Exam 6: The Meaning and Measurement of Risk and Return

The market rewards the patient investor,for between 1926 and 2008,there has never been a time when an investor lost money if she held an all-stock portfolio for ten years.

Assume that you have $165,000 invested in a stock whose beta is 1.25,$85,000 invested in a stock whose beta is 2.35,and $235,000 invested in a stock whose beta is 1.11.What is the beta of your portfolio?

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? Probability of

Stock A has the following returns for various states of the economy: State of Stock A's expected return is

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

Assume that you have $165,000 invested in a stock that is returning 11.50%,$85,000 invested in a stock that is returning 22.75%,and $235,000 invested in a stock that is returning 10.25%.What is the expected return of your portfolio?

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

Proper diversification generally results in the elimination of risk.

Stock A has an expected return of 12% with a standard deviation of 8%.If returns are normally distributed,then approximately two-thirds of the time the return on stock A will be

Stock A has the following returns for various states of the economy: Stock A's standard deviation of returns is

What is diversifying among different kinds of assets known as?

According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's risk premium.

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

You are considering investing in a project with the following possible outcomes: Probability of Investment Calculate the expected rate of return and standard deviation of returns for this investment,respectively.

You must add one of two investments to an already well- diversified portfolio. If you are a risk-averse investor,which one is the better choice?

The risk-return tradeoff that investors face on a day-to-day basis is based on realized rates of return because expected returns involve too much uncertainty.

Bankers Corp has a very conservative Beta of .7,while Biotech Corp has a Beta of 2.1.Given that the T-bill rate is 5%,and the market is expected to return 15%,what is the expected return of Bankers Corp,Biotech Corp,and a portfolio composed of 60% of Bankers Corp and 40% Biotech Corp? a.Solve this problem first by weighting the Betas to calculate a portfolio Beta,and then using CAPM to calculate the portfolio expected return. b.Then solve the problem again by calculating the expected return of each asset and weighting those returns to calculate the portfolio expected return. c.Why is Biotech Corp's expected return not three times that of Bankers Corp?

Cash flows is the most relevant variable to measure the returns on debt instruments,while GAAP net income is the most relevant variable to measure the returns on common stock.

Of the following different types of securities,which is typically considered most risky?

The rate on T-bills is currently 2%.Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%.According to CAPM,determine the return on the market portfolio.