Question 1

The historical record fails to show that investors have received a risk premium for holding risky assets.

Accepted Answer

A) True 
 B)False  False

Question 2

Average returns on high-risk assets are higher than those on low-risk assets.

Accepted Answer

A) True 
 B)False  True

Question 3

When the annual rate of return on U.S. Treasury bills is historically high, investors expect the risk premium on the stock market to be:

Accepted Answer

A)  considerably lower than normal. 
B)  considerably higher than normal. 
C)  approximately normal. 
D) approximately equal to zero. 
A)  considerably lower than normal. 
B)  considerably higher than normal. 
C)  approximately normal. 
D) approximately equal to zero. C

Question 4

A stock investor owns a diversified portfolio of 15 stocks. What will be the most likely effect on the portfolio's standard deviation if one more stock is added?

Accepted Answer

A)  A slight increase will occur. 
B)  A large increase will occur. 
C)  A slight decrease will occur. 
D) A large decrease will occur. 
A)  A slight increase will occur. 
B)  A large increase will occur. 
C)  A slight decrease will occur. 
D) A large decrease will occur.

Question 5

When you compute standard deviation, what type of risk are you measuring?

Accepted Answer

Standard deviation measures total risk.

Question 6

Calculate the expected return, variance, and standard deviation for a portfolio of four equally-weighted stocks with returns of 16.4%, -9.2%, 7.9%, and 22.0%. (Show your work)

Accepted Answer

E(R) = (16.4% - 9.2 + 7.9 + 22

Question 7

Assume market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 6% return over their 15-year life. If the investor sells now he or she is likely to realize a total return that is:

Accepted Answer

A)  greater than 6%. 
B)  less than 6%. 
C)  equal to 2%. 
D) equal to 6%. 
A)  greater than 6%. 
B)  less than 6%. 
C)  equal to 2%. 
D) equal to 6%.

Question 8

Which one of the following statements seems most appropriate when the Dow Jones Industrial Average increases by 2%?

Accepted Answer

A)  All stocks on the exchange increased by 2%. 
B)  All 30 DJIA stocks increased by 2%. 
C)  One market indicator was up by 2%. 
D) The S&P 500 index increased by 2%. 
A)  All stocks on the exchange increased by 2%. 
B)  All 30 DJIA stocks increased by 2%. 
C)  One market indicator was up by 2%. 
D) The S&P 500 index increased by 2%.

Question 9

The actual real rate of return on an investment will be positive as long as the:

Accepted Answer

A)  nominal return is positive. 
B)  inflation rate is positive. 
C)  nominal return exceeds the inflation rate. 
D) inflation rate exceeds the real return. 
A)  nominal return is positive. 
B)  inflation rate is positive. 
C)  nominal return exceeds the inflation rate. 
D) inflation rate exceeds the real return.

Question 10

What is the standard deviation of returns of a 4-stock portfolio (each stock being equally weighted) that produced returns of 20%, 20%, 25%, and 30%?

Accepted Answer

A)  2.15% 
B)  3.15% 
C)  4.15% 
D) 5.15% 
A)  2.15% 
B)  3.15% 
C)  4.15% 
D) 5.15%

Question 11

The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that:

Accepted Answer

A)  the variance of Treasury bill returns is zero. 
B)  the standard deviation of Treasury bill returns is negative. 
C)  the real return on Treasury bills has been negative. 
D) common stocks should offer a higher return than Treasury bills. 
A)  the variance of Treasury bill returns is zero. 
B)  the standard deviation of Treasury bill returns is negative. 
C)  the real return on Treasury bills has been negative. 
D) common stocks should offer a higher return than Treasury bills.

Question 12

Which one of the following guarantees is offered to common stock investors?

Accepted Answer

A)  Guarantee to receive dividends 
B)  Guarantee to receive capital gains 
C)  Guarantee only to receive a refund of principal 
D) No guarantees of any form 
A)  Guarantee to receive dividends 
B)  Guarantee to receive capital gains 
C)  Guarantee only to receive a refund of principal 
D) No guarantees of any form

Question 13

The expected return on an investment provides compensation to investors both for waiting and for worrying.

Accepted Answer

A) True 
 B)False

Question 14

Although several stock indexes are available to inform investors of market changes, the Dow Jones Industrial Average:

Accepted Answer

A)  is the broadest-based of the market indexes. 
B)  is the only reliable market index. 
C)  accounts for approximately 70% of U.S. market value. 
D) is the best-known of the U.S. market indexes. 
A)  is the broadest-based of the market indexes. 
B)  is the only reliable market index. 
C)  accounts for approximately 70% of U.S. market value. 
D) is the best-known of the U.S. market indexes.

Question 15

What is the approximate standard deviation of returns if over the past 4 years an investment returned 8%, -12%, -12%, and 15%?

Accepted Answer

A)  9.26% 
B)  10.26% 
C)  11.26% 
D) 12.01% 
A)  9.26% 
B)  10.26% 
C)  11.26% 
D) 12.01%

Question 16

Over a 20-year period an investment of $1,000 in common stocks returned an average of 11% in nominal terms and 4% in real terms. At the end of the 20 years, the portfolio value was:

Accepted Answer

A)  $1,800 in real terms. 
B)  $3,679.19 in real terms. 
C)  $7,870.59 in nominal terms. 
D) $8,062.31 in nominal terms. 
A)  $1,800 in real terms. 
B)  $3,679.19 in real terms. 
C)  $7,870.59 in nominal terms. 
D) $8,062.31 in nominal terms.

Question 17

Contrast the Dow Jones Industrial Average and the Standard and Poor's Composite Index.

Accepted Answer

The Dow Jones Industrial Average contain

Question 18

Industries that generally perform well when other industries are performing well are referred to as:

Accepted Answer

A)  diversified industries. 
B)  cyclical industries. 
C)  risk-free industries. 
D) systematic-risk industries. 
A)  diversified industries. 
B)  cyclical industries. 
C)  risk-free industries. 
D) systematic-risk industries.

Question 19

If the stock market return in 2014 turns out to be 18%, what will happen to our estimate of the "normal" risk premium? Does this make sense?

Accepted Answer

If we use historical averages to compute

Question 20

Every additional stock added to a portfolio reduces the portfolio's level of risk by an equal amount.

Accepted Answer

A) True 
 B)False

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

The historical record fails to show that investors have received a risk premium for holding risky assets.

Average returns on high-risk assets are higher than those on low-risk assets.

When the annual rate of return on U.S. Treasury bills is historically high, investors expect the risk premium on the stock market to be:

A stock investor owns a diversified portfolio of 15 stocks. What will be the most likely effect on the portfolio's standard deviation if one more stock is added?

When you compute standard deviation, what type of risk are you measuring?

Calculate the expected return, variance, and standard deviation for a portfolio of four equally-weighted stocks with returns of 16.4%, -9.2%, 7.9%, and 22.0%. (Show your work)

Assume market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 6% return over their 15-year life. If the investor sells now he or she is likely to realize a total return that is:

Which one of the following statements seems most appropriate when the Dow Jones Industrial Average increases by 2%?

The actual real rate of return on an investment will be positive as long as the:

What is the standard deviation of returns of a 4-stock portfolio (each stock being equally weighted) that produced returns of 20%, 20%, 25%, and 30%?

The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that:

Which one of the following guarantees is offered to common stock investors?

The expected return on an investment provides compensation to investors both for waiting and for worrying.

Although several stock indexes are available to inform investors of market changes, the Dow Jones Industrial Average:

What is the approximate standard deviation of returns if over the past 4 years an investment returned 8%, -12%, -12%, and 15%?

Over a 20-year period an investment of $1,000 in common stocks returned an average of 11% in nominal terms and 4% in real terms. At the end of the 20 years, the portfolio value was:

Contrast the Dow Jones Industrial Average and the Standard and Poor's Composite Index.

Industries that generally perform well when other industries are performing well are referred to as:

If the stock market return in 2014 turns out to be 18%, what will happen to our estimate of the "normal" risk premium? Does this make sense?

Every additional stock added to a portfolio reduces the portfolio's level of risk by an equal amount.

Goals and Governance of the Corporation

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters