Question 1

A stock has an expected return of 15 percent and a standard deviation of 20 percent.Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 11 percent.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. C

Question 2

An investor owns $10,000 of Adobe Systems stock,$15,000 of Dow Chemical,and $25,000 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 = 0.2, Dow Chemical = 0.3, Office Depot = 0.5
C)   Adobe System = 0.3, Dow Chemical = 0.2, Office Depot = 0.5
D)   Adobe System = 0.2667, Dow Chemical = 0.3333, Office Depot = 0.4 B

Question 3

If you own 300 shares of Alaska Air at $15.88,250 shares of Best Buy at $151.00,and 1,150 shares of Ford Motor at $3.51,what are the portfolio weights of each stock?

Accepted Answer

A)   Weight of Alaska Air: 10.23 percent; Weight of Best Buy: 81.09 percent; Weight of Ford Motor: 8.67 percent
B)   Weight of Alaska Air: 6.23 percent; Weight of Best Buy: 71.09 percent; Weight of Ford Motor: 22.67 percent
C)   Weight of Alaska Air: 15.23 percent; Weight of Best Buy: 81.09 percent; Weight of Ford Motor: 3.67 percent
D)   Weight of Alaska Air: 20.23 percent; Weight of Best Buy: 76.09 percent; Weight of Ford Motor: 3.67 percent A

Question 4

WayCo stock was $75 per share at the end of last year.Since then,it paid a $3 per share dividend last year.The stock price is currently $70.If you owned 200 shares of WayCo,what was your percent return?

Accepted Answer

A)   −6.67 percent
B)   −2.67 percent
C)   4.00 percent
D)   4.29 percent

Question 5

At the beginning of the month,you owned $8,000 of Company G,$8,000 of Company S,and $3,000 of Company N.The monthly returns for Company G,Company S,and Company N were 7.80 percent,1.50 percent,and −0.75 percent.What is your portfolio return?

Accepted Answer

A)   2.85 percent
B)   3.80 percent
C)   4.03 percent
D)   8.55 percent

Question 6

A stock has an expected return of 12 percent and a standard deviation of 25 percent.Long-term Treasury bonds have an expected return of 5 percent and a standard deviation of 9 percent.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 7

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 the statements are correct.

Question 8

Rank the following three stocks by their level of total risk,highest to lowest.Rail Haul has an average return of 8 percent and standard deviation of 10 percent.The average return and standard deviation of Idol Staff are 10 percent and 20 percent; and of Poker-R-Us are 6 percent and 15 percent.

Accepted Answer

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

Question 9

A stock has an expected return of 12 percent and a standard deviation of 20 percent.Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 15 percent.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 10

The past five monthly returns for PG Company are 3.25 percent,−1.45 percent,4.35 percent,6.49 percent,and 3.75 percent.What is the average monthly return?

Accepted Answer

A)   1.366 percent
B)   1.608 percent
C)   3.278 percent
D)   3.858 percent

Question 11

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 percent
B)   1.21 percent
C)   −3.46 percent
D)   3.17 percent

Question 12

Sprint Nextel Corp.stock ended the previous year at $25.00 per share.It paid a $2.57 per share dividend last year.It ended last year at $18.89.If you owned 650 shares of Sprint,what was your dollar return and percent return?

Accepted Answer

A)   $2,960; 11.13 percent
B)   −$4,960; −16.13 percent
C)   −$3,960; −15.13 percent
D)   −$2,301; −14.16 percent

Question 13

The standard deviation of the past five monthly returns for K and Company are 2.28 percent,2.64 percent,−1.05 percent,4.25 percent,and 9.25 percent.What is the standard deviation?

Accepted Answer

A)   1.45 percent
B)   1.62 percent
C)   3.47 percent
D)   3.76 percent

Question 14

Rank the following three stocks by their total risk level,highest to lowest.Night Ryder has an average return of 14 percent and standard deviation of 30 percent.The average return and standard deviation of WholeMart are 12 percent and 25 percent; and of Fruit Fly are 25 percent and 40 percent.

Accepted Answer

A)   Fruit Fly, Night Ryder, WholeMart
B)   Night Ryder, WholeMart, Fruit Fly
C)   WholeMart, Fruit Fly, Night Ryder
D)   WholeMart, Night Ryder, Fruit Fly

Question 15

Which of the following is the correct ranking from least risky to most risky?

Accepted Answer

A)   Long-term Treasury bonds, stocks, Treasury bills
B)   Treasury bills, long-term Treasury bonds, stocks
C)   Stocks, long-term Treasury bond, Treasury bills
D)   Stocks, Treasury bills, long-term Treasury bonds

Question 16

The total risk of the S&P 500 Index is equal to:

Accepted Answer

A)   diversifiable risk.
B)   nondiversifiable risk.
C)   modern portfolio risk.
D)   efficient frontier risk.

Question 17

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 percent
B)   1.21 percent
C)   −3.46 percent
D)   −6.17 percent

Question 18

Which of the following makes this a true statement: The shape of the efficient frontier implies that:

Accepted Answer

A)   diminishing returns apply to risk-taking in the investment world.
B)   increasing returns apply to risk-taking in the investment world.
C)   returns are not impacted by risk-taking in the investment world.
D)   None of the options complete the sentence to make it true.

Question 19

Which of these is a measure of risk to reward earned by an investment over a specific period of time?

Accepted Answer

A)   Coefficient of variation
B)   Market deviation
C)   Standard deviation
D)   Total variation

Question 20

If you own 1,000 shares of Alaska Corporation at $19.95,250 shares of Best Company at $17.50,and 250 shares of Motor Company at $2.50,what are the portfolio weights of each stock?

Accepted Answer

A)   Alaska = 0.1000, Best = 0.2500, Motor = 0.2500
B)   Alaska = 0.4994, Best = 0.4380, Motor = 0.0626
C)   Alaska = 0.7996, Best = 0.1754, Motor = 0.0250
D)   Alaska = 0.1995, Best = 0.1750, Motor = 0.0250

Exam 9: Characterizing Risk and Return