BUS 350 Principles of finacechapter 9 smart book

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Excelsior University *

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Jan 9, 2024

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Positive What type of relationship exists between risk and expected return? Dividend income and capital gains or losses The dollar return on a stock investment includes which of these? Dollar return/money invested How can the percentage return on a stock be defined? The higher the risk, the higher the expected return What is the relationship between risk and return? Amount of profit or loss from an investment expressed in dollars How is the term "dollar return" defined? The equivalent return that is compounded for N periods What is. a geometric mean return? Initial Investment The percentage total return on a stock investment is expressed as a percentage of what? Geometric mean return
Which of these is an accurate measure of returns that is used in performance analysis? The returns on the S&P 500 were more volatile than long-term Treasury bond returns but produced a higher average return in the long-run Which of these best summarizes market performance for the period 1950-2012? Measure of past return volatility, or risk How is standard deviation defined in relation to investments? 1950's The S&P 500 had the highest decade average return for which period? Total risk What does standard deviation measure? -The average return is an arithmetic average -(N-1) Is used when computing historical standard deviations -N is the total number of returns Which of these statements regarding the standard deviation formula is correct? -More volatile than T-bill returns on an annual basis -Higher returns than T-bill returns over the period Which of these correctly describe the returns on long-term Treasury bonds for the period 1950-2017?
When one asset class incurred a loss, the other class had a positive rate of return How can you best describe the relationship between the performance of long-term Treasury bonds and the S&P 500 during the period 2000-2012? The deviations must be squared to eliminate all negative values Which one of these is correct regarding the standard deviation formula? Long-term Treasury bonds are riskier than Treasury bills Based on returns and their volatility for the period 1950-2017, what can be implied about the risk level of long-term Treasury bonds? T-bills as their returns were less volatile Based on actual performance for the period 1950-2017, which one of the following displayed the least amount of risk and why? Treasury bills Which of the following is considered the risk-free asset? Positively Risk and expected return are correlated how? False
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T/F: T-bills are considered to be risk-free because of their standard deviation of returns is always zero Measure of total risk to reward What is the definition of the coefficient of variation? The higher the long-term rate of return on an asset class, the higher its risk level Which statement is true? Risk that can be reduced by diversification How can firm-specific risk be defined? Volatility of returns Risk, as it is used in the coefficient of variation (CoV), is best defined as a measure of which of these? Standard deviation/Average return Which of these will calculate the coefficient of variation (CoV) for a security? -Fraud committed by company management -Decreased demand for electric cars Which of the following are examples of diversifiable risk? Market risk only
What type of risk exists in a fully-diversified portfolio? Risk that affects only one firm or one industry What is firm-specific risk? Minimizing portfolio risk for a given level of return What is the primary focus of modern portfolio theory (MPT)? Firm-specific risk is diversifiable Which of these is correct? Market risk Stock investors cannot avoid which type of risk? At the highest return achievable for any selected standard deviation On a graph with expected return on the vertical axis and standard deviation on the horizontal axis, where is an efficient portfolio located? Highest return for a given level of risk Modern portfolio theory (MPT) is designed to achieve which one of these? Upward-sloping; direct relationship between risk and return
What is the shape of the efficient frontier and what does this imply? Maximum expected return for a given level of risk What are the characteristics of an efficient portfolio? Statistical value ranging from -1 to +1 Which of these defines correlation? The stock returns tend to move closely, although not perfectly, together What does a correlation value of +0.9 indicate? Measure of the co-movement between the returns on two variables How is correlation defined? No relationship between the co-movements of the security returns What does a correlation value of zero indicate? Market value of each security expressed as a percentage of the total portfolio value What determines the weights to be used in computing a portfolio rate of return? Select an answer that applies to both equal and unequal portfolio allocations
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Total risk can be lowered by eliminating firm-specific risk, which is achieved by combining securities with low, or negative correlations How does correlation relate to total risk? What is the relationship between risk and return? The higher the risk, the higher the expected return. How is the term "dollar return" defined? Amount of profit or loss from an investment expressed in dollars Which of these best summarizes market performance for the period 1950-2012? The returns on the S&P 500 were more volatile than long-term Treasury bond returns but produced a higher average return in the long-run. How is standard deviation defined in relation to investments? Measure of past return volatility, or risk Based on actual performance for the period 1950-2017, which one of the following displayed the least amount of risk and why? Select the best answer. T-bills as their returns were less volatile. What type of relationship exists between risk and expected return? Positive
Risk, as it is used in the coefficient of variation (CoV), is best defined as a measure of which one of these? Volatility of returns The dollar return on a stock investment includes which of these? Dividend income and capital gains or losses What type of risk exists in a fully-diversified portfolio? Market risk only The S&P 500 had the highest decade average return for which period? 1950s What is firm-specific risk? Risk that affects only one firm or one industry What does standard deviation measure? total risk Modern portfolio theory (MPT) is designed to achieve which one of these? Highest return for a given level of risk
Based on annual returns for the years 2000-2012, which one of the following exhibited the greatest risk and why? S&P 500 because the highest annual return was 28.7 percent and the lowest annual return was -35.5 percent. Which of these defines correlation? Statistical value ranging from -1 to +1 What is the definition of the coefficient of variation? Measure of total risk to reward Stock investors cannot avoid which type of risk? market risk Which one of these is the correct formula for computing the return on a portfolio comprised of unequal amounts of stocks A, B, and C? Rp = (wA × RA) + (wB × RB) + (wC × RC) How can firm-specific risk be defined? Risk that can be reduced by diversification How is the capital gain or loss on a stock investment computed? Ending stock value - Beginning stock value
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What is the primary focus of modern portfolio theory (MPT)? Minimizing portfolio risk for a given level of return How is correlation defined? Measure of the co-movement between the returns on two variables What determines the weights to be used in computing a portfolio rate of return? Select an answer that applies to both equal and unequal portfolio allocations. Market value of each security expressed as a percentage of the total portfolio value How is the total dollar return on a stock investment calculated? (Ending stock value - Beginning stock value) + Dividend income Relationship between risk and return The higher the risk, the higher the expected return. "dollar return" Definition: Amount of profit or loss from an investment expressed in dollars initial investment The percentage total return on a stock investment is expressed as a percentage of what?
