Deck 7: An Introduction to Risk and Return-History of Financial Market Returns

Question 1

The expected rate of return is the weighted average of the possible returns for an investment.

Answer 1

True

Question 2

Using the following information for McDonovan,Inc.'s stock,calculate their expected return and standard deviation.

Answer 2

Question 3

You purchased the stock of Sargent Motors at a price of $75.75 one year ago today.If you sell the stock today for $89.00,what is your holding period return?

A)35.00%
B)12.50%
C)17.50%
D)25.00%

Answer 3

C

Question 4

What is the standard deviation of an investment that has the following expected scenario? 18% probability of a recession,2.0% return;65% probability of a moderate economy,9.5% return;17% probability of a strong economy,14.2% return.

A)3.68%
B)1.23%
C)8.47%
D)6.66%

Question 5

Riskier investments have traditionally had lower returns than less risky investments have had.

Question 6

Which of the following best measures the risk of holding an asset in isolation (i.e. ,stand-alone risk)?

A)The mean co-variance
B)The standard deviation
C)The coefficient of optimization
D)The standard asset pricing model
E)The correlation

Question 7

You are considering investing in a firm that has the following possible outcomes:
What is the expected rate of return on the investment?

A)15.0%
B)11.7%
C)14.5%
D)25.0%

Question 8

Investments in emerging markets have higher volatility than do U.S.Stocks.

Question 9

Spartan Sofas,Inc.is selling for $50.00 per share today.In one year,Spartan will be selling for $48.00 per share,and the dividend for the year will be $3.00.What is the cash return on Spartan stock?

A)0%
B)2%
C)6%
D)10%

Question 10

You have invested in a project that has the following payoff schedule:
What is the expected value of the investment's payoff? (Round to the nearest $1. )

A)$60
B)$65
C)$58
D)$70

Question 11

The expected rate of return is the sum of each possible return times it likelihood of occurrence.

Question 12

Less risky investments have lower standard deviations than do more risky investments.

Question 13

The holding period return is always positive.

Question 14

Even though an investor expects a positive rate of return,it is possible that the actual return will be negative.

Question 15

Expected return and realized return are the same thing.

Question 16

You are considering investing in a project with the following possible outcomes:
Calculate the expected rate of return for this investment.

A)9.8%
B)7.0%
C)8.3%
D)6.3%

Question 17

If there is a 20% chance we will get a 16% return,a 30% chance of getting a 14% return,a 40% chance of getting a 12% return,and a 10% chance of getting an 8% return,what is the expected rate of return?

A)12%
B)13%
C)14%
D)15%

Question 18

Because returns are more certain for the least risky investments,the required return on these investments should be higher than the required returns on more risky investments.

Question 19

The higher the standard deviation,the less risk the investment has.

Question 20

The risk-return tradeoff tells us that expected returns should be higher on investments that have higher risk.

Question 21

How much money did Roddy Richards receive when he sold his shares of W.M.D.?

A)$12,014.88
B)$12,398.42
C)$13,663.47
D)$14,184.73

Question 22

What is the arithmetic average return of Roddy Richard's investment?

A)2.42%
B)3.96%
C)5.18%
D)15.1%

Question 23

Each of the following would tend to weaken the Efficient Market Hypothesis EXCEPT:

A)There is publicly available information that Boeing Aircraft has procured a contract to build 25 planes for the U.S.Government and the price of Boeing quickly goes up.
B)ACG,Inc.performed well for the past six months,but they just lost a major distribution contract,but the price of ACG stock continues to go up.
C)Louisville Slugger,Inc. ,gets a contract to supply bats for Little League play,a contract it never had before,and stock price remains stable.
D)Disney corporation,a growth company,opens a new theme park,which investors expect will do tremendously well,and the stock price stays stable,while Urban Electric Company,which has a set infrastructure,and generates 95% of its earnings from assets it owns,outperforms Disney.

Question 24

If an investor holds a stock for three years,the value at the end of three years will always be the initial cost of the stock times (1 + arithmetic average return)to the third power.

Question 25

Marcus Berger invested $9842.33 in Hawkeyehats,Inc.four years ago.He sold the stock today for $11,396.22.What is his arithmetic average return?

A)There is insufficient information to derive an answer.
B)2.98%
C)3.73%
D)3.95%

Question 26

An investor with access to all publicly available information will be able to make higher than expected profit if the market has semi-strong efficiency.

Question 27

Investors are always rewarded for taking higher risk with higher realized returns.

Question 28

Investors make different investment choices partially because individuals do not all have the same tolerance for risk.

Question 29

What is the geometric average return on her stock if she sells it five years from today?

A)-2.33%
B).59%
C)3.67%
D)4.88%

Question 30

Historically,in the United States stocks have had higher returns and greater volatility than have government bonds.

Question 31

If an investor holds a stock for six years,the value at the end of six years will be the initial cost times (1 + geometric average return)to the sixth power.

Question 32

Stock prices go up when there is positive information about a company,and go down when there is negative information about the company.

Question 33

Marcus Berger invested $9842.33 in Hawkeyehats,Inc.four years ago.He sold the stock today for $11,396.22.What is his geometric average return?

A)There is insufficient information to derive an answer.
B)2.98%
C)3.73%
D)3.95%

Question 34

What is the geometric average return of Roddy's Richard's investment?

A)3.38%
B)4.63%
C)6.96%
D)8.78%

Question 35

An investor who wishes to hold a stock for five years will be most interested in geometric average rather than in the arithmetic average return.

Question 36

Why do the arithmetic average return and the geometric return differ?

Question 37

Treasury Bills have less default risk than do Government Bonds.

Question 38

How much will Susan's stock be worth if she sells it five years from today?

A)$71,423.85
B)$73,419.66
C)$75,628.75
D)$80,333.40

Question 39

What is the arithmetic average return on her stock if she sells it five years from today?

A)1.92%
B)3.98%
C)6.47%
D)7.11%

Question 40

Arithmetic average rate of return takes compounding into effect.

Question 41

If an individual with inside information can make higher than expected profits,the market is no more than semi-strong form efficient.

Question 42

Are markets moving toward being more efficient or toward being less efficient?

Question 43

Under the efficient market hypothesis,would securities be properly priced.

Question 44

If a market has weak form efficiency,an investor can make higher than expected profits by studying the past price patterns of a stock.