Deck 12: Financial Return and Risk Concepts

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

Standard deviation is stated in the same units of measurement (e.g., dollars, percent) as those of the data from which they were generated.

Answer 3

True

Question 4

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

Question 5

Standard deviation is the square root of the variance.

Question 6

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

Question 7

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

Question 8

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

Question 9

In an efficient market, investors cannot consistently earn above average profits after taking risk differences into account.

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

A portfolio is any combination of financial assets or investments.

Question 22

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 23

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

Question 24

During the past 75 years, small company stocks have provided investors with higher average annual returns than large company stocks.
Not in the chapter.

Question 25

In general, large company stocks are less more risky than small company stocksTreasury bonds.
Large cap stock vs small cap stock comparison is no longer in the chapter.

Question 26

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

Question 27

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

Question 28

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

Question 29

The variance is the square root of the standard deviation.

Question 30

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 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

If a financial asset has a historical variance of 4% squared25, then its standard deviation must be 12.56%.

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

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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

Question 43

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 44

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

Question 45

Most market risk can be eliminated through diversification.

Question 46

In general, securities with lower returns have lower historical standard deviations.

Question 47

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

Question 48

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

Question 49

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 50

Unsystematic risk is also known as:

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

Question 51

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 52

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

Question 53

After controlling for risk, iIf someone were able to earn greater than the average returns for the market on a consistent basis using publicly available information, which form of market efficiency is violated?

A)weaknone of forms would be violated
B)semi-strong
C)strong
D)both a and ball of the forms of market efficiency would be violated,

Question 54

The market portfolio would have a beta of:

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

Question 55

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 56

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 57

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

Question 58

An aggressive (that is, higher risk) portfolio would have a beta of:

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

Question 59

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

Question 60

The slope of 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 61

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 62

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

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 63

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

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

Question 64

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 oneall of the above

Question 65

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.
Not in the chapter

Question 66

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 67

The security market line can be used to determine the expected return on a security if we know the:

A)risk-free rate
B)systematic risk of that security
C)market risk premium
D)all of 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

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

Question 70

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 71

The benefits of diversification are greatest when asset returns have:

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

Question 72

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 73

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 74

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 75

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 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) all of the above
D) none of the above

Question 77

The strong-form efficient market implies that:

A)no investors can consistently beat the market after adjusting for risk differences
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 oneall of the above

Question 78

Systematic risk is rewarded with a premiumhigher returns 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 79

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 80

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