Exam 11: Introduction to Risk, Return, and the Opportunity Cost of Capital

An investor is considering purchasing an auto stock (A) and a gold stock (B).If the auto stock is purchased, it is expected that it will provide an -8%, 5% and 18% potential returns during recessionary, normal or boom economies.If a gold stock is purchased, it is expected that it will provide 20%, 3% or -20% returns during the three economic states.All economic states have equal chance of occurring.Based on the above information, determine the correlation between the two stocks.

An investor is analyzing the risk two stocks A and B within three expected states of the economy.If a boom economy occurs, stock A will provide an 8% return, while stock B will provide a 10% return; if an average economy transpires, stock A will provide a 5 return, while stock B will provide a 5% return; if a bust economy transpires, stock A will provide a -11% return and stock B will provide a -15% return.It is expected that there will be a 60% probability of an average return.Boom and Bust states have an equal chance of occurring.Determine which stock is riskier given the state information.

For investment horizons greater than 20 years, long-term corporate bonds traditionally have outperformed common stocks.

The risk that remains in a stock portfolio after efforts to diversify is known as unique risk.

In addition to the number of stocks represented, a difference between the TSX 300 and the Dow is that the TSX 300:

Which of the following risk types can be diversified by adding stocks to a portfolio?

From a historical perspective (1926-2014), what would you expect to be the approximate return on a diversified portfolio of common stocks in a year that Treasury bills offered 7.5 percent?

Calculate the expected return, variance, and standard deviations for investments in either stock A or stock B, or an equally weighted portfolio of both. Scenario Probability Return an A Return an B Recession 25\% -4\% 9\% Nonmal 40\% 8\% 4\% Boom 35\% 20\% -4\%

Treasury bonds have provided a higher historical return than Treasury bills, which can be attributed to:

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:

What is the approximate standard deviation of returns for a one-year project that is equally likely to return 100 percent as it is to provide a 100 percent loss?

What is the standard deviation of a portfolio's returns if the mean return is 15 percent, the variance of returns is 184 percent, and there are three stocks in the portfolio?

An investor is considering purchasing two stocks for a portfolio.Both stocks will have equal weighting in the portfolio.It is expected that three economic states may occur, each with equal probability of occurring.If a boom economy transpires, stock A will yield a 20% return and stock B 10%.An average economy will see a 10% and 5% returns for stocks A and B respectively.In a bust economy, stock A will have a return of -5% and stock B 1%.Given the above information, calculate the standard deviations of each stock along with the portfolio.

The variance of an investment's returns is a measure of the:

Systematic risk is faced by all common stock investors.

How much is an investor's tolerance for risk worth over a long horizon? Calculate the difference in accumulation in real terms for an investor who initially invests $25,000 and ignores it for 20 years in either a long-term Treasury bond portfolio or a portfolio of diversified common stocks.Assume the historic real returns of 2.1 percent annually for bonds and 9.3 percent for common stocks.

Which of the following would you expect to represent the broadest-based index of Canadian stocks?

If a project's expected return is 15 percent, which represents a 35 percent return in a booming economy and a 5 percent return in a stagnant economy, what is the probability of a booming economy?

Calculate the real rate of interest if the nominal rate of interest is 8.65% and the inflation rate is 2.24%.

"TSX up 14.Story at 6:00 p.m." This means that: