Deck 6: Risk and Return

Question 1

What is a portfolio?

A)A group of single assets held by an investor
B)A type of derivative security
C)A type of risk free bond
D)None of the above

Answer 1

A group of single assets held by an investor

Question 2

What would be the current value of a bank- accepted bill with a face value of $5,000,80 days until maturity when the current yield is 8.3% p.a.?

A)$5,000
B)$21,064.17
C)$4,872.64
D)$4,910.67

Answer 2

$4,910.67

Question 3

The less the risk premium gives the risk- free rate.

A)Market risk premium
B)Risk free premium
C)Required rate of return
D)Market required rate

Answer 3

Required rate of return

Question 4

Consider the following information regarding the forecast returns of The Chocolate Company Ltd: The standard deviation of The Chocolate Company Ltd is:

A)36.49%
B)10.15%
C)16.34%
D)267.00%

Question 5

The extent to which the return of a security is expected to vary from its expected return is the security's:

A)Pricing
B)Rate of return
C)Premium
D)Risk

Question 6

How regularly is the S&P/ASX 200 Index updated by the Standard and Poor's Index Services?

A)Every 30 seconds
B)Each hour
C)Every 10 seconds
D)At the end of each trading day

Question 7

Consider the following information regarding the forecast returns of The Chocolate Company Ltd: The expected return of The Chocolate Company Ltd is:

A)15.15%
B)21.04%
C)10.15%
D)11.71%

Question 8

What would be the current value of a bank- accepted bill with a face value of $5,000,180 days until maturity when the current yield is 5.3%p.a.?

A)$4956.45
B)$4872.64
C)$5000.00
D)$9628.57

Question 9

Consider the following historic set of returns for Healthclub Ltd stock: What is the standard deviation of the returns on Healthclub Ltd?

A)4.78%
B)9.23%
C)85.19%
D)18.30%

Question 10

BABs are known as 'zero coupon' securities because .

A)They are not considered to be debt securities
B)They do not offer an interim interest payment
C)They do not require a final principle payment
D)They do not contain an interest component

Question 11

If the standard deviation of stock A is 10% and the standard deviation of stock B is 15% and the correlation coefficient between the stocks is 0.5,what is the covariance between stock A and stock B?

A)0.05
B)0.0005
C)0.015
D)0.0075

Question 12

Which of the following is used to measure total risk of an investment?

A)Standard deviation
B)Covariance
C)Correlation
D)Beta

Question 13

If the mean of an investment's historical returns is 10.5% and the standard deviation of the returns is 11.3%,then there is a 68% chance the returns will lay between .

A)8.1% and 13.5%
B)10.5% and 11.3%
C)- 0.8% and 21.8%
D)- 11.3% and 32.3%

Question 14

The index number,expressed in points,measures:

A)The value,in millions of dollars,of the market capitalisation of the securities in the index
B)The aggregate number of securities in the index
C)The aggregate market capitalisation of the securities in the index
D)The index does not directly measure any physical quantity.

Question 15

Which of these is the 'risk premium'?

A)The proportion of return required by an investor on a risky security over and above the market rate of return
B)The proportion of return required by an investor on a risky security over and above the rate of return on equity
C)The proportion of return required by an investor on a risky security over and above the risk- free rate of return
D)The proportion of return required by an investor on a risky security over and above the dividend rate of return

Question 16

A negative covariance between two securities implies that an increase in returns on one of the assets is associated with .

A)An unrelated change in the returns of the other asset
B)No change in the returns of the other asset
C)An increase in returns in the other asset
D)A decrease in returns of the other asset

Question 17

The S&P/ASX 200 Accumulation Index differs from the S&P/ASX 200 Index in that it incorporates which of the following?

A)Takeover announcements
B)Dividends
C)Earnings forecasts
D)Share splits

Question 18

Why is systematic risk also called non- diversifiable risk?

A)It is risk which is driven by broad market- related factors and therefore common to all securities.
B)It is a residual risk,with no way of being quantified.
C)It is risk which is specific to each individual security.
D)None of the above

Question 19

In the equation, what does t represent?

A) The time until the security is issued, measured in days
B) The time since the security remains outstanding, measured in days
C) The time since the security was issued, measured in days
D) The time until the security matures, measured in days

Question 20

Which of the following combinations would result in a portfolio with the lowest risk?

A)Two stocks which are perfectly negatively correlated
B)Two stock which are uncorrelated
C)Two stocks which are perfectly correlated with the market
D)Two stocks with perfect positive correlation

Question 21

Historically,the stock market indices strongly suggest that the market fails to provide investors with a reward for bearing risk.

Question 22

What does beta measure?

A)The amount of business risk the stock is exposed to
B)The amount of market risk the stock is exposed to
C)The amount of credit risk the stock is exposed to
D)The amount of unique risk the stock is exposed to

Question 23

In addition to inflation risk,10- year government bonds face which type of risk?

A)Credit risk
B)Systematic risk
C)Interest rate risk
D)Default risk

Question 24

Calculate the risk (standard deviation)of a $100,000 portfolio consisting of $50,000 of Sunspray Products Ltd (SPL)and $50,000 of Raincoats Galore Ltd (RGL)shares.The standard deviation of returns for SPL and RGL respectively are 6.68% and 10.60%,and the covariances of returns on the shares is - 0.0031.
What does your answer tell you about this portfolio?

Question 25

If two stocks are perfectly positively correlated,then an increase in one of 10% will be associated with a decrease in the other of 10%.

Question 26

Which of these is the main index used by the London Stock Exchange?

A)AOAI
B)FTSE 100
C)S&P 500
D)AOI

Question 27

Consider the following forecasts of the likely returns and associated probabilities for XHZ Ltd shares: The mean of XHZ Ltd's returns is:

A)4.4%
B)13.4%
C)7.4%
D)10.4%

Question 28

Consider the following historic set of returns for TKY Ltd stock: What is the standard deviation of the returns on TKY Ltd?

A)6.47%
B)64.81%
C)3.98%
D)8.05%

Question 29

Consider the following forecasts of the likely returns and associated probabilities for Jumbo Ltd shares: The mean of Jumbo Ltd's returns is:

A)18.67%
B)10.50%
C)10.67%
D)8.67%

Question 30

If you are told that a_a is 25%,a_b is 12% and a_ab is - 0.03,that what will be the value of q_ab?

A)- 1
B)0
C)1
D)None of the above

Question 31

Total risk is comprised of systematic and unsystematic risk.

Question 32

If the mean of an investment's historical returns is 12.5% and the standard deviation of the returns is 4.3%,then there is a 68% chance the returns will sit between .

A)3.9 and 21.1%
B)- 8.2% and 16.8%
C)8.2% and 16.8%
D)- 0.4% and 25.4%

Question 33

If the standard deviation of stock A is 12% and the standard deviation of stock B is 16% and the correlation coefficient between the stocks is 0.5,what is the covariance between stock A and stock B?

A)0.0060
B)0.0096
C)0.0012
D)0.05

Question 34

Which of the following demonstrates that simple price indices are limited because they do not fully reflect changes in shareholder wealth?

A)They only trace changes in the aggregate market capitalisation of securities.
B)They ignore dividends paid to shareholders.
C)Not all companies are represented in the index.
D)They are not updated often enough to be meaningful.

Question 35

The S&P/ASX 200 Accumulation Index tracks movements in shareholders wealth more poorly than the S&P/ASX 200 Index due to the fact that it incorporates dividends.

Question 36

Investors should not hold a portfolio of shares because these will increase the risk of the investments.

Question 37

Which of the following has offered the lowest average real return over the period 1980- 2007?

A)All Ordinaries Index
B)All Ordinaries Accumulation Index
C)90- day Bank Accepted Bills
D)10- year Treasury Bonds

Question 38

Calculate the covariance in monthly returns on XYZ and STQ using the following data:

Question 39

If you are told that a_a is 15%,a_b is 8% and a_ab is 0.012,that what will be the value of q_ab?

A)- 1
B)1
C)0
D)None of the above

Question 40

Roger holds a portfolio consisting of two stocks,A and B.Stock A has a standard deviation of 10% and Stock B has a standard deviation of 10%.The correlation coefficient of the two stocks is -1.Would Roger's portfolio exhibit greater diversification benefits if he added in a proportion of Stock C which is uncorrelated to both Stock A and Stock B?

Question 41

A stock with a beta of 1 contains the same level of systematic risk as the market portfolio.

Question 42

Beta is used as a measure of unsystematic risk.

Question 43

A portfolio is a single asset held as an investment.

Question 44

Bank- accepted bills (BABs)are called 'zero- coupon' securities because they do not offer a return to investors.

Question 45

A risk associated with using historical data to estimate the risk of expected returns of stocks is that the standard deviation of stocks does not remain constant over time.

Question 46

If the beta of an individual share is 1.5,a change in the value of the market will cause the price of the share to change by 1.5 times the change in the market.

Question 47

Increasing the number of stocks in a portfolio reduces its systematic risk.

Question 48

A weak negative relationship between the return of two securities is indicated by a covariance of
- 0.00031.

Question 49

If two assets are perfectly negatively correlated,changes in returns on the securities are inversely proportional.

Question 50

Beta is a measure of the degree of correlation between a stock and the market.