Question 1

If one portfolio's variance exceeds that of another portfolio, its standard deviation will also be greater than that of the other portfolio.

Accepted Answer

A) True 
 B)False

Question 2

When the annual rate of return on Canadian Treasury bills is historically high, investors expect the risk premium on the stock market to be:

Accepted Answer

A) considerably lower than normal. 
B) considerably higher than normal. 
C) approximately normal. 
D) approximately equal to zero.

Question 3

Which of the following companies might you expect to be exposed to less macro risk?

Accepted Answer

A) a large producer of flour 
B) a regional airline 
C) a major commercial bank 
D) an electric utility

Question 4

When high growth is expected in the economy, an investor should receive higher returns from:

Accepted Answer

A) cyclical investments. 
B) countercyclical investments. 
C) stocks with negative correlations. 
D) stocks with low standard deviations.

Question 5

What nominal return was received by an investor when inflation averaged 8.0 percent and the real rate of return was a negative 2.5 percent?

Accepted Answer

A) 5.30 percent 
B) 5.36 percent 
C) 6.50 percent 
D) 10.77 percent

Question 6

The appropriate opportunity cost of capital is the return that investors give up on alternative investments with:

Accepted Answer

A) the same risk. 
B) the risk-free return. 
C) the expected return on the TSX 300. 
D) the normal, common stock risk premium.

Question 7

A firm is said to be countercyclical if its returns:

Accepted Answer

A) continue to decrease, year after year. 
B) continue to increase, year after year. 
C) are better when most firms do poorly. 
D) are negative in real terms.

Question 8

Which of the following statements is incorrect concerning stock indexes?

Accepted Answer

A) they have been developed for foreign stocks. 
B) they have been developed for smaller companies. 
C) indexes include all common stocks. 
D) some indexes are equal-weighted.

Question 9

What is the variance of a three-stock portfolio that produced returns of 20 percent, 25 percent and 30 percent?

Accepted Answer

A) 0.17% 
B) 0.33% 
C) 0.50% 
D) 0.10%

Question 10

What are the components of total return and total risk?

Accepted Answer

The answer of What are the components of total return...

Question 11

Although the TSX 300 contains a small proportion of Canadian publicly traded stocks, it represents:

Accepted Answer

A) all stocks that prefer to be equal-weighted. 
B) all stocks that prefer to be value-weighted. 
C) approximately 50 percent of Canadian stocks traded, in value. 
D) approximately 70 percent of Canadian stocks traded, in value.

Question 12

Market interest rates have risen substantially in the five years since an investor purchased Treasury bonds that were offering a 7 percent return.If the investor sells now she is likely to receive:

Accepted Answer

A) greater than a 7 percent total return. 
B) less than a 7 percent total return. 
C) a 7 percent total rate of return. 
D) a 7 percent nominal return but less than a 7 percent real return.

Question 13

Real rates of return will be positive as long as:

Accepted Answer

A) the nominal return is positive. 
B) the inflation rate is positive. 
C) the nominal return exceeds the inflation rate. 
D) the inflation rate exceeds the real return.

Question 14

What is the variance of return of a three-stock portfolio (with unequal weights 25%, 50% and 25%) that produced returns of 20%, 25% and 30%, respectively?

Accepted Answer

A) 10.00 
B) 12.50 
C) 15.00 
D) 20.00

Question 15

Which of the following statements is true for a stock that sells now for $60, pays an annual dividend of $3.00, and experienced a 30 percent return on investment over the past year? Its price one year ago was:

Accepted Answer

A) $42.00. 
B) $46.15. 
C) $48.46. 
D) $56.10.

Question 16

Perhaps the best way to reduce macro risk in a stock portfolio is to invest in stocks that:

Accepted Answer

A) have only unique risks. 
B) have diversified away the macro risk. 
C) have low exposure to business cycles. 
D) pay guaranteed dividends.

Question 17

An investor is considering purchasing two stocks for a portfolio.Stock A will comprise of 40% of the portfolio and Stock B 60%.It is expected that three economic states may occur, with a 40% probability of a boom economy, 50% probability of an average economy and a 10% probability of a bust economy.If a boom economy transpires, stock A will yield an 11% return and stock B 15%.An average economy will see a 7% and 11% returns for stocks A and B respectively.In a bust economy, stock A will have return of -20% and stock B -5%.Given the above information, calculate the portfolio expected return.

Accepted Answer

The answer of An investor is considering purchasing two stocks...

Question 18

Calculate the inflation rate, given a nominal rate of 10.2% and a real rate of 8.05%.

Accepted Answer

A) 2.99% 
B) 2.49% 
C) 1.99% 
D) 1.06%

Question 19

What real rate of return is earned by a one-year investor in a bond that was purchased for $1,000, has an 8 percent coupon, and was sold for $960 when the inflation rate was 6 percent?

Accepted Answer

A) -1.89 percent 
B) 1.92 percent 
C) 5.66 percent 
D) 11.47 percent

Question 20

Justify the historic ranking of returns for the following three categories of investment, listed from highest to lowest return: Common stocks, long-term Treasury bonds, and Treasury bills.

Accepted Answer

The answer of Justify the historic ranking of returns for...

Exam 11: Introduction to Risk, Return, and the Opportunity Cost of Capital