Exam 5: Risk and Return - Introduction

Compaq recently adjusted the probabilities for its expected cash flows in light of the Asian currency crisis.It revised the probability of favorable conditions from 32% to 18% and the probability of poor earnings from 7% to 17%.Which of the following is the most likely result from this revision?

You pay $1,000 to flip a two-sided,fair coin at the local fair.If you flip heads,you walk away with $3,000,a return of 200%.However,if you flip tails,you walk away with $250,a return of -75%.What is the standard deviation of the returns?

You bought a stock for $80.00 and sold it after three years for $95.00.While you held the stock it paid $3.00 in dividends.What is the annualized return?

A year ago,you purchased IBM stock for $94 a share.Today,IBM stock is selling for $93 a share.Additionally,you just received a check for $1.20 per share.Your holding period return is

A company will earn 10% returns in a poor economy,15% returns in a normal economy,and 25% returns in a booming economy.What is the standard deviation if there is a 25% chance of a poor economy and a 25% chance of a booming economy?

The Table below presents returns across three states of nature for two assets: Risky and Safe.The standard deviation of Safe is 3.2%.What is the difference between the standard deviation of Risky and Safe? (Risky - Safe)

By incrementally adding securities to a portfolio

All of the following statements are true EXCEPT:

If the required return from an asset is 10%,and the asset has a 60% probability of yielding a 20% return and a 40% probability of earning a 5% return,you should:

The table below shows market data for two stocks on two days.The two stocks are the components of a value weighted index like the S&P 500.Calculate the percentage change in the index over the two days.

Which of the following would be the most useful to an investor who is evaluating securities to add to her portfolio?

The Table below presents returns across three states of nature for two assets: Risky and Safe.The expected return on Safe is 8.4%.Which asset has a higher expected return?

If an asset has a 35% probability of earning a 20% return and a 65% probability of earning a 5% return,what is its standard deviation?

Assume you currently hold one type of security and decide to construct a portfolio.Which of the following would provide the greatest degree of risk reduction?

Suppose that you hold a two-asset portfolio consisting of 100 shares of Clooney Brothers at $33 per share and 100 shares of Marx Brothers at $42 per share.Assume that you have computed the expected return on Clooney Brothers and Marx Brothers to be 20% and 12%,respectively.What is the expected return from the portfolio?

It costs $1,000 to enter the following game of chance,which is based on the outcome of a coin toss (fair coin).If the coin comes up 'heads' then you win and walk away with $1,100,which is a 10% rate of return.If the coin comes up 'tails',then you lose and walk away with $900,which is a -10% rate of return.What is the variance of the returns?

You have a portfolio of two stocks: you invested $12,000 in a small biotech company and $6,000 in a fiber optic cable manufacturer.What is the portfolio weight on the biotech stock?

If General Motors expects profits of $50 million in a booming economy,what is the expected profit during a recession if this is the only other possibility and the overall expected profit is $35 million? The probability of a recession is 70%.

XYZ Corp has a 30% chance to earn 12% returns,a 40% chance for 18% returns,and a 30% chance to earn 15% returns.What is the standard deviation?

Frank's Franks went public and opened at $15.00 per share.One year later the stock was selling for $17.50 per share.What was the holding period return if during the year Frank sent out $1.25 per share in dividends?