Positive What type of relationship exists between risk and expected return? Dividend income and capital gains or losses The dollar return on a stock investment includes which of these? * Capital gains and losses only * Dividends only * Capital gains only * Dividend income and capital gains or losses Geometric mean return Which of these is an accurate measure of returns that is used in performance analysis? * Variance * Geometric mean return * Arithmetic average return * Standard deviation Standard deviation ____ ____ is a measure of total risk. Includes firm-specific and market risk. Variance ____ is a measure of risk
Dollar return/Money invested How can the percentage return on a stock be defined? 1950s The S&P 500 had the highest decade average return for which period? 20.9 The S&P 500 had an average return ____ percent for the 1950s. Measure of past return volatility or risk How is standard deviation defined in relation to investments? geometric mean return The equivalent return that is compounded for N periods is a ___ ___ ___ arithmetic average return The sum of all returns divided by the number of returns is the ___ ___ ___ Standard deviation formula * The deviations must be squared to eliminate all negative values.
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* The sum of the return deviations must equal zero. * The returns can be for any period of time provided the time periods are consistent. * You must have at least two returns so that (N - 1)will be a positive value. These statements are correct regarding the ___ ___ ___ TRUE True or false: Investing in the S&P 500 index is riskier than investing in long-term Treasury bonds. Long-term Treasury bonds are riskier than Treasury bills. Based on returns and their volatility for the period 1950-2017, what can be implied about the risk level of long-term Treasury bonds? Treasury Bills (T-Bills) ___ ___ are debt securities that are less risky than long-term Treasury bonds. TRUE True or false: While Treasury bonds are backed by the federal government their long-term maturities subject them to a fair amount of interest rate risk. The returns on the S&P 500 were more volatile than long-term Treasury bond returns but produced a higher average return in the long-run.
Which of these best summarizes market performance for the period 1950-2012? * Long-term Treasury bond returns were less volatile in the short-run but produced the highest long-run average rate of return. * Long-term Treasury bonds outperformed T-bills during every decade. * T-bills produced more stable returns in the short-run and outperformed long-term Treasury bonds for the period. * The returns on the S&P 500 were more volatile than long-term Treasury bond returns but produced a higher average return in the long-run. TRUE True or false: The S&P 500 had the most volatile returns in the short-run and also the highest long-run average return. T-bills as their returns were less volatile. Based on actual performance for the period 1950-2017, which one of the following displayed the least amount of risk and why? Select the best answer. * T-bills as their decade average returns were all positive. * S&P 500 as its average return for the period exceeded T-bonds and T-bills. * Long-term Treasury bonds because their returns were higher than the Treasury bills. * T-bills as their returns were less volatile. Total risk What does standard deviation measure? FALSE
True or false: T-bills are considered to be risk-free because their standard deviation of returns is always zero. TRUE True or false: Risk-free assets have low levels of volatility as measured by standard deviation. Over a decade, T-bills generally have a standard deviation less than 3%. N is the total number of returns, (N - 1) is used when computing historical standard deviations, The average return is an arithmetic average Which of these statements regarding the standard deviation formula is correct? Select all that apply. * N is the total number of returns. * Standard deviation is a squared value. * (N - 1) is used when computing historical standard deviations. * The average return is an arithmetic average. Variance; Standard deviation _____ is a squared value. ___ ____ is the square root of the variance. positively Risk and expected return are Blank______ correlated.
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More volatile than T-bill returns on an annual basis and Higher returns than T-bill returns over the period Which of these correctly describe the returns on long-term Treasury bonds for the period 1950-2017? Select all that apply * More volatile than T-bill returns on an annual basis * Higher returns than S&P 500 returns over the period *More volatile than S&P 500 returns over the period * Higher returns than T-bill returns over the period True True or false: Long-term Treasury bonds were more volatile than T-bills. T-bills as their returns were less volatile. Based on actual performance for the period 1950-2017, which one of the following displayed the least amount of risk and why? True True or false: The S&P 500 had the highest average return for the period 1950-2017 but was also the riskiest as seen in the volatility of those returns. True True or false: Treasury bond returns are more volatile than T-bill returns. Thus, T-bonds are riskier than T- bills.
True True or false: For the period 1950-2017, both the S&P 500 and long-term Treasury bills had positive decade average returns. T-bills were the least risky as their returns were the least volatile. Volatility of returns Risk, as it is used in the coefficient of variation (CoV), is best defined as a measure of which one of these? Measure of past return volatility or risk How is standard deviation defined in relation to investments? Standard deviation/Average return What will calculate the coefficient of variation (CoV) for a security? Treasury Bills Which of the following is considered the risk-free asset? 3 MULTIPLE CHOICE OPTIONS The higher the long-term rate of return on an asset class, the higher its risk level. Which statement is true? 3 MULTIPLE CHOICE OPTIONS True True or false: T-bills have the lowest level of standard deviation and are considered to be risk-free.
