and stock B has an expected return of 20%) If 40% of the 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?

Discuss the importance of "beta" as a measure of risk.

What has been the average annual nominal rate of interest on Treasury bills over the past 107 years (1900 - 2006)?

Which portfolio has had the highest average risk premium during the period 1900-2006?

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

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