Exam 7: Introduction to Risk and Return

A stock having a covariance with the market that is higher than the variance of the market will always have a beta above 1.0.

Briefly explain the difference between beta as a measure of risk and variance as a measure of risk.

The historical nominal returns for stock A were -8 percent, +10 percent, and +22 percent.The nominal returns for the market portfolio were +6 percent, +18 percent, and 24 percent during this same time.Calculate the beta for stock A.

Which of the following provides a correct measure of the opportunity cost of capital regardless of the timing of cash flows?

If the average annual rate of return for common stocks is 11.7 percent, and 4.0 percent for U.S.Treasury bills, what is the average market risk premium?

Stock M and Stock N have had the following returns for the past three years: 12 percent, -10 percent, and 32 percent; and 15 percent, 6 percent, and 24 percent, respectively.Calculate the covariance between the two securities.(Ignore the correction for the loss of a degree of freedom set out in the text.)

Briefly explain how the beta of a stock is estimated.

The standard deviation of a two-stock portfolio generally equals the value-weighted average of the standard deviations of the two stocks.

Unique risk is also called