Deck 12: Financial Return and Risk Concepts

Question 1

The variance or standard deviation measures the risk per unit of return.

Answer 1

False

Question 2

Any consistent trend in the same direction as the price change would be evidence of an efficient market.

Answer 2

False

Question 3

The market portfolio is a portfolio that contains all risky assets.

Answer 3

True

Question 4

Although gold is a risky investment by itself,including gold in a stock portfolio can make the portfolio less risky.

Question 5

Beta measures the variability of an asset's returns relative to the market portfolio.

Question 6

Standard deviation is stated in the same units of measurement as those of the data from which they were generated.

Question 7

The benefits of diversification are greatest when asset returns have positive correlations.

Question 8

A higher coefficient of variation indicates more risk per unit of return.

Question 9

Standard deviation is the square root of the variance.

Question 10

Diversification occurs when we invest in several different assets rather than just a single one.

Question 11

The coefficient of variation is a measure of total return on a stock.

Question 12

In an efficient market,expected and unexpected news should cause stock prices to move up or down.

Question 13

If Stock A has a higher standard deviation than Stock B,it will also have a greater coefficient of variation.

Question 14

A market system that allows for quick execution of customers' trades is said to be informationally efficient.

Question 15

If standard deviation is used to measure the risk of stocks,one problem that arises is the inability to tell which stock is riskier by looking at the standard deviation alone.

Question 16

In an efficient market,investors cannot consistently earn above average profits.

Question 17

The Capital Asset Pricing Model states that the expected return on an asset depends on its level of unsystematic risk.

Question 18

Unsystematic risk is the risk that cannot be eliminated through diversification.

Question 19

A weak-form efficient market is a market in which prices reflect all past information.

Question 20

The variance of a portfolio would be calculated by finding the variances of the individual components of the portfolio and finding the weighted average of those variances.

Question 21

If a financial asset has a historical variance of 4% squared,then its standard deviation must be 16%.

Question 22

A weak-form efficient market is one in which prices reflect all public and private knowledge,including past and current information.

Question 23

Research suggests that a portfolio of 20 or 30 different stocks has eliminated most of the portfolios systematic risk.

Question 24

When we speak of ex-ante returns,we are referring to historical information or data.

Question 25

The existence of chartists or technicians suggests that some investors believe that markets are not weak form efficient.

Question 26

The term "ex-ante" refers to the past or historical information.

Question 27

A portfolio is any combination of financial assets or investments.

Question 28

The expected rate of return on a portfolio is the weighted average of the expected returns of the individual assets in the portfolio.

Question 29

The variance is the square root of the standard deviation.

Question 30

The term "ex-ante" refers to expected or forecasted information.

Question 31

A stock that went from $40 per share at the beginning of the year to $45 at the end of the year and paid a $2 dividend provided an investor with a 14% return.

Question 32

The coefficient of variation measures the risk per unit of return.

Question 33

During the past 75 years,corporate bonds have provided investors with higher average annual returns than stocks.

Question 34

If the expected return is 10%,the standard deviation is 3%,about 68% of the time returns will be expected to fall between 10% and 13%.

Question 35

During the past 75 years,small company stocks have provided investors with higher average annual returns than large company stocks.

Question 36

In general,large company stocks are less risky than small company stocks.

Question 37

The historical percentage return for a single financial asset is equal to any dividends received minus the difference between the selling price and the purchase price,all divided by the purchase price.

Question 38

Future returns and risk cannot be predicted precisely from past measures.

Question 39

In general,securities with higher historical standard deviations have provided higher returns.

Question 40

If a financial asset has a historical variance of 16%,then its standard deviation must be 4%.

Question 41

As defined in accordance with efficient markets notions,a strong-form efficient market would be a market in which asset prices reflect all:

A)past information
B)current information
C)public information
D)public and private information

Question 42

An aggressive portfolio would have a beta of:

A)1
B)0
C)less than 1
D)more than 1

Question 43

The linear relation between the returns on a stock and the returns on the market portfolio is called the:

A)alpha
B)beta
C)covariance
D)coefficient of variance

Question 44

A stock that went from $40 per share at the beginning of the year to $45 at the end of the year and paid a $2 dividend provided an investor with a ____ return.

A)8.75%
B)14%
C)17.5%
D)7%
E)none of the above

Question 45

Most nondiversifiable risk can be eliminated by creating a portfolio of around 30 stocks.

Question 46

The greatest level of risk reduction through diversification can be achieved when combining two securities whose returns are perfectly negatively correlated.

Question 47

If a market is semi-strong form efficient,it also is by definition weak-form efficient.

Question 48

Unsystematic risk is also known as:

A)market risk
B)nondiversifiable risk
C)firm-specific risk
D)macroeconomic risk

Question 49

The Security Market Line describes the relationship between the:

A)expected return on securities and their systematic risk
B)expected return on securities and their unsystematic risk
C)expected return on a security and the expected return on the market portfolio
D)risk-free rate and the expected return on the market portfolio

Question 50

The risk of a portfolio is simply equal to the weighted average return of the securities that comprise it.

Question 51

The market portfolio would have a beta of:

A)0
B)1
C)-1
D)0.8

Question 52

If someone were able to earn greater than the average returns for the market on a consistent basis,which form of market efficiency is violated?

A)weak
B)semi-strong
C)strong
D)both a and b

Question 53

If prices in a particular market fully reflect all public and private knowledge,the market is efficient in the:

A)weak form
B)semi-strong form
C)strong form
D)both a and b

Question 54

Most market risk can be eliminated through diversification.

Question 55

A weak-form efficient market is one in which prices reflect all public knowledge,including past and current information.

Question 56

The only relevant risk for investors that hold diversified portfolios of securities is nondiversifiable risk.

Question 57

As defined in accordance with efficient markets notions,a weak-form efficient market would be a market in which asset prices reflect all:

A)current information
B)past information
C)inside information
D)public information

Question 58

The return on a portfolio is simply equal to the weighted average return of the securities that comprise it.

Question 59

A strong-form efficient market is one in which prices reflect all public knowledge,including past and current information.

Question 60

An asset's beta can be estimated by regressing its returns against the returns for the market portfolio.

Question 61

Research on the weak-form efficient market suggests that:

A)past trends cannot be used to predict the future
B)technical analysis has limited value
C)stock prices follow a random walk
D)more than one of the above

Question 62

The benefits of diversification are greatest when asset returns have:

A)negative correlations
B)positive correlations
C)zero correlations
D)low positive covariances

Question 63

Because of portfolio effect,the most significant factor related to the risk of any investment is its:

A)standard deviation
B)coefficient of variation
C)effect on the risk of the portfolio
D)unsystematic risk

Question 64

Which of the following is not required to compute the standard deviation of a two-stock portfolio?

A)the variance in returns on each stock
B)the amount invested in each stock
C)the correlation between the returns on each stock
D)the expected return on a risk-free asset

Question 65

If IBM has a beta of 1.2 when the risk-free rate is 6% and the expected return on the market portfolio is 18%,the expected return on IBM is:

A)17.2%
B)20.4%
C)22.1%
D)23.6%

Question 66

If the expected return on Stock 1 is 6%,and the expected return on Stock 2 is 20%,the expected return on a two-asset portfolio that holds 10% of its funds in Stock 1 and 90% in Stock 2 is:

A)11.52%
B)13%
C)18.6%
D)19.14%

Question 67

In an efficient market:

A)it is fairly easy to find stocks whose prices do not fairly reflect the present value of future expected cash flows
B)unexpected news will cause a rapid change in prices
C)information flows are random,both in timing and in content
D)all the above

Question 68

If the market rate of return is 12%,and the beta on Consolidated Edison is .8,the return on Con Ed is:

A)greater than 12%
B)less than 12%
C)greater or less than 12%,depending on the risk-free rate of return
D)dependent on some other factors

Question 69

The strong-form efficient market implies that:

A)no investors can consistently beat the market
B)stock prices reflect all public and private knowledge
C)even corporate officers and insiders cannot earn above-average,risk-adjusted profits
D)more than one of the above

Question 70

If the _____________ of a stock is known,an investor can use the security market line to determine the expected return on that stock.

A)standard deviation
B)beta
C)coefficient of variation
D)unsystematic risk

Question 71

Systematic risk is rewarded with a premium in the market because:

A)it is associated with market movements which cannot be eliminated through diversification
B)it is a microeconomic risk
C)that risk is unique to a firm or an industry
D)none of the above

Question 72

The security market line can be used to determine the expected return on a security based on the:

A)market rate of return
B)slope of the line
C)systematic risk of that security
D)risk premium

Question 73

In an efficient market which of the following would not be expected to cause a quick price change in the stock of a company?

A)an unexpected announcement by a major competitor
B)higher than predicted earnings announcement
C)unexpected death of CEO
D)all the above would be expected to cause a quick price change

Question 74

Which of the following statements is most correct?

A)mutual fund shares are traded either on an organized exchange or in the over-the-counter market.
B)mutual funds continually sell shares to investors,and shareholders may sell their shares back to the mutual fund at any time.
C)mutual funds can only invest in equity.
D)all of the above statements are correct.

Question 75

Which of the following statements is most correct?

A)the variance of a portfolio is a weighted average of asset variances.
B)the benefits of diversification are greatest when asset returns have zero correlations.
C)the market portfolio truly eliminates all unsystematic risk.
D)beta is the measure of an asset's unsystematic risk.

Question 76

The Capital Asset Pricing Model (CAPM)states that the expected return on an asset depends upon its level of:

A)systematic risk
B)unsystematic risk
C)beta
D)two of the above
E)none of the above

Question 77

The portfolio that contains all risky assets is known as the:

A)market portfolio
B)efficient portfolio
C)efficient frontier
D)value-weighted portfolio

Question 78

The correlation between the return on the risk-free asset and the return on a risky asset is always:

A)-1
B)0
C)1
D)0.5

Question 79

If you invest 40% of your investment in GE with an expected rate of return of 10% and the remainder in IBM with an expected rate of return of 16%,the expected return on your portfolio is:

A)12.4%
B)13%
C)13.6%
D)14.5%

Question 80

Which of the following is not required to compute the expected return of a three-asset portfolio?

A)the amount invested in each stock
B)the correlation between the returns on each stock
C)the expected return on each stock
D)all of the above are required