Question 1

Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 10 percent and standard deviation of 19 percent. The average return and standard deviation of Idol Staff are 12 percent and 22 percent; and of Poker-R-Us are 11 percent and 25 percent.

Accepted Answer

A)  Idol Staff, Rail Haul, Poker-R-Us 
B)  Rail Haul, Idol Staff, Poker-R-Us 
C)  Idol Staff, Poker-R-Us, Rail Haul 
D)  Poker-R-Us, Rail Haul, Idol Staff

Question 2

Portfolio Weights If you own 600 shares of Alaska Corporation at $23.25, 450 shares of Best Company at $34.50, and 150 shares of Motor Company at $6.95, what are the portfolio weights of each stock?

Accepted Answer

A)  Alaska = .6000, Best = .4500, Motor = .1500 
B)  Alaska = .3594, Best = .5332, Motor = .1074 
C)  Alaska = .4571, Best = .5087, Motor = .0342 
D)  Alaska = .2325, Best = .3450, Motor = .0695

Question 3

This is the portion of total risk that is attributable to overall economic factors.

Accepted Answer

A)  firm specific risk 
B)  market risk 
C)  modern portfolio risk 
D)  total risk

Question 4

You have $10,000 to invest. You want to purchase shares of Alaska Air at $50.00, Best Buy at $50.00, and Ford Motor at $10.00. How many shares of each company should you purchase so that your portfolio consists of 25 percent Alaska Air, 40 percent Best Buy, and 35 percent Ford Motor? Report only whole stock shares.

Accepted Answer

A)  50 shares of Alaska Air, 80 shares of Best Buy and 300 shares of Ford Motor 
B)  50 shares of Alaska Air, 80 shares of Best Buy and 350 shares of Ford Motor 
C)  40 shares of Alaska Air, 90 shares of Best Buy and 300 shares of Ford Motor 
D)  75 shares of Alaska Air, 40 shares of Best Buy and 350 shares of Ford Motor

Question 5

The past five monthly returns for PG&E are 12.14 percent, -11.37 percent, 3.77 percent, 6.47 percent, and 3.58 percent. What is the average monthly return?

Accepted Answer

A)  2.92% 
B)  1.21% 
C)  -3.46% 
D)  3.17%

Question 6

Which of the following statements is correct?

Accepted Answer

A)  The dollar return is a more useful measure to compare performance because it more accurately reflects the change in wealth of the investor. 
B)  A dominant portfolio is one that has the highest risk and highest return within a set of portfolios. 
C)  By adding stocks to your portfolio, it is possible to effectively eliminate nearly all of the market risk. 
D)  None of these statements are correct.

Question 7

This is a measurement of the co-movement between two variables that ranges between -1 and +1.

Accepted Answer

A)  coefficient of variation 
B)  correlation 
C)  standard deviation 
D)  total risk

Question 8

Portfolio Weights An investor owns $2,000 of Adobe Systems stock, $4,000 of Dow Chemical, and $6,000 of Office Depot. What are the portfolio weights of each stock?

Accepted Answer

A)  Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333 
B)  Adobe System = 0.1667, Dow Chemical = 0.3333, Office Depot = 0.5 
C)  Adobe System = 0.3333, Dow Chemical = 0.1667, Office Depot = 0.5 
D)  Adobe System = 0.2, Dow Chemical = 0.4, Office Depot = 0.6

Question 9

This is the dollar return characterized as a percentage of money invested.

Accepted Answer

A)  average return 
B)  dollar return 
C)  market return 
D)  percentage return

Question 10

Average Return The past five monthly returns for PG Company are 1.25 percent, -1.50 percent, 4.25 percent, 3.75 percent, and 1.98 percent. What is the average monthly return?

Accepted Answer

A)  1.946% 
B)  2.546% 
C)  9.73% 
D)  12.73%

Question 11

Standard Deviation The past five monthly returns for K and Company are 4.25 percent, 4.13 percent, -2.05 percent, 3.25 percent, and 7.75 percent. What is the standard deviation of these returns?

Accepted Answer

A)  1.40% 
B)  3.37% 
C)  3.53% 
D)  0.12%

Question 12

A stock has an expected return of 12% and a standard deviation of 20%. Long-term Treasury bonds have an expected return of 9% and a standard deviation of 15%. Given this data, which of the following statements is correct?

Accepted Answer

A)  The two assets have the same coefficient of variation. 
B)  The stock investment has a better risk-return trade-off. 
C)  The bond investment has a better risk-return trade-off. 
D)  Both investments have the same diversifiable risk.

Question 13

This is defined as the volatility of an investment, which includes firm specific risk as well as market risk.

Accepted Answer

A)  diversifiable risk 
B)  market risk 
C)  standard deviation 
D)  total risk

Question 14

Interest rates, inflation and economic growth are economic factors that are examples of ______________________.

Accepted Answer

A)  Firm-specific risks that can be diversified away 
B)  Market risk 
C)  External factors that are neither firm specific risk nor market risk 
D)  None of these statements are correct

Question 15

Investment Return MedTech Corp stock was $50.95 per share at the end of last year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500 shares of MedTech, what was your percent return?

Accepted Answer

A)  7.20% 
B)  8.83% 
C)  22.67% 
D)  23.55%

Question 16

Which of the following describes what will occur as you randomly add stocks to your portfolio?

Accepted Answer

A)  The nondiversifiable risk will decrease. 
B)  Both the diversifiable and nondiversifiable risk will decrease. 
C)  The portfolio return will increase. 
D)  The diversifiable risk will decrease.

Question 17

This is defined as a combination of investment assets held by an investor.

Accepted Answer

A)  bundle 
B)  market basket 
C)  portfolio 
D)  All of these

Question 18

Modern portfolio theory is ________________.

Accepted Answer

A)  a concept and procedure for combining securities into a portfolio to minimize risk 
B)  a concept and procedure for combining securities into a portfolio to maximize return 
C)  a concept and procedure for combining securities into a portfolio to maximize volatility 
D)  a concept and procedure for combining securities into a portfolio to maximize dollar return

Question 19

The past five monthly returns for Kohl's are 2.55 percent, -8.62 percent, -14.44 percent, -1.52 percent, and 4.75 percent. What is the average monthly return?

Accepted Answer

A)  2.21% 
B)  1.21% 
C)  -3.46% 
D)  -6.17%

Question 20

Portfolio Return Year-to-date, Company O had earned a -2.10 percent return. During the same time period, Company V earned 8.00 percent and Company M earned 6.25 percent. If you have a portfolio made up of 40 percent Company O, 30 percent Company V, and 30 percent Company M, what is your portfolio return?

Accepted Answer

A)  3.435% 
B)  5.115% 
C)  12.15% 
D)  16.35%

Exam 9: Characterizing Risk and Return