Question 1

What has been the average annual rate of return in real terms for a portfolio of U.S.common stocks between 1900 and 2014?

Accepted Answer

A) Less than 2 percent 
B) Between 2 percent and 5 percent 
C) Between 5 percent and 8 percent 
D) Greater than 8 percent 
A) Less than 2 percent 
B) Between 2 percent and 5 percent 
C) Between 5 percent and 8 percent 
D) Greater than 8 percent

Question 2

One dollar invested in a portfolio of long-term U.S.government bonds in 1900 would have grown in nominal value by the end of year 2014 to

Accepted Answer

A) $719. 
B) $66. 
C) $74. 
D) $278. 
A) $719. 
B) $66. 
C) $74. 
D) $278.

Question 3

For a portfolio of N-stocks, the formula for portfolio variance contains

Accepted Answer

A) N variance terms. 
B) N(N - 1)/2 variance terms. 
C) N2 variance terms. 
D) N - 1 variance terms. 
A) N variance terms. 
B) N(N - 1)/2 variance terms. 
C) N2 variance terms. 
D) N - 1 variance terms.

Question 4

By purchasing U.S.government bonds, an investor can achieve both a risk-free nominal rate of return and a risk-free real rate of return.

Accepted Answer

A) True 
 B)False

Question 5

The beta of the market portfolio is

Accepted Answer

A) +1.0. 
B) +0.5. 
C) 0.0. 
D) -1.0. 
A) +1.0. 
B) +0.5. 
C) 0.0. 
D) -1.0.

Question 6

A statistical measure of the degree to which securities' returns move together is called a

Accepted Answer

A) variance. 
B) correlation coefficient. 
C) standard deviation. 
D) geometric average. 
A) variance. 
B) correlation coefficient. 
C) standard deviation. 
D) geometric average.

Question 7

Briefly explain how individual securities affect portfolio risk.

Accepted Answer

The risk of a well-diversified portfolio

Question 8

Spill Drink Company's stocks had -8 percent, 11 percent, and 24 percent rates of return, respectively, during the last three years; calculate the (arithmetic) average rate of return for the stock.

Accepted Answer

A) 8 percent per year 
B) 9 percent per year 
C) 10 percent per year 
D) 11 percent per year 
A) 8 percent per year 
B) 9 percent per year 
C) 10 percent per year 
D) 11 percent per year

Question 9

If the standard deviation of annual returns is 19.8 percent and the number of years of observation is 107, what is the standard error?

Accepted Answer

A) 4.23 percent 
B) 1.91 percent 
C) 0.47 percent 
D) 19.8 percent 
A) 4.23 percent 
B) 1.91 percent 
C) 0.47 percent 
D) 19.8 percent

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

What has been the approximate standard deviation of returns of U.S.common stocks during the period between 1900 and 2014?

Accepted Answer

A) 19.9 percent 
B) 33.4 percent 
C) 8.9 percent 
D) 2.8 percent 
A) 19.9 percent 
B) 33.4 percent 
C) 8.9 percent 
D) 2.8 percent

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Regarding stock returns, briefly explain the term variance.

Accepted Answer

Variance is a standard statistical measu

Question 15

One dollar invested in a portfolio of U.S.common stocks in 1900 would have grown in nominal value by the end of year 2014 to

Accepted Answer

A) $38,255. 
B) $245. 
C) $74. 
D) $6. 
A) $38,255. 
B) $245. 
C) $74. 
D) $6.

Question 16

The covariance between YOHO stock and the S&P 500 is 0.05.The standard deviation of the stock market is 20 percent.What is the beta of YOHO?

Accepted Answer

A) 0.00 
B) 1.00 
C) 1.25 
D) 1.42 
A) 0.00 
B) 1.00 
C) 1.25 
D) 1.42

Question 17

Sun Corporation has had returns of -6 percent, 16 percent, 18 percent, and 28 percent for the past four years.Calculate the standard deviation of the returns using the correction for the loss of a degree of freedom shown below.When variance is estimated from a sample of observed returns, we add the squared deviations and divide by N -1, where N is the number of observations.We divide by N -1 rather than N to correct for a loss of a degree of freedom.The formula is. $\operatorname { Variance } \left( \tilde { r } _ { m } \right) = \frac { 1 } { N - 1 } \sum _ { t = 1 } ^ { N } \left( \tilde { r } _ { m t } - r _ { m } \right) ^ { 2 }$ Where is the market return in period t and rm is the mean of the values of rmt.

Accepted Answer

A) 11.6 percent 
B) 14.3 percent 
C) 13.4 percent 
D) 14.0 percent 
A) 11.6 percent 
B) 14.3 percent 
C) 13.4 percent 
D) 14.0 percent

Question 18

For log normally distributed returns, the annual geometric average return is greater than the arithmetic average return.

Accepted Answer

A) True 
 B)False

Question 19

Diversification can reduce portfolio risk even in the case when correlations across stock returns equal zero.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following countries has had the lowest risk premium?

Accepted Answer

A) United States 
B) Denmark 
C) Italy 
D) Germany 
A) United States 
B) Denmark 
C) Italy 
D) Germany

Exam 7: Introduction to Risk and Return

What has been the average annual rate of return in real terms for a portfolio of U.S.common stocks between 1900 and 2014?

One dollar invested in a portfolio of long-term U.S.government bonds in 1900 would have grown in nominal value by the end of year 2014 to

For a portfolio of N-stocks, the formula for portfolio variance contains

By purchasing U.S.government bonds, an investor can achieve both a risk-free nominal rate of return and a risk-free real rate of return.

The beta of the market portfolio is

A statistical measure of the degree to which securities' returns move together is called a

Briefly explain how individual securities affect portfolio risk.

Spill Drink Company's stocks had -8 percent, 11 percent, and 24 percent rates of return, respectively, during the last three years; calculate the (arithmetic) average rate of return for the stock.

If the standard deviation of annual returns is 19.8 percent and the number of years of observation is 107, what is the standard error?

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

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

What has been the approximate standard deviation of returns of U.S.common stocks during the period between 1900 and 2014?

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

Regarding stock returns, briefly explain the term variance.

One dollar invested in a portfolio of U.S.common stocks in 1900 would have grown in nominal value by the end of year 2014 to

The covariance between YOHO stock and the S&P 500 is 0.05.The standard deviation of the stock market is 20 percent.What is the beta of YOHO?

For log normally distributed returns, the annual geometric average return is greater than the arithmetic average return.

Diversification can reduce portfolio risk even in the case when correlations across stock returns equal zero.

Which of the following countries has had the lowest risk premium?

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