True True or false: Risk-free assets have low rates of return as risk and return are directly related. Risk that can be reduced by diversification How can firm-specific risk be defined? 3 MULTIPLE CHOICE OPTIONS Long-term Treasury bonds are riskier than Treasury bills. Based on returns and their volatility for the period 1950-2017, what can be implied about the risk level of long-term Treasury bonds? True True or false: While Treasury bonds are backed by the federal government their long-term maturities subject them to a fair amount of interest rate risk and they are not risk free. A decrease in GDP output, An increase in taxes, An increase in inflation Which of the following exemplifies market risk? Select all that apply. * A decrease in GDP output * An increase in taxes * An increase in inflation *A decrease in a firm's sales
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Measure of total risk to reward What is the definition of the coefficient of variation? True True or false: The coefficient of variation is the amount of risk per unit of return, thus lower values are preferred by investors. CoV = (0.02468^1/2)/0.144 A stock has a variance of 0.02468, a current price of $28 a share, and an average rate of return of 14.4 percent. How is the coefficient of variation (CoV) computed? Market risk only What type of risk exists in a fully-diversified portfolio? 3 MULTIPLE CHOICE OPTIONS Risk that affects only one firm or one industry What is firm-specific risk? 3 MULTIPLE CHOICE OPTIONS Highest return for a given level of risk Modern portfolio theory (MPT) is designed to achieve which one of these? 3 MULTIPLE CHOICE OPTIONS
True True or false: MPT describes how to achieve the highest return for a given level of risk. Decreased demand for electric cars and Fraud committed by company management Which of the following are examples of diversifiable risk? Select all that apply. * Multiple select question. * Increase in interest rates * Increase in economic regulation * Decreased demand for electric cars * Fraud committed by company management 11% return; 8% standard deviation Nicholas is less risk-adverse than your average investor; returns are his primary investment concern. Which one of these represents an optimal portfolio for him? 3 MULTIPLE CHOICE OPTIONS Volatility of returns Risk, as it is used in the coefficient of variation (CoV), is best defined as a measure of which one of these? 3 MULTIPLE CHOICE OPTIONS 11 percent return; 15 percent standard deviation and 11.5 percent return; 17 percent standard deviation Which of these sets represents an optimal portfolio? Select all that apply. Multiple select question. * 11 percent return; 15 percent standard deviation
* 11.5 percent return; 17 percent standard deviation * 10.5 percent return; 17 percent standard deviation * 10 percent return; 15 percent standard deviation Standard deviation/Average return Which of these will calculate the coefficient of variation (CoV) for a security? Variance/Current price Standard deviation/Average return Standard deviation/Current price Variance/Average return 3 MULTIPLE CHOICE OPTIONS At the highest return achievable for any selected standard deviation On a graph with expected return on the vertical axis and standard deviation on the horizontal axis, where is an efficient portfolio located? 3 MULTIPLE CHOICE OPTIONS Market risk Stock investors cannot avoid which type of risk? 13 percent return; 19 percent standard deviation Assume a portfolio with a return of 12 percent with a standard deviation of 18 percent is an efficient portfolio. Which one of these is most apt to also be an efficient portfolio? 3 MULTIPLE CHOICE OPTIONS
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Minimizing portfolio risk for a given level of return What is the primary focus of modern portfolio theory (MPT)? -0.34 You want to invest in two stocks that will provide you with the most diversified portfolio. You should select the two stocks with which one of these correlation values? 3 MULTIPLE CHOICE OPTIONS 8 percent return; 7 percent standard deviation Marta is risk-adverse, which is her primary investment concern. Which one of these represents an optimal portfolio for her? 3 MULTIPLE CHOICE OPTIONS Statistical value ranging from -1 to +1 Which of these defines correlation? 3 MULTIPLE CHOICE OPTIONS 14.9 percent return; 25.4 percent standard deviation and 14.3 percent return; 24.8 percent standard deviation Which of these represents an optimal portfolio comprised of two stocks? Select all that apply. Multiple select question. * 14.9 percent return; 25.4 percent standard deviation * 14.8 percent return; 25.4 percent standard deviation * 14.2 percent return; 24.8 percent standard deviation * 14.3 percent return; 24.8 percent standard deviation
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No relationship between the co-movements of the security returns What does a correlation value of zero indicate? 3 MULTIPLE CHOICE OPTIONS Maximum expected return for a given level of risk What are the characteristics of an efficient portfolio? Market value of each security expressed as a percentage of the total portfolio value What determines the weights to be used in computing a portfolio rate of return? Select an answer that applies to both equal and unequal portfolio allocations. 3 MULTIPLE CHOICE OPTIONS Upward-sloping; direct relationship between risk and return What is the shape of the efficient frontier and what does this imply? True True or false: The efficient frontier is upward-sloping indicating a direct relationship between risk and return. Stocks A and B; 0.49 Which set of securities will provide the least amount of diversification given their correlation values?
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3 MULTIPLE CHOICE OPTIONS Measure of the co-movement between the returns on two variables How is correlation defined? 3 MULTIPLE CHOICE OPTIONS False True or false: Total risk can be reduced by combining two perfectly correlated stocks. True false question. The stock returns tend to move closely, although not perfectly, together. What does a correlation value of +0.9 indicate? $2,000/($3,000 + $5,000 + $2,000) How is the portfolio weight of stock C computed? 3 MULTIPLE CHOICE OPTIONS Total risk can be lowered by eliminating firm-specific risk, which is achieved by combining securities with low, or negative correlations. How does correlation relate to total risk? 3 MULTIPLE CHOICE OPTIONS Market value of each security expressed as a percentage of the total portfolio value
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What determines the weights to be used in computing a portfolio rate of return? Select an answer that applies to both equal and unequal portfolio allocations. 3 MULTIPLE CHOICE OPTIONS Rp = (wA × RA) + (wB × RB) + (wC × RC) Which one of these is the correct formula for computing the return on a portfolio comprised of unequal amounts of stocks A, B, and C? 3 MULTIPLE CHOICE OPTIONS The S&P 500 had the highest decade average return for which period? 1950s Which of the following are examples of diversifiable risk? Select all that apply. Decreased demand for electric cars; Fraud committed by company management Which statement is true? (S&P 500) Investing in a single stock is generally riskier than investing in the S&P 500. Which of these correctly describe the returns on long-term Treasury bonds for the period 1950-2012? Select all that apply. More volatile than T-bill returns on an annual basis; Higher returns than T-bill returns over the period Which of these statements regarding the standard deviation formula is correct? Select all that apply.
