Question 1

The standard deviation of U.S.returns from 2005 to the financial crisis four years later had increased (approximately) by a factor of

Accepted Answer

A) 2. 
B) 3. 
C) 4. 
D) 6. 
A) 2. 
B) 3. 
C) 4. 
D) 6. B

Question 2

As the number of stocks in a portfolio is increased,

Accepted Answer

A) unique risk decreases and approaches zero. 
B) market risk decreases. 
C) unique risk decreases and becomes equal to market risk. 
D) total risk approaches zero. 
A) unique risk decreases and approaches zero. 
B) market risk decreases. 
C) unique risk decreases and becomes equal to market risk. 
D) total risk approaches zero. A

Question 3

Assume the following data: Risk-free rate = 4.0 percent; average risk premium = 7.7 percent.Calculate the required rate of return for the risky asset.

Accepted Answer

A) 5.6 percent 
B) 7.6 percent 
C) 11.7 percent 
D) 30.8 percent 
A) 5.6 percent 
B) 7.6 percent 
C) 11.7 percent 
D) 30.8 percent C

Question 4

One can easily calculate the estimated risk premium on stocks via the statistical analysis of historical stock returns.

Accepted Answer

A) True 
 B)False

Question 5

Macro Corporation has had the following returns for the past three years: -10 percent, 10 percent, and 30 percent.Use the following formulas to calculate the standard deviation of the returns: Variance = expected value of $\left( r _ { m } \right)$ $\left( \tilde { r } _ { m } - r _ { m } \right) ^ { 2 }$ Standard deviation of . $\tilde { r } _ { m } = \sqrt { \text { variance } \left( r _ { m } \right) }$

Accepted Answer

A) 10.00 percent 
B) 16.33 percent 
C) 18.21 percent 
D) 30.00 percent 
A) 10.00 percent 
B) 16.33 percent 
C) 18.21 percent 
D) 30.00 percent

Question 6

Which of the following portfolios has the least risk?

Accepted Answer

A) A portfolio of Treasury bills 
B) A portfolio of long-term U.S.government bonds 
C) A portfolio of U.S.common stocks of small firms 
D) A portfolio of U.S.common stocks of large firms 
A) A portfolio of Treasury bills 
B) A portfolio of long-term U.S.government bonds 
C) A portfolio of U.S.common stocks of small firms 
D) A portfolio of U.S.common stocks of large firms

Question 7

Stocks with high standard deviations will necessarily also have high betas.

Accepted Answer

A) True 
 B)False

Question 8

Market risk is also called I) systematic risk; II) undiversifiable risk; III) firm-specific risk.

Accepted Answer

A) systematic risk. 
B) undiversifiable risk. 
C) firm-specific risk. 
D) systematic risk and undiversifiable risk. 
A) systematic risk. 
B) undiversifiable risk. 
C) firm-specific risk. 
D) systematic risk and undiversifiable risk.

Question 9

The variability of a well-diversified portfolio mostly reflects the contributions to risk from the standard deviations of the stocks within that portfolio.

Accepted Answer

A) True 
 B)False

Question 10

According to the authors, a reasonable range for the risk premium in the United States is 5 percent to 8 percent.

Accepted Answer

A) True 
 B)False

Question 11

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 U.S.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 12

Which of the following is an estimate of the standard error of the mean?

Accepted Answer

A) The average annual rate of return divided by the square root of the number of observations 
B) The variance divided by the number of observations 
C) The standard deviation of returns divided by the square root of the number of observations 
D) The variance of returns divided by the square root of the number of observations 
A) The average annual rate of return divided by the square root of the number of observations 
B) The variance divided by the number of observations 
C) The standard deviation of returns divided by the square root of the number of observations 
D) The variance of returns divided by the square root of the number of observations

Question 13

Explain why international stocks may have high standard deviations but low betas.

Accepted Answer

Beta is traditionally measured relative

Question 14

A standard error measures

Accepted Answer

A) nominal annual rate of return on a portfolio. 
B) risk of a portfolio. 
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. 
C) reliability of an estimate. 
D) real annual rate of return on a portfolio.

Question 15

The correlation coefficient between a stock and the market portfolio is +0.6.The standard deviation of return of the stock is 30 percent and that of the market portfolio is 20 percent.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 16

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

Accepted Answer

A) True 
 B)False

Question 17

Briefly explain how diversification reduces risk.

Accepted Answer

Diversification reduces risk because pri

Question 18

Briefly explain the concept of value additivity.

Accepted Answer

If the capital market establishes a valu

Question 19

For log normally distributed returns, annual compound returns equal

Accepted Answer

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

Question 20

What has been the average annual nominal rate of return on a portfolio of U.S.common stocks over the past 114 years (from 1900 to 2014)?

Accepted Answer

A) Less than 2 percent 
B) Between 2 percent and 5 percent 
C) Between 5 percent and 11 percent 
D) Greater than 11 percent 
A) Less than 2 percent 
B) Between 2 percent and 5 percent 
C) Between 5 percent and 11 percent 
D) Greater than 11 percent

Exam 7: Introduction to Risk and Return

The standard deviation of U.S.returns from 2005 to the financial crisis four years later had increased (approximately) by a factor of

As the number of stocks in a portfolio is increased,

Assume the following data: Risk-free rate = 4.0 percent; average risk premium = 7.7 percent.Calculate the required rate of return for the risky asset.

One can easily calculate the estimated risk premium on stocks via the statistical analysis of historical stock returns.

Which of the following portfolios has the least risk?

Stocks with high standard deviations will necessarily also have high betas.

Market risk is also called I) systematic risk; II) undiversifiable risk; III) firm-specific risk.

The variability of a well-diversified portfolio mostly reflects the contributions to risk from the standard deviations of the stocks within that portfolio.

According to the authors, a reasonable range for the risk premium in the United States is 5 percent to 8 percent.

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 U.S.stock market, and the standard deviation of the stock market is .18?

Which of the following is an estimate of the standard error of the mean?

Explain why international stocks may have high standard deviations but low betas.

A standard error measures

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

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

Briefly explain how diversification reduces risk.

Briefly explain the concept of value additivity.

For log normally distributed returns, annual compound returns equal

What has been the average annual nominal rate of return on a portfolio of U.S.common stocks over the past 114 years (from 1900 to 2014)?

Introduction to Corporate Finance

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 Risk

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters