Question 1

Although unique risk is present in differing amounts, individual stocks are:

Accepted Answer

A) exposed to the same amount of market risk. 
B) exposed to differing amounts of market risk also. 
C) not exposed to market risk; only the general economy is subject to market risk. 
D) able to diversify away their market risk.

Question 2

Industries that generally perform well when other industries are performing well are referred to as:

Accepted Answer

A) diversified industries. 
B) cyclical industries. 
C) risk-free industries. 
D) systematic risk industries.

Question 3

In general, which stocks should be combined in a portfolio, if the goal is to reduce overall risk?

Accepted Answer

A) stocks with returns that are positively correlated. 
B) stocks with returns that are negatively correlated. 
C) stocks with returns that are not correlated. 
D) stocks that have the highest expected returns.

Question 4

The major benefit of diversification is to:

Accepted Answer

A) increase the expected return. 
B) remove negative risk assets from the portfolio. 
C) reduce the portfolio's systematic risk. 
D) reduce the expected risk.

Question 5

If the stock market return in 2020 turns out to be 30 percent, what will happen to our estimate of the "normal" risk premium? Does this make sense?

Accepted Answer

The answer of If the stock market return in 2020...

Question 6

An analyst predicts three economic states of a Boom, Average and Bust economic states, with probabilities of 40%, 50% and 10% respectively.If a boom economic state occurs, stock A will provide a 10% return and stock B will provide a 2% return; if an average economy occurs, stock A will provide a 6% return and stock B will provide a 5% return.During a bust economy, stock A will provide a -5% return and stock B a 12% return.Given this information, determine which stock is riskier.

Accepted Answer

The answer of An analyst predicts three economic states of...

Question 7

Discuss the statement, "Only market risk matters to a diversified investor."

Accepted Answer

The answer of Discuss the statement, "Only market risk matters...

Question 8

The risk premium that is offered on common stock is equal to the:

Accepted Answer

A) expected return on the stock. 
B) real rate of return on the stock. 
C) excess of expected return over a risk-free return. 
D) expected return on the S&P 500 index.

Question 9

When inflation is expected to be low, the risk premium on common stocks is expected to be low.

Accepted Answer

A) True 
 B)False

Question 10

A stock that is considered to be a positive risk asset is added to a portfolio.As a result, the portfolio will:

Accepted Answer

A) have lower average returns. 
B) have a lower variance of returns. 
C) have a higher volatility of returns. 
D) have a lower correlation of returns with stock market indexes.

Question 11

A market index is used to measure performance of a broad-based portfolio of stocks.

Accepted Answer

A) True 
 B)False

Question 12

In a year in which common stocks offered an average return of 18 percent, Treasury bonds offered 10 percent and Treasury bills offered 7 percent, the risk premium for common stocks was:

Accepted Answer

A) 1 percent. 
B) 3 percent. 
C) 8 percent. 
D) 11 percent.

Question 13

The variance of a stock's returns can be calculated as the:

Accepted Answer

A) average value of deviations from the mean. 
B) average value of squared deviations from the mean. 
C) square root of average value of deviations from the mean. 
D) sum of the deviations from the mean.

Question 14

Which of the following security portfolios should offer the highest maturity premium?

Accepted Answer

A) common stocks, because they never mature 
B) long-term treasury bonds, because of potential fluctuations in interest rates 
C) treasury bills, because of fluctuations in inflation rates 
D) The Dow, because it is the oldest and most stable index

Question 15

How is it possible for real rates of return to increase during times when the rate of inflation increases?

Accepted Answer

A) inflation increased more than the real return 
B) nominal returns actually decreased 
C) nominal returns increased more than inflation 
D) nominal returns increased less than inflation

Question 16

Most of the beneficial effects of diversification will have been received by the time a portfolio of common stocks contains _____ stocks.

Accepted Answer

A) 2 
B) 5 
C) 20 
D) 50

Question 17

Determine the nominal rate of interest, if the real rate is 6% and the inflation rate is 1.85%.

Accepted Answer

A) 8.84% 
B) 7.96% 
C) 6.75% 
D) 3.24%

Question 18

What is the expected return on a portfolio that will decline in value by 13 percent in a recession, will increase by 16 percent in normal times, and will increase by 23 percent during boom times if each scenario has equal likelihood?

Accepted Answer

A) 8.67 percent 
B) 13.00 percent 
C) 13.43 percent 
D) 17.33 percent

Question 19

Which of the following guarantees is offered to common stock investors?

Accepted Answer

A) guaranteed to receive dividends 
B) guaranteed to receive capital gains 
C) guaranteed only to receive a refund of principal 
D) no guarantees of any form

Question 20

How is the standard deviation of returns for individual common stocks or for a stock portfolio calculated?

Accepted Answer

The answer of How is the standard deviation of returns...

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