Chapter 8 Self-Test Problems

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Chapter 8 Self-test Problems Self-test problems are similar to the types of problems you will see on the exam. For conceptual problems please review the lecture slides, your lecture notes, and read the textbook chapters. For computational problems, please review the problems worked during lectures, the self-test problems, and the challenge problems. You can check your answers by attending recitation sessions. 1.) Which of the following is true of risk? a. Risk and return are inversely proportionate to each other. b. Riskier investments tend to have lower returns as compared to T-bills which are risk free. c. Higher the risk associated with a security the lower is its return. d. Risk is a measure of the uncertainty surrounding the return that an investment will earn. 2.) If an investor prefers a higher return investment regardless of its risk, then he is following a ________ strategy. a. risk-aware b. risk-seeking c. risk-neutral d. risk-averse 3.) A ________ shows all possible outcomes and associated probabilities for a given event. a. A) discrete probability distribution b. B) histogram c. C) scenario analysis d. D) simulation 4.) The portion of an asset's risk that is attributable to firm-specific, random causes is called ________. a. unsystematic risk b. nondiversifiable risk c. market risk d. political risk

5.) An efficient portfolio is defined as a ________. a. collection of assets that minimizes risk for a given level of return b. collection of assets with the lowest possible level of risk and return c. collection of assets that maximizes risk for a given level of return d. collection of assets with the highest possible level of risk and return 6.) A common approach of estimating the variability of returns involving the forecast of pessimistic, most likely, and optimistic returns associated with an asset is called ________. a. scenario analysis b. marginal analysis c. sensitivity analysis d. break-even analysis 7.) In the capital asset pricing model, an increase in inflationary expectations will be reflected by ________. a. a parallel shift upward in the security market line b. an increase in the slope of the security market line c. a parallel shift downward in the security market line d. a decrease in the slope of the security market line 8.) In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by ________. a. the risk-free rate b. the level of the security market line c. the slope of the security market line d. the difference between the beta and the risk-free rate 9.) Asset 1 has an expected return of 10% and a standard deviation of 20%. Asset 2 has an expected return of 15% and a standard deviation of 30%. The correlation between the two assets is -1.0. Portfolios of these two assets will have a standard deviation ________. a. between 0% and 20% b. between 0% and 30% c. below 10% d. between 20% and 30%

10.) Jill wants to invest all her money in just two assets: the risk-free asset and the market portfolio. What is Jill's portfolio beta if she invests a quarter of her money in the market portfolio and the rest in the risk-free asset? a. 0.00 b. 0.25 c. 0.75 d. 1.00 11.) Last year, Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $60 per share. What rate of return did Mike earn over the year? a. 11.7 percent b. 13.2 percent c. 14.1 percent d. 15.9 percent 12.) Nico bought 100 shares of a company's stock for $22.00 per share on January 1, 2019. He received a dividend of $2.00 per share at the end of 2019 and $3.00 per share at the end of 2020. At the end of 2021, Nico collected a dividend of $4.00 per share and sold his stock for $18.00 per share. What was Nico's total return over the three-year period? What was Nico's compound annual rate of return? (Hint: use trial- and-error). a. 20.1%, 6% b. 21.5%, 6.5% c. 22.7%, 7.8% d. 23.4%, 8.2%

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13.) Use the following information to calculate the expected value, standard deviation of returns, and coefficient of variation for Asset Z. a. 23.00%; 47.00%; 0.49 b. 18.33; 25.32%; 1.38 c. 7.85%; 8.39%; 1.07 d. 23.54%; 17.25%; 0.73 14.) One stock has a standard deviation of 20%, and another has a standard deviation of 40%. The correlation coefficient is 0.3. The standard deviation of a portfolio that invests 50% in each of the two stocks equals ________. a. 30.0% b. 26.5% c. 6.2% d. 24.9% 15.) Given the following expected returns and standard deviations of assets B, M, Q, and D, which asset has the most favorable coefficient of variation? a. Asset B b. Asset M c. Asset Q d. Asset D Possible Outcomes Probability Returns Pessimistic 0.18 -9% Most likely 0.47 23% Optimistic 0.35 41% Asset Z

16.) Given the returns of two stocks J and K in the table below over the next 4 years. Find the expected return and standard deviation of a portfolio consisting of 40% of stock J and 60% in stock K over the next 4 years: Stock J Stock K 2020 10% 9% 2021 12% 8% 2022 13% 10% 2023 15% 11% a. 10.7% and 1.50% b. 10.6% and 1.79% c. 10.6% and 1.16% d. 14.3% and 2.02% 17.) Find the correlation coefficient for the return of stocks J and K in the table below. Stock J Stock K 2020 10% 9% 2021 12% 8% 2022 13% 10% 2023 15% 11% a. 0.74 b. -0.63 c. -0.74 d. 0.82 18.) An investment banker has recommended a $100,000 portfolio containing assets B, D, and F. $20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a beta of 2.0; and $30,000 will be invested in asset F, with a beta of 0.5. The beta of the portfolio is ________. a. 1.25 b. 1.33 c. 1.45 d. 1.85

19.) What is the risk-free rate of return if Asset X, with a beta of 1.5, has an expected return of 20 percent, and the expected market return is 15 percent? a. 5.0% b. 7.5% c. 15.0% d. 22.5% 20.) What is the expected return for Asset Y if it has a beta of 2.0, the expected market return is 10 percent, and the risk-free rate is 2 percent? a. 10.0% b. 16.0% c. 22.0% d. 18.0%

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21.) For Figure 2, which of the following ranks the firm’s returns in order of responsiveness to the market’s returns (highest to lowest)? a. AT&T; T-Mobile; Verizon b. T-Mobile ; AT&T ; Verizon c. AT&T; Verizon; T-Mobile d. Verizon ; T-Mobile; AT&T 22.) What is the portfolio beta for an equally weighted portfolio of the three firms shown in Figure 2? a. 0.5370 b. 0.0059 c. 0.5312 d. 1.6111 23.) If the risk-free rate is 2% and the market risk premium is 10%, what is the portfolio return for an equally weighted portfolio of the three firms shown in Figure 2 a. 7.37% b. 6.30% c. 2.06% d. 2.05%