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(N-1) is used when computing historical standard deviations; The average return is an arithmetic average; N is the total number of returns The annual returns on a stock for the past four years are: 5.2 percent, -16.8 percent, 22.1 percent, and 11.4 percent. What is the geometric mean return? 4.46 percent [(1.052)(0.832)(1.221)(1.114)]^1/4-1=0.0446=4.46% How is correlation defined? Measure of the co-movement between the returns on two variables An arithmetic average return can be which of these? Select all that apply. Dollar return; Return for any period of time; Percentage return How is the capital gain or loss on a stock investment computed? Ending stock value - Beginning stock value A stock returned 13 percent, 8 percent, -16 percent, and 1 percent annually for the past four years, respectively. What is the arithmetic average return? 1.50 percent (13%+8%-16%+1%)/4=1.5% What type of risk exists in a fully-diversified portfolio? Market risk only
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How is market risk defined? The portion of total risk that is attributable to over-all economic factors How can firm-specific risk be defined? Risk that can be reduced by diversification Which statement(s) is (are) correct for the period of 1950 to 2015? Select all that apply. The S&P 500 had a positive average rate of return for the six decades starting with the 1950s; The S&P 500 outperformed long-term Treasury bonds by about 6 percent Maria bought a stock one year ago for $16 a share. The stock pays quarterly dividends of $0.12 and is currently valued at $17 a share. How is the percentage return computed? [$17-$16+(4x$0.12)]/$16 Based on annual standard deviation of returns for the years 2000-2009, which one of the following exhibited the greatest risk? Stocks The percentage total return on a stock investment is expressed as a percentage of what? Initial investment
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Lew has a portfolio comprised of $3,000 of stock A, $5,000 of stock B, and $2,000 of stock C. How is the portfolio weight of stock C computed? $2,000/($3,000+$5,000+$2,000) Which of these represents an optimal portfolio comprised of two stocks? Select all that apply. 14.3 percent return, 24.8 percent standard deviation; 14.9 percent return, 25.4 standard deviation The dollar return on a stock investment includes which of these? Dividend income and capital gains or losses What does standard deviation measure? Total risk Which one of these best describes diversification? Purchasing stocks in eight different industries Which one of these is an accurate measure of returns that is used in performance analysis? Geometric mean return How can the percentage return on a stock be defined? Dollar return/Money invested
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Which of these sets represents an optimal portfolio? Select all that apply. 11 percent return, 15 percent standard deviation; 11.5 percent return, 17 percent standard deviation Market risk applies to which of the following? All firms and individuals Stock investors cannot avoid which type of risk? Market risk Which of these defines correlation? Statistical value ranging from -1 to +1 How is the total dollar return on a stock investment calculated? (Ending stock value- Beginning stock value)+Dividend income How is standard deviation defined in relation to investments? Measure of past return volatility, or risk An investor who purchases a high-risk investment should expect to earn a higher rate of return as compared to low-risk investment over which period of time? Long term
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Based on actual performance for the period 1950-2012, which one of the following displayed the least amount of risk and why? Select the best answer. T-bills as their returns were less volatile. What type of relationship exists between risk and expected return? Positive How is the term "dollar return" defined? Amount of profit or loss from an investment expressed in dollars For the past three years, a stock had annual returns of 14 percent, -32 percent, and 4 percent. What is the average arithmetic return? -4.67 percent (14%-32%+4%)/3=-4.67% Which of these represents the optimal portfolio comprised of two stocks? Select all that apply. 14.3 percent return, 24.8 percent standard deviation; 14.9 percent return, 25.4 percent standard deviation For the past three years a stock has provided an average return of 11.6 percent with a variance of 0.02789. What is the coefficient of variation (CoV)? 1.44 CoV=(0.02789^1/2)/0.116=1.44
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What are the characteristics of an efficient portfolio? Maximum expected return for a given level of risk The variance of the returns on an individual stock is 0.060565. What is the standard deviation? 24.61 percent o=(0.060565)^1/2=0.2461=24.61% What is the primary focus of modern portfolio theory (MPT)? Minimizing portfolio risk for a given level of return What does a correlation value of +0.9 indicate? The stock returns tend to move closely, although not perfectly, together Which of the following indicates a portfolio is becoming more diversified? Decreasing portfolio standard deviation What is a geometric mean return? The equivalent return that is compounded for N periods Modern portfolio theory (MPT) is designed to achieve which one of these? Highest return for a given level of risk
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A bond has a standard deviation of 10.7 percent and an average rate of return of 6.4 percent. What is the coefficient of variation (CoV)? 1.67 CoV=0.107/0.064=1.67 On a graph with expected return on the vertical axis and standard deviation on the horizontal axis, where is an efficient portfolio located? At the highest return achievable for any selected standard deviation Risk, as it is used in the coefficient of variation (CoV), is best defined as a measure of which one of these? Volatility of returns You want to invest in two stocks that will provide you with the most diversified portfolio. You should select the two stocks with which one of these correlation values? -0.34 Which of these is an accurate measure of returns that is used in performance analysis? Geometric mean return Which of these will calculate the coefficient of variation (CoV) for a security? Standard deviation/Average return
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Roger purchased a stock for $16 a share. The stock paid a $1 annual dividend and increased in price by $2 a year for the following three years. What is the arithmetic average annual capital gain? The arithmetic average annual total return? 11.20 percent; 16.81 percent Average capital gain= ($2/$16+$2/$18+$2/$20)/3=11.20% Average total return= ($3/$16+$3/$18+$3/$20)/3=16.81% True or false: T-bills are considered to be risk-free because their standard deviation of returns is always zero. False Risk-free assets have low levels of volatility as measured by standard deviation. Over a decade, T-bills generally have a standard deviation less than 3%. What is the shape of the efficient frontier and what does this imply? Upward-sloping; direct relationship between risk and return Which set of securities will provide the least amount of diversification given their correlation values? Stocks A and B; 0.49 What is the definition of the coefficient of variation? Measure of total risk to reward A stock has a variance of 0.02468, a current price of $28 a share, and an average rate of return of 14.4 percent. How is the coefficient of variation (CoV) computed? CoV=(0.02468^1/2)/0.144
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The price of a stock at the end of each of the past three years has been $14, $12, and $11 with $11 being the latest price. The stock pays an annual dividend of $1 per share. What is the average annual capital gain for the past two years? The average annual total return? -11.31 percent; -3.57 percent Average annual capital gain= [(-$2/$14)+($1/$12)]/2=-0.1131=-11.31% Average annual return= [(-$1/$14)+($0/$12)]/2=-0.0357=-3.57% What benefit is derived from the use of standard deviation when measuring rates of return? Standard deviation quantifies total risk with higher values representing greater risk. Which of these best summarizes market performance for the period 1950-2012? The returns on the S&P 500 were more volatile than long-term Treasury bond returns but produced a higher average return in the long-run. How does correlation relate to total risk? Total risk can be lowered by eliminating firm-specific risk, which is achieved by combining securities with low, or negative correlations Which statement is true? (Asset class) The higher the long-term rate of return on an asset class, the higher its risk level What does an increase in the coefficient of variation (CoV) for a security indicate? An increase in the amount of risk per unit of return
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Which rate of return best illustrates the historical performance of a security over time? Geometric mean return Luther invested $1,500 in stock A with a return of 11.6 percent, $500 in stock B with a return of 19 percent, and $1,000 in bond C with a return of 6.7 percent. What is the portfolio return? 11.20 percent Rp=($1,500/$3,000x0.116)+($500/$3,000x0.19)+($1,000/$3,000x0.067)=0.1120=11.20% Marta is risk-averse, which is her primary investment concern. Which one of these represents an optimal portfolio for her? 8 percent return; 7 percent standard deviation What is the relationship between risk and return? The higher the risk, the higher the expected return. The dollar return on a stock investment includes which of these? Dividend income and capital gains or losses The price of a stock at the end of each of the past three years has been $14, $12, and $11 with $11 being the latest price. The stock pays an annual dividend of $1 per share. What is the average annual capital gain for the past two years? The average annual total return? -11.31 percent; -3.57 percent
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How can the percentage return on a stock be defined? Dollar return/Money invested Maria bought a stock one year ago for $16 a share. The stock pays quarterly dividends of $0.12 and is currently valued at $17 a share. How is the percentage return computed? [$17 - $16 + (4 × $0.12)]/$16 What type of relationship exists between risk and expected return? Positive How is the term "dollar return" defined? Amount of profit or loss from an investment expressed in dollars A stock returned 13 percent, 8 percent, -16 percent, and 1 percent annually for the past four years, respectively. What is the arithmetic average return? 1.50 percent Roger purchased a stock for $16 a share. The stock paid a $1 annual dividend and increased in price by $2 a year for the following three years. What is the arithmetic average annual capital gain? The arithmetic average annual total return? 11.20 percent; 16.81 percent The percentage total return on a stock investment is expressed as a percentage of what? Initial investment
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Theo purchased a stock at $28 a share and sold it six months later for $23 a share. He received a $0.75 dividend. How is his percentage return calculated? ($23 - $28 + $0.75)/$28 What is a geometric mean return? The equivalent return that is compounded for N periods For the past three years, a stock had annual returns of 14 percent, -32 percent, and 4 percent. What is the average arithmetic return? -4.67 percent A stock provided annual returns of 11.2 percent, 16.8 percent, and 0.3 percent for the past three years. What is the geometric mean return? 9.22 percent How can you best describe the relationship between the performance of long-term Treasury bonds and the S&P 500 during the period 2000-2012? When one asset class incurred a loss, the other class had a positive rate of return. Which of these is an accurate measure of returns that is used in performance analysis? Geometric mean return
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How is standard deviation defined in relation to investments? Measure of past return volatility, or risk The annual returns on a stock for the past four years are: 5.2 percent, -16.8 percent, 22.1 percent, and 11.4 percent. What is the geometric mean return? 4.46 percent Which one of these is correct regarding the standard deviation formula? The deviations must be squared to eliminate all negative values. Which of these best summarizes market performance for the period 1950-2012? The returns on the S&P 500 were more volatile than long-term Treasury bond returns but produced a higher average return in the long-run. For the past three years, a stock returned 11 percent, 6 percent, and 22 percent. What is the standard deviation? 8.19 percent Based on actual performance for the period 1950-2017, which one of the following displayed the least amount of risk and why? Select the best answer. T-bills as their returns were less volatile. What does standard deviation measure? total risk
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Which of these statements regarding the standard deviation formula is correct? - N is the total number of returns. - The average return is an arithmetic average. - (N - 1) is used when computing historical standard deviations. he S&P 500 had the highest decade average return for which period? 1950s The variance of the returns on an individual stock is 0.060565. What is the standard deviation? 24.61 percent Based on returns and their volatility for the period 1950-2012, what can be implied about the risk level of long-term Treasury bonds? Long-term Treasury bonds are riskier than Treasury bills. Which of the following is considered the risk-free asset? Treasury Bills Risk and expected return are ______ correlated. positively
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Risk, as it is used in the coefficient of variation (CoV), is best defined as a measure of which one of these? Volatility of returns Which of these will calculate the coefficient of variation (CoV) for a security? Standard deviation/Average return Which of these correctly describe the returns on long-term Treasury bonds for the period 1950-2017? Select all that apply. - Higher returns than T-bill returns over the period - More volatile than T-bill returns on an annual basis A bond has a standard deviation of 10.7 percent and an average rate of return of 6.4 percent. What is the coefficient of variation (CoV)? 1.67 True or false: T-bills are considered to be risk-free because their standard deviation of returns is always zero. False Which statement is true? The higher the long-term rate of return on an asset class, the higher its risk level. What is the definition of the coefficient of variation? Measure of total risk to reward
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How can firm-specific risk be defined? Risk that can be reduced by diversification A stock has a variance of 0.02468, a current price of $28 a share, and an average rate of return of 14.4 percent. How is the coefficient of variation (CoV) computed? CoV =(0.02468^1/2)/0.144 Which of the following are examples of diversifiable risk? - Decreased demand for electric cars - Fraud committed by company management For the past three years a stock has provided an average return of 11.6 percent with a variance of 0.02789. What is the coefficient of variation (CoV)? 1.44 Stock investors cannot avoid which type of risk? market risk What is firm-specific risk? Risk that affects only one firm or one industry
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What is the primary focus of modern portfolio theory (MPT)? Minimizing portfolio risk for a given level of return Which of the following exemplifies market risk? - A decrease in GDP output - An increase in inflation - An increase in taxes Nicholas is less risk-adverse than your average investor; returns are his primary investment concern. Which one of these represents an optimal portfolio for him? 11% return; 8% standard deviation What type of risk exists in a fully-diversified portfolio? Market risk only Which of these sets represents an optimal portfolio? - 11.5 percent return; 17 percent standard deviation - 11 percent return; 15 percent standard deviation What are the characteristics of an efficient portfolio? Maximum expected return for a given level of risk What is the shape of the efficient frontier and what does this imply?
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Upward-sloping; direct relationship between risk and return Modern portfolio theory (MPT) is designed to achieve which one of these? Highest return for a given level of risk Which set of securities will provide the least amount of diversification given their correlation values? Stocks A and B; 0.49 Marta is risk-adverse, which is her primary investment concern. Which one of these represents an optimal portfolio for her? 8 percent return; 7 percent standard deviation How is correlation defined? Measure of the co-movement between the returns on two variables Which of these represents an optimal portfolio comprised of two stocks? - 14.9 percent return; 25.4 percent standard deviation - 14.3 percent return; 24.8 percent standard deviation What does a correlation value of +0.9 indicate? The stock returns tend to move closely, although not perfectly, together.
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On a graph with expected return on the vertical axis and standard deviation on the horizontal axis, where is an efficient portfolio located? At the highest return achievable for any selected standard deviation What determines the weights to be used in computing a portfolio rate of return? Select an answer that applies to both equal and unequal portfolio allocations. Market value of each security expressed as a percentage of the total portfolio value Assume a portfolio with a return of 12 percent with a standard deviation of 18 percent is an efficient portfolio. Which one of these is most apt to also be an efficient portfolio? 13 percent return; 19 percent standard deviation Lew has a portfolio comprised of $3,000 of stock A, $5,000 of stock B, and $2,000 of stock C. How is the portfolio weight of stock C computed? $2,000/($3,000 + $5,000 + $2,000) You want to invest in two stocks that will provide you with the most diversified portfolio. You should select the two stocks with which one of these correlation values? -0.34 True or false: Total risk can be reduced by combining two perfectly correlated stocks. False Which of these defines correlation?
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Statistical value ranging from -1 to +1 What does a correlation value of zero indicate? No relationship between the co-movements of the security returns Which one of these is the correct formula for computing the return on a portfolio comprised of unequal amounts of stocks A, B, and C? Rp = (wA × RA) + (wB × RB) + (wC × RC) Luther invested $1,500 in stock A with a return of 11.6 percent, $500 in stock B with a return of 19 percent, and $1,000 in bond C with a return of 6.7 percent. What is the portfolio return? 11.20 percent How does correlation relate to total risk? Total risk can be lowered by eliminating firm-specific risk, which is achieved by combining securities with low, or negative correlations. an investor who purchases a high-risk investment should expect to earn a higher rate of return over which period of time? long term dollar return earned includes any capital gain (or loss) that occurred as well as any income that you received over the period.
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dollar return = = capital gain or loss + income = (ending value - beginning value) + income the percentage total return on a stock investment is expressed as a percentage of what? initial investment maria bought a stock one year ago for $16 a share. the stock pays quarterly dividends of $0.12 and is currently valued at $17 a share. How is the percentage return computed? [$17-$16 + (4x0.12)]/$16 how can the percentage return on a stock be defined? dollar return/ money invested what type of risk exists in a fully-diversified portfolio? market risk only what is a geometric mean return? the equivalent return that is compounded for N periods. standard deviation a measure of past return volatility, or risk, of an investment.
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what does standard deviation measure? total risk the deviations must be squared to eliminate all ______________ . negative values market risk applies to _____________. all firms and individuals how can firm-specific risk be defined? risk that can be reduced by diversification what type of relationship exists between risk and expected return? positive lew has a portfolio comprised of $3,000 of stock A, $5,000 of stock B, and $2,000 of stock C. How is the portfolio weight of stock C computed? $2,000/($3,000+$5,000+$2,000) _____________ are riskier than Treasury bills. Long-term Treasury bonds
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correlation a measurement of the co-movement between two variables that ranges between -1 and +1. market risk the portion of total risk that is attributable to overall economic factors. Modern portfolio theory (MPT) is designed to achieve ________________. highest return for a given level of risk what is the shape of the efficient frontier and what does this imply? Upward-sloping; direct relationship between risk and return how to calculate the coefficient of variation (CoV) for a security? standard deviation/average return investing in a single stock can be riskier than ______________. investing in the S&P500 the higher the long-term rate of return on an asset class, _________________. the higher its risk level
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Percentage return Which of these is the dollar return characterized as a percentage of money invested? When people purchase a stock, they do not know what their return is going to be—either short term or in the long run. Which of these is a measure of risk to reward earned by an investment over a specific period of time? Coefficient of variation Firm specific risk Which of the following is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification? Which of these is the portion of total risk that is attributable to overall economic factors? market risk Which of the following is another term for market risk? nondiversifiable risk Which of the following is the correct ranking from least risky to most risky? Treasury bills, long-term Treasury bonds, stocks
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If you observe a high variability in a stock's returns you can infer that the stock is very risky. true There is a positive relationship between risk and return. true Total risk is measured by the standard deviation. true How is the term "dollar return" defined? Amount of profit or loss from an investment expressed in dollars The price of a stock at the end of each of the past three years has been $14, $12, and $11 with $11 being the latest price. The stock pays an annual dividend of $1 per share. What is the average annual capital gain for the past two years? The average annual total return? -11.31 percent; -3.57 percent Rationale: Average annual capital gain = [(-$2/$14) + (-$1/$12)]/2 = -0.1131 = -11.31%; Average annual return = [(- $1/$14) + ($0/$12)]/2 = -0.0357 = -3.57% True or false: A high-risk investment can underperform a low-risk investment over the short term. True Rationale: A high risk investment can underperform a low risk investment over the short term.
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Theo purchased a stock at $28 a share and sold it six months later for $23 a share. He received a $0.75 dividend. How is his percentage return calculated? ($23 - $28 + $0.75)/$28 What is the relationship between risk and return? The higher the risk, the higher the expected return. The dollar return on a stock investment includes which of these? Dividend income and capital gains or losses Roger purchased a stock for $16 a share. The stock paid a $1 annual dividend and increased in price by $2 a year for the following three years. What is the arithmetic average annual capital gain? The arithmetic average annual total return? 11.20 percent; 16.81 percent Rationale: Average capital gain = ($2/$16 + $2/$18 + $2/$20)/3 = 11.20% Average total return = ($3/16 + $3/$18 + $3/$20)/3 = 16.81% Which one of these defines an arithmetic average return? Sum of all returns divided by the number of returns
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A stock returned 13 percent, 8 percent, -16 percent, and 1 percent annually for the past four years, respectively. What is the arithmetic average return? 1.50 percent Rationale: (13% + 8% - 16% + 1%)/4 = 1.5% An arithmetic average return can be which of these? Select all that apply. -Percentage return -Return for any period of time -Dollar return The annual returns on a stock for the past four years are: 5.2 percent, -16.8 percent, 22.1 percent, and 11.4 percent. What is the geometric mean return? 4.46 percent Rationale: [(1.052)(0.832)(1.221)(1.114)]1/4 -1 = 0.0446 = 4.46% Which rate of return is most appropriate for statistical analysis and represents the expected return in any given year? Arithmetic average return Rationale: The geometric mean return best illustrates historical performance over time.
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For the past three years, a stock had annual returns of 14 percent, -32 percent, and 4 percent. What is the average arithmetic return? -4.67 percent Rationale: (14% - 32% + 4%)/3 = -4.67% The S&P 500 had the highest decade average return for which period? 1950s Rationale: The S&P 500 had an average return of 19 percent for the 1990s and 20.9 percent for the 1950s. A stock provided annual returns of 11.2 percent, 16.8 percent, and 0.3 percent for the past three years. What is the geometric mean return? 9.22 percent Rationale: [(1.112)(1.168)(1.003)](1/3) - 1 = 0.0922 = 9.22% Which rate of return best illustrates the historical performance of a security over time? Geometric mean return Standard deviation squared is known as [BLANK 1] Blank 1: variance
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Which of these best summarizes market performance for the period 1950-2012? The returns on the S&P 500 were more volatile than long-term Treasury bond returns but produced a higher average return in the long-run. How is standard deviation defined in relation to investments? Measure of past return volatility, or risk What benefit is derived from the use of standard deviation when measuring rates of return? Standard deviation quantifies total risk with higher values representing greater risk. For the past three years, a stock returned 11 percent, 6 percent, and 22 percent. What is the standard deviation? 8.19 percent Rationale: Average = (0.11 + 0.06 + 0.22)/3 = 0.13; σ = {[(0.11 - 0.13)2 + (0.06 - 0.13)2 + (0.22 - 0.13)2]/(3 - 1)}1/2 = 0.0819 = 8.19% Based on returns and their volatility for the period 1950-2012, what can be implied about the risk level of long-term Treasury bonds? Long-term Treasury bonds are riskier than Treasury bills. Based on annual returns for the years 2000-2012, which one of the following exhibited the greatest risk and why?
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S&P 500 because the highest annual return was 28.7 percent and the lowest annual return was -35.5 percent. Which of these statements regarding the standard deviation formula is correct? Select all that apply. -(N - 1) is used when computing historical standard deviations. Rationale: (N - 1) is used when computing historical standard deviations. -The average return is an arithmetic average. -N is the total number of returns. Which of the following is considered the risk-free asset? Treasury Bills The variance of the returns on an individual stock is 0.060565. What is the standard deviation? 24.61 percent Rationale: σ = (0.060565)1/2 = 0.2461 = 24.61% Which of these correctly describe the returns on long-term Treasury bonds for the period 1950-2012? Select all that apply. -Higher returns than T-bill returns over the period
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Rationale: Long-term Treasury bonds produced a higher rate of return than T-bills for the period. -More volatile than T-bill returns on an annual basis Rationale: Long-term Treasury bonds were more volatile than T-bills. Which statement is true? Investing in a single stock is generally riskier than investing in the S&P 500. Based on actual performance for the period 1950-2012, which one of the following displayed the least amount of risk and why? Select the best answer. T-bills as their returns were less volatile. Which one of these is correct regarding the standard deviation formula? The deviations must be squared to eliminate all negative values. True or false: T-bills are considered to be risk-free because their standard deviation of returns is always zero. False Rationale: Risk-free assets have low levels of volatility as measured by standard deviation. Over a decade, T-bills generally have a standard deviation less than 3%.
