Question 1

An investor is considering purchasing an auto stock (A) and a gold stock (B).If the auto stock is purchased, it is expected that it will provide an -8%, 5% and 18% potential returns during recessionary, normal or boom economies.If a gold stock is purchased, it is expected that it will provide 20%, 3% or -20% returns during the three economic states.All economic states have equal chance of occurring.Based on the above information, determine the correlation between the two stocks.

Accepted Answer

The answer of An investor is considering purchasing an auto...

Question 2

An investor is analyzing the risk two stocks A and B within three expected states of the economy.If a boom economy occurs, stock A will provide an 8% return, while stock B will provide a 10% return; if an average economy transpires, stock A will provide a 5 return, while stock B will provide a 5% return; if a bust economy transpires, stock A will provide a -11% return and stock B will provide a -15% return.It is expected that there will be a 60% probability of an average return.Boom and Bust states have an equal chance of occurring.Determine which stock is riskier given the state information.

Accepted Answer

The answer of An investor is analyzing the risk two...

Question 3

For investment horizons greater than 20 years, long-term corporate bonds traditionally have outperformed common stocks.

Accepted Answer

A) True 
 B)False

Question 4

The risk that remains in a stock portfolio after efforts to diversify is known as unique risk.

Accepted Answer

A) True 
 B)False

Question 5

In addition to the number of stocks represented, a difference between the TSX 300 and the Dow is that the TSX 300:

Accepted Answer

A) dates back to the 19th century while the Dow is a recent innovation. 
B) is value-weighted while the Dow is an equal-weighted index. 
C) includes foreign stocks while the Dow is domestic. 
D) index includes dividends in its return while the Dow does not.

Question 6

Which of the following risk types can be diversified by adding stocks to a portfolio?

Accepted Answer

A) systematic risk 
B) unique risk 
C) default risk 
D) market risk

Question 7

From a historical perspective (1926-2014), what would you expect to be the approximate return on a diversified portfolio of common stocks in a year that Treasury bills offered 7.5 percent?

Accepted Answer

A) 8.5 percent 
B) 12.5 percent 
C) 14.5 percent 
D) 19.5 percent

Question 8

Calculate the expected return, variance, and standard deviations for investments in either stock A or stock B, or an equally weighted portfolio of both.
 $$\begin{array} { | l | c | c | c | } 
\hline  { \text { Scenario } } & \text { Probability } & \text { Return an A } & \text { Return an B } \
\hline \text { Recession } & 25 \% & - 4 \% & 9 \% \
\hline \text { Nonmal } & 40 \% & 8 \% & 4 \% \
\hline \text { Boom } & 35 \% & 20 \% & - 4 \% \
\hline
\end{array}$$

Accepted Answer

The answer of Calculate the expected return, variance, and standard...

Question 9

Treasury bonds have provided a higher historical return than Treasury bills, which can be attributed to:

Accepted Answer

A) greater default risk. 
B) a higher level of unique risk. 
C) greater price risk due to longer maturities. 
D) the fact that they are less frequently traded than bills.

Question 10

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:

Accepted Answer

A) offer higher returns. 
B) have more systematic risk. 
C) have no diversification of risk. 
D) do not have unique risk.

Question 11

What is the approximate standard deviation of returns for a one-year project that is equally likely to return 100 percent as it is to provide a 100 percent loss?

Accepted Answer

A) 0 percent 
B) 50 percent 
C) 71 percent 
D) 100 percent

Question 12

What is the standard deviation of a portfolio's returns if the mean return is 15 percent, the variance of returns is 184 percent, and there are three stocks in the portfolio?

Accepted Answer

A) 7.83 percent 
B) 13.56 percent 
C) 41.00 percent 
D) 225.00 percent

Question 13

An investor is considering purchasing two stocks for a portfolio.Both stocks will have equal weighting in the portfolio.It is expected that three economic states may occur, each with equal probability of occurring.If a boom economy transpires, stock A will yield a 20% return and stock B 10%.An average economy will see a 10% and 5% returns for stocks A and B respectively.In a bust economy, stock A will have a return of -5% and stock B 1%.Given the above information, calculate the standard deviations of each stock along with the portfolio.

Accepted Answer

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

Question 14

The variance of an investment's returns is a measure of the:

Accepted Answer

A) volatility of the rates of return. 
B) probability of a negative return. 
C) historic return over long periods. 
D) average value of the investment.

Question 15

Systematic risk is faced by all common stock investors.

Accepted Answer

A) True 
 B)False

Question 16

How much is an investor's tolerance for risk worth over a long horizon? Calculate the difference in accumulation in real terms for an investor who initially invests $25,000 and ignores it for 20 years in either a long-term Treasury bond portfolio or a portfolio of diversified common stocks.Assume the historic real returns of 2.1 percent annually for bonds and 9.3 percent for common stocks.

Accepted Answer

The answer of How much is an investor's tolerance for...

Question 17

Which of the following would you expect to represent the broadest-based index of Canadian stocks?

Accepted Answer

A) TSX 300 
B) CDNX 
C) Standard and Poor's Composite 
D) Financial Times Index

Question 18

If a project's expected return is 15 percent, which represents a 35 percent return in a booming economy and a 5 percent return in a stagnant economy, what is the probability of a booming economy?

Accepted Answer

A) 18.33 percent 
B) 25.00 percent 
C) 33.33 percent 
D) 50.00 percent

Question 19

Calculate the real rate of interest if the nominal rate of interest is 8.65% and the inflation rate is 2.24%.

Accepted Answer

A) 9.50% 
B) 8.49% 
C) 7.38% 
D) 6.27%

Question 20

"TSX up 14.Story at 6:00 p.m." This means that:

Accepted Answer

A) The TSX was up 14 percent during today's trading. 
B) 14 of the TSX's 300 stocks increased in price today. 
C) a share of TSX stock went up by $14 today. 
D) The TSX index increased by 14 points in today's trading.

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

For investment horizons greater than 20 years, long-term corporate bonds traditionally have outperformed common stocks.

The risk that remains in a stock portfolio after efforts to diversify is known as unique risk.

In addition to the number of stocks represented, a difference between the TSX 300 and the Dow is that the TSX 300:

Which of the following risk types can be diversified by adding stocks to a portfolio?

From a historical perspective (1926-2014) , what would you expect to be the approximate return on a diversified portfolio of common stocks in a year that Treasury bills offered 7.5 percent?

Treasury bonds have provided a higher historical return than Treasury bills, which can be attributed to:

The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio because individual stocks:

What is the approximate standard deviation of returns for a one-year project that is equally likely to return 100 percent as it is to provide a 100 percent loss?

What is the standard deviation of a portfolio's returns if the mean return is 15 percent, the variance of returns is 184 percent, and there are three stocks in the portfolio?

The variance of an investment's returns is a measure of the:

Systematic risk is faced by all common stock investors.

Which of the following would you expect to represent the broadest-based index of Canadian stocks?

If a project's expected return is 15 percent, which represents a 35 percent return in a booming economy and a 5 percent return in a stagnant economy, what is the probability of a booming economy?

Calculate the real rate of interest if the nominal rate of interest is 8.65% and the inflation rate is 2.24%.

"TSX up 14.Story at 6:00 p.m." This means that: