Question 1

Unique security risk can be eliminated from an investor's portfolio through diversification.

Accepted Answer

A) True 
 B)False

Question 2

The realized rate of return,or holding period return,is equal to the holding period dollar gain divided by the price at the beginning of the period.

Accepted Answer

A) True 
 B)False

Question 3

Security A has an expected rate of return of 29.8 percent and a beta of 3.1.Security B has a beta of 1.70.If the Treasury bill rate is 5 percent,what is the expected rate of return for Security B?

Accepted Answer

Use A to determine the market

Question 4

An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%.

Accepted Answer

A) True 
 B)False

Question 5

Use the following data:
Market risk premium = 10%
Risk-free rate = 2%
Beta of XYZ stock = 1.6
Beta of PDQ stock = 2.4
Investment in XYZ stock = $15,000
Investment in PDQ stock = $60,000
You have no assets other than your investments in XYZ and PDQ stock.
What is the expected return of your portfolio? Show all work.

Accepted Answer

Portfolio Beta method:
Bp = (15/75 × 1.6

Question 6

Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.

Accepted Answer

A) True 
 B)False

Question 7

Investment A has an expected return of 14% with a standard deviation of 4%,while investment B has an expected return of 20% with a standard deviation of 9%.Therefore,

Accepted Answer

A)  a risk averse investor will definitely select investment A because the standard deviation is lower. 
B)  a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A ($14% - 4%). 
C)  it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A's, but the return is not twice as big. 
D)  rational investors could pick either A or B, depending on their level of risk aversion. 
A)  a risk averse investor will definitely select investment A because the standard deviation is lower. 
B)  a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A ($14% - 4%). 
C)  it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A's, but the return is not twice as big. 
D)  rational investors could pick either A or B, depending on their level of risk aversion.

Question 8

A stock with a beta of 1.4 has 40% more variability in returns than the average stock.

Accepted Answer

A) True 
 B)False

Question 9

Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return.What is the expected amount of return this investment will produce?

Accepted Answer

A)  $4,040 
B)  $7,640 
C)  $12140 
D)  $1,540 
A)  $4,040 
B)  $7,640 
C)  $12140 
D)  $1,540

Question 10

Proper diversification generally results in the elimination of risk.

Accepted Answer

A) True 
 B)False

Question 11

Assume that you have $330,000 invested in a stock that is returning 11.50%,$170,000 invested in a stock that is returning 22.75%,and $470,000 invested in a stock that is returning 10.25%.What is the expected return of your portfolio?

Accepted Answer

A)  15.6% 
B)  12.9% 
C)  18.3% 
D)  14.8% 
A)  15.6% 
B)  12.9% 
C)  18.3% 
D)  14.8%

Unique security risk can be eliminated from an investor's portfolio through diversification.

The realized rate of return,or holding period return,is equal to the holding period dollar gain divided by the price at the beginning of the period.

Security A has an expected rate of return of 29.8 percent and a beta of 3.1.Security B has a beta of 1.70.If the Treasury bill rate is 5 percent,what is the expected rate of return for Security B?

An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%.

Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.

Investment A has an expected return of 14% with a standard deviation of 4%,while investment B has an expected return of 20% with a standard deviation of 9%.Therefore,

A stock with a beta of 1.4 has 40% more variability in returns than the average stock.

Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return.What is the expected amount of return this investment will produce?

Proper diversification generally results in the elimination of risk.

Assume that you have $330,000 invested in a stock that is returning 11.50%,$170,000 invested in a stock that is returning 22.75%,and $470,000 invested in a stock that is returning 10.25%.What is the expected return of your portfolio?

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

Exam 6: The Meaning and Measurement of Risk and Return

Unique security risk can be eliminated from an investor's portfolio through diversification.

The realized rate of return,or holding period return,is equal to the holding period dollar gain divided by the price at the beginning of the period.

Security A has an expected rate of return of 29.8 percent and a beta of 3.1.Security B has a beta of 1.70.If the Treasury bill rate is 5 percent,what is the expected rate of return for Security B?

An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%.

Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.

Investment A has an expected return of 14% with a standard deviation of 4%,while investment B has an expected return of 20% with a standard deviation of 9%.Therefore,

A stock with a beta of 1.4 has 40% more variability in returns than the average stock.

Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return.What is the expected amount of return this investment will produce?

Proper diversification generally results in the elimination of risk.

Assume that you have $330,000 invested in a stock that is returning 11.50%,$170,000 invested in a stock that is returning 22.75%,and $470,000 invested in a stock that is returning 10.25%.What is the expected return of your portfolio?

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters