Question 1

If the probability of a 20% return is 70% and the probability of a 4% loss is 30%,what is the expected return to the nearest whole percentage?

Accepted Answer

A)  17% 
B)  3% 
C)  13% 
D)  15% 
E)  11% 
A)  17% 
B)  3% 
C)  13% 
D)  15% 
E)  11%

Question 2

Which of the following statements is true?

Accepted Answer

A)  Calculus of variations (CV) adjusts standard deviations to compare the risk of securities with different expected returns. 
B)  Risk-averse investors prefer securities with high standard deviations. 
C)  An increase in risk will result in an increase in the standard deviation. 
D)  Standard deviations can be computed for stock returns, but not for bond yields. 
E)  If the returns from a security are normally distributed, 86% of the observations fall within one standard deviation of the expected value. 
A)  Calculus of variations (CV) adjusts standard deviations to compare the risk of securities with different expected returns. 
B)  Risk-averse investors prefer securities with high standard deviations. 
C)  An increase in risk will result in an increase in the standard deviation. 
D)  Standard deviations can be computed for stock returns, but not for bond yields. 
E)  If the returns from a security are normally distributed, 86% of the observations fall within one standard deviation of the expected value.

Question 3

If the probability of a 20% return is 70% and the probability of a 3% loss is 30%,what is the expected return?

Accepted Answer

A)  13% 
B)  10% 
C)  12% 
D)  17% 
E)  15% 
A)  13% 
B)  10% 
C)  12% 
D)  17% 
E)  15%

Question 4

The stock for L-Corp expects a 12% return in a down economy,15% in a normal economy,and 20% in a booming economy.What is the expected return if there is a 20% chance for a down economy and a 65% chance for a normal economy?

Accepted Answer

A)  13.05% 
B)  15.00% 
C)  15.15% 
D)  15.55% 
E)  14.25% 
A)  13.05% 
B)  15.00% 
C)  15.15% 
D)  15.55% 
E)  14.25%

Question 5

Correlation

Accepted Answer

A)  is a measure similar to the standard deviation, but more precise. 
B)  may only be positive. 
C)  is usually negative for a portfolio with two securities. 
D)  measures the degree to which a change in the riskiness of one security causes the risk of another to change. 
E)  ranges between −1 and +1. 
A)  is a measure similar to the standard deviation, but more precise. 
B)  may only be positive. 
C)  is usually negative for a portfolio with two securities. 
D)  measures the degree to which a change in the riskiness of one security causes the risk of another to change. 
E)  ranges between −1 and +1.

Question 6

Consider the following bet: heads I pay you a dollar,tails you pay me a dollar.What is the standard deviations of the payoffs (returns)of this bet? (Assume a fair coin.)

Accepted Answer

A)  -$1.00 
B)  $0 
C)  $0.50 
D)  $1.00 
E)  $10.00 
A)  -$1.00 
B)  $0 
C)  $0.50 
D)  $1.00 
E)  $10.00

Question 7

Which of the following is a false statement?

Accepted Answer

A)  Expected returns are not always predicted accurately. 
B)  Expected returns may differ from actual returns because of an unforeseen recession. 
C)  Historical returns can be calculated with more confidence than expected returns. 
D)  Accurate predictions of expected returns depend on the analyst's ability to estimate probabilities. 
E)  Although expected returns may differ from actual returns, they seldom do. 
A)  Expected returns are not always predicted accurately. 
B)  Expected returns may differ from actual returns because of an unforeseen recession. 
C)  Historical returns can be calculated with more confidence than expected returns. 
D)  Accurate predictions of expected returns depend on the analyst's ability to estimate probabilities. 
E)  Although expected returns may differ from actual returns, they seldom do.

Question 8

XYZ Corp expects to have $350,000 in sales in a poor economy,$500,000 in a moderate economy,and $900,000 in a booming economy.If the chances of a booming economy and poor economy are 10% each,what is the expected return?

Accepted Answer

A)  525,000 
B)  512,500 
C)  500,000 
D)  805,000 
E)  621,000 
A)  525,000 
B)  512,500 
C)  500,000 
D)  805,000 
E)  621,000

Question 9

A home insurance company anticipates the following pattern of claims,based on historical data.What is the expected claim on the next policy sold by the company?

Accepted Answer

A)  $100 
B)  $110 
C)  $120 
D)  $130 
E)  $140 
A)  $100 
B)  $110 
C)  $120 
D)  $130 
E)  $140

Question 10

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 standard deviation of the returns?

Accepted Answer

A)  9% 
B)  15% 
C)  30% 
D)  10% 
E)  5% 
A)  9% 
B)  15% 
C)  30% 
D)  10% 
E)  5%

Question 11

A home insurance company anticipates the following pattern of claims,based on historical data.What is the standard deviation of claims?

Accepted Answer

A)  $2,562.79 
B)  $6,567,900 
C)  $2,000 
D)  $110 
E)  $3,753.52 
A)  $2,562.79 
B)  $6,567,900 
C)  $2,000 
D)  $110 
E)  $3,753.52

Question 12

To earn a ________ return,you must incur ________ risk.

Accepted Answer

A)  lower; higher 
B)  higher; higher 
C)  decent; very high 
D)  higher; lower 
E)  None of the above. 
A)  lower; higher 
B)  higher; higher 
C)  decent; very high 
D)  higher; lower 
E)  None of the above.

Question 13

Which of the following is a true statement?

Accepted Answer

A)  It is easy to predict the probability and length of a foreign country's recession. 
B)  Although economists understand the relationship between risk and return, they have been unable to develop a way to quantify it. 
C)  There is a direct relationship between risk and expected return. 
D)  Risk and the likelihood of realizing future cash flows from an investment are unrelated. 
E)  Riskless investments do not usually earn a positive return. 
A)  It is easy to predict the probability and length of a foreign country's recession. 
B)  Although economists understand the relationship between risk and return, they have been unable to develop a way to quantify it. 
C)  There is a direct relationship between risk and expected return. 
D)  Risk and the likelihood of realizing future cash flows from an investment are unrelated. 
E)  Riskless investments do not usually earn a positive return.

Question 14

Given the following probability distributions,what are the expected returns for the Market and for Security J? State 1 P1 = 0.2 Km = -10% Kj = 40% : State 2 P1 = 0.5 Km = 10% Kj = -20% : State 3 P1 = 0.3 Km = 30% Kj = 30%

Accepted Answer

A)  10.0%; 13.0% 
B)  9.5%; 13.0% 
C)  10.0%; 11.3% 
D)  12.0%; 7.0% 
E)  10.0%; 9.5% 
A)  10.0%; 13.0% 
B)  9.5%; 13.0% 
C)  10.0%; 11.3% 
D)  12.0%; 7.0% 
E)  10.0%; 9.5%

Question 15

You are watching the Inter Milan vs.Barcelona Champions League game with your best friend Joe.You make a deal with Joe:
If Barcelona wins,you walk away with $110.
If Inter Milan wins,you walk away with $50.
If you paid $100,what is your expected return assuming that each team has an equal probability of winning?

Accepted Answer

A)  -0.21 
B)  -0.22 
C)  -0.20 
D)  -0.23 
E)  -0.24 
A)  -0.21 
B)  -0.22 
C)  -0.20 
D)  -0.23 
E)  -0.24

Question 16

The expected return on an asset is 13% and the required return is 12%.You should probably

Accepted Answer

A)  wait and see what happens to actual returns before making a decision. 
B)  buy the asset now. 
C)  sell the asset now. 
D)  hold the asset. 
E)  None of the above. 
A)  wait and see what happens to actual returns before making a decision. 
B)  buy the asset now. 
C)  sell the asset now. 
D)  hold the asset. 
E)  None of the above.

Question 17

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',you win and walk away with $2,000,which is a 100% rate of return.However,if the coin comes up 'tails',you lose and walk away with nothing,which is a - 100% rate of return.What is the expected return on this gamble?

Accepted Answer

A)  0% 
B)  1,000% 
C)  100% 
D)  10% 
E)  -10% 
A)  0% 
B)  1,000% 
C)  100% 
D)  10% 
E)  -10%

Question 18

Bond prices rise when interest rates fall.These two variables (bond prices and interest rates)are:

Accepted Answer

A)  Not correlated 
B)  Positively correlated 
C)  Negatively correlated 
D)  Positively skewed 
A)  Not correlated 
B)  Positively correlated 
C)  Negatively correlated 
D)  Positively skewed

Question 19

An expected return from a portfolio

Accepted Answer

A)  can be calculated more accurately than the expected return from any of the securities in the portfolio. 
B)  will lie somewhere between the highest and lowest expected returns from securities in the portfolio. 
C)  cannot be computed if there are fewer than three securities in the portfolio. 
D)  will exceed the highest expected return from any of the securities in the portfolio. 
E)  will be lower than the expected return from the security in the portfolio with the lowest yield because portfolios have less risk than individual securities. 
A)  can be calculated more accurately than the expected return from any of the securities in the portfolio. 
B)  will lie somewhere between the highest and lowest expected returns from securities in the portfolio. 
C)  cannot be computed if there are fewer than three securities in the portfolio. 
D)  will exceed the highest expected return from any of the securities in the portfolio. 
E)  will be lower than the expected return from the security in the portfolio with the lowest yield because portfolios have less risk than individual securities.

Question 20

Suppose you paid $18.50 per share for Commerce Group Inc.common stock and sold it one year later for $24 per share.What was your holding period return if the stock paid no dividends during the year?

Accepted Answer

A)  27% 
B)  13% 
C)  23% 
D)  32% 
E)  30% 
A)  27% 
B)  13% 
C)  23% 
D)  32% 
E)  30%

If the probability of a 20% return is 70% and the probability of a 4% loss is 30%,what is the expected return to the nearest whole percentage?

Which of the following statements is true?

If the probability of a 20% return is 70% and the probability of a 3% loss is 30%,what is the expected return?

The stock for L-Corp expects a 12% return in a down economy,15% in a normal economy,and 20% in a booming economy.What is the expected return if there is a 20% chance for a down economy and a 65% chance for a normal economy?

Correlation

Consider the following bet: heads I pay you a dollar,tails you pay me a dollar.What is the standard deviations of the payoffs (returns)of this bet? (Assume a fair coin.)

Which of the following is a false statement?

XYZ Corp expects to have $350,000 in sales in a poor economy,$500,000 in a moderate economy,and $900,000 in a booming economy.If the chances of a booming economy and poor economy are 10% each,what is the expected return?

A home insurance company anticipates the following pattern of claims,based on historical data.What is the expected claim on the next policy sold by the company?

A home insurance company anticipates the following pattern of claims,based on historical data.What is the standard deviation of claims?

To earn a return,you must incur risk.

Which of the following is a true statement?

Given the following probability distributions,what are the expected returns for the Market and for Security J? State 1 P1 = 0.2 Km = -10% Kj = 40% : State 2 P1 = 0.5 Km = 10% Kj = -20% : State 3 P1 = 0.3 Km = 30% Kj = 30%

The expected return on an asset is 13% and the required return is 12%.You should probably

Bond prices rise when interest rates fall.These two variables (bond prices and interest rates)are:

An expected return from a portfolio

Suppose you paid $18.50 per share for Commerce Group Inc.common stock and sold it one year later for $24 per share.What was your holding period return if the stock paid no dividends during the year?

Overview of Finance

Financial Statements and Ratio Analysis

Time Value of Money - Introduction

Time Value of Money - Streams and Valuations

Portfolio Theory

Interest Rates and Bond Valuation

Stock Valuation and Market Efficiency

Capital Budgeting Techniques

Capital Budgeting - Cash Flows

Cost of Capital

Capital Structure

Dividends, repurchases, and Splits

Financial Planning

The Management of Working Capital

International Finance

Filters

Exam 5: Risk and Return - Introduction

If the probability of a 20% return is 70% and the probability of a 4% loss is 30%,what is the expected return to the nearest whole percentage?

Which of the following statements is true?

If the probability of a 20% return is 70% and the probability of a 3% loss is 30%,what is the expected return?

The stock for L-Corp expects a 12% return in a down economy,15% in a normal economy,and 20% in a booming economy.What is the expected return if there is a 20% chance for a down economy and a 65% chance for a normal economy?

Correlation

Consider the following bet: heads I pay you a dollar,tails you pay me a dollar.What is the standard deviations of the payoffs (returns)of this bet? (Assume a fair coin.)

Which of the following is a false statement?

XYZ Corp expects to have $350,000 in sales in a poor economy,$500,000 in a moderate economy,and $900,000 in a booming economy.If the chances of a booming economy and poor economy are 10% each,what is the expected return?

A home insurance company anticipates the following pattern of claims,based on historical data.What is the expected claim on the next policy sold by the company?

A home insurance company anticipates the following pattern of claims,based on historical data.What is the standard deviation of claims?

To earn a ________ return,you must incur ________ risk.

Which of the following is a true statement?

Given the following probability distributions,what are the expected returns for the Market and for Security J? State 1 P1 = 0.2 Km = -10% Kj = 40% : State 2 P1 = 0.5 Km = 10% Kj = -20% : State 3 P1 = 0.3 Km = 30% Kj = 30%

The expected return on an asset is 13% and the required return is 12%.You should probably

Bond prices rise when interest rates fall.These two variables (bond prices and interest rates)are:

An expected return from a portfolio

Suppose you paid $18.50 per share for Commerce Group Inc.common stock and sold it one year later for $24 per share.What was your holding period return if the stock paid no dividends during the year?

Overview of Finance

Financial Statements and Ratio Analysis

Time Value of Money - Introduction

Time Value of Money - Streams and Valuations

Portfolio Theory

Interest Rates and Bond Valuation

Stock Valuation and Market Efficiency

Capital Budgeting Techniques

Capital Budgeting - Cash Flows

Cost of Capital

Capital Structure

Dividends, repurchases, and Splits

Financial Planning

The Management of Working Capital

International Finance

Filters

To earn a return,you must incur risk.