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Risk and expected return are ________ correlated. positively The difference in standard deviations between individual companies and the entire market is due to mostly the principle of [BLANK 1] Blank 1: diversification What does an increase in the coefficient of variation (CoV) for a security indicate? An increase in the amount of risk per unit of return Which statement is true? The higher the long-term rate of return on an asset class, the higher its risk level. Rationale: Risk and return are directly related. A stock has a variance of 0.02468, a current price of $28 a share, and an average rate of return of 14.4 percent. How is the coefficient of variation (CoV) computed? CoV = (0.02468[1/2])/0.144 Risk, as it is used in the coefficient of variation (CoV), is best defined as a measure of which one of these? Volatility of returns
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The coefficient of variance is Standard Deviation divided by: Average Return Which of these will calculate the coefficient of variation (CoV) for a security? Standard deviation/Average return What is the definition of the coefficient of variation? Measure of total risk to reward For the past three years a stock has provided an average return of 11.6 percent with a variance of 0.02789. What is the coefficient of variation (CoV)? 1.44 Rationale: CoV = (0.027891/2)/0.116 = 1.44 Which of the following exemplifies market risk? Select all that apply. -An increase in inflation Rationale: This is market risk as it affects the entire market. -An increase in taxes
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Rationale: This is market risk as it affects the entire market. -A decrease in GDP output Rationale: This is market risk at it affects the entire market. Stock investors cannot avoid which type of risk? Market risk Market risk applies to which of the following? All firms and individuals What is firm-specific risk? Risk that affects only one firm or one industry What is the primary focus of modern portfolio theory (MPT)? Minimizing portfolio risk for a given level of return Marta is risk-adverse, which is her primary investment concern. Which one of these represents an optimal portfolio for her? 8 percent return; 7 percent standard deviation
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Rationale: Since Marta's main concern is low risk, she should select the portfolio with the highest return given the lowest standard deviation. Which of these represents an optimal portfolio comprised of two stocks? Select all that apply. -14.3 percent return; 24.8 percent standard deviation Rationale: This portfolio has the highest return for this level of risk. -14.9 percent return; 25.4 percent standard deviation Rationale: This portfolio has the highest return for this level of risk. Which of the following are examples of diversifiable risk? Select all that apply. -Decreased demand for electric cars Rationale: This is firm-specific risk, which is diversifiable. -Fraud committed by company management Rationale: This is firm-specific risk, which is diversifiable.
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What are the characteristics of an efficient portfolio? Maximum expected return for a given level of risk How is market risk defined? The portion of total risk that is attributable to over-all economic factors Modern portfolio theory (MPT) is designed to achieve which one of these? Highest return for a given level of risk Nicholas is less risk-adverse than your average investor; returns are his primary investment concern. Which one of these represents an optimal portfolio for him? 11% return; 8% standard deviation Which of the following indicates a portfolio is becoming more diversified? Decreasing portfolio standard deviation Which of these sets represents an optimal portfolio? Select all that apply. 11.5 percent return; 17 percent standard deviation 11 percent return; 15 percent standard deviation Rationale: This portfolio offers the highest return for the given level of risk. -11 percent return; 15 percent standard deviation
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Rationale: This portfolio offers the highest return for the given level of risk. Assume a portfolio with a return of 12 percent with a standard deviation of 18 percent is an efficient portfolio. Which one of these is most apt to also be an efficient portfolio? 13 percent return; 19 percent standard deviation Rationale: This could be an efficient portfolio as both its return and risk levels are higher than the given efficient portfolio. On a graph with expected return on the vertical axis and standard deviation on the horizontal axis, where is an efficient portfolio located? At the highest return achievable for any selected standard deviation How is correlation defined? Measure of the co-movement between the returns on two variables Which one of these best describes diversification? Purchasing stocks in eight different industries What does a correlation value of zero indicate? No relationship between the co-movements of the security returns
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You want to invest in two stocks that will provide you with the most diversified portfolio. You should select the two stocks with which one of these correlation values? -0.34 Which of these defines correlation? Statistical value ranging from -1 to +1 True or false: Total risk can be reduced by combining two perfectly correlated stocks. False Rationale: Total risk can be lowered by combining securities with low or negative correlation values. What does a correlation value of +0.9 indicate? The stock returns tend to move closely, although not perfectly, together. Rationale: A correlation of +1 indicates stocks moving in sync with each other. Which set of securities will provide the least amount of diversification given their correlation values? Stocks A and B; 0.49 Rationale:
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The higher the correlation value, the more the stocks tend to move together and the less diversification that is achieved. Luther invested $1,500 in stock A with a return of 11.6 percent, $500 in stock B with a return of 19 percent, and $1,000 in bond C with a return of 6.7 percent. What is the portfolio return? 11.20 percent How does correlation relate to total risk? Total risk can be lowered by eliminating firm-specific risk, which is achieved by combining securities with low, or negative correlations. What determines the weights to be used in computing a portfolio rate of return? Select an answer that applies to both equal and unequal portfolio allocations. Market value of each security expressed as a percentage of the total portfolio value How is the capital gain or loss on a stock investment computed? Ending stock value - Beginning stock value Which one of these is the correct formula for computing the return on a portfolio comprised of unequal amounts of stocks A, B, and C? Rp = (wA × RA) + (wB × RB) + (wC × RC) How is the total dollar return on a stock investment calculated? (Ending stock value-Beginning stock value) + Dividend income
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Which of these correctly describe the returns on long-term Treasury bonds for the period 1950-2012? Select all that apply. About us About Quizlet How Quizlet works Careers Advertise with us Get the app For students Flashcards Test Learn Solutions Q-Chat: AI Tutor Spaced Repetition Modern Learning Lab For teachers Live Checkpoint Blog What is the relationship between risk and return? the higher the risk, the higher the return
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An investor who purchases a high-risk investment should expect to earn a higher rate of return over which period of time? Long term How is the term "dollar return" defined? Amount of profit or loss from an investment expressed in dollars How is the capital gain or loss on a stock investment computed? Ending stock value - Beginning stock value The price of a stock at the end of each of the past three years has been $14, $12, and $11 with $11 being the latest price. The stock pays an annual dