Exam 6: The Meaning and Measurement of Risk and Return

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

Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds.

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?

The relevant variable a financial manager uses to measure returns is

You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year.Historical data suggests the following probability distribution for your commission income.Which job has the higher expected income?

You are going to add one of the following three projects to your already well-diversified portfolio. Assume the risk-free rate of return is 2% and the market risk premium is 8%.If you are a risk averse investor,which project should you choose?

You are considering a security with the following possible rates of return: a.Calculate the expected rate of return. b.Calculate the standard deviation of the returns.

You hold a portfolio made up of the following stocks: If the market's expected return is 14%,and the risk free rate of return is 5%,what is the expected return of the portfolio?

Variation in the rate of return of an investment is a measure of the riskiness of that investment.

Assume that you expect to hold a $20,000 investment for one year.It is forecasted to have a year end value of $21,000 with a 30% probability; a year end value of $24,000 with a 45% probability; and a year end value of $30,000 with a 25% probability.What is the standard deviation of the holding period return for this investment?

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

Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12.Wendy sold the shares on 12/31/12 for $3.45.Genetics stock has a beta of 1.9,the risk-free rate of return is 4%,and the market risk premium is 9%.Wendy's holding period return is

Based on the security market line,Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%.Robo-Tech has a standard deviation of returns of 18%.Therefore

The T-bill return is used in the CAPM model as the risk free rate.

If we are able to fully diversify,what is the appropriate measure of risk to use?

Another name for an asset's expected rate of return is holding-period return.

If the Beta for stock A equals zero,then

The risk-free rate of interest is 4% and the market risk premium is 9%.Howard Corporation has a beta of 2.0,and last year generated a return of 16% with a standard deviation of returns of 27%.The required return on Howard Corporation stock is

Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return.What is the standard deviation of return for this investment?

Which of the following statements is MOST correct concerning diversification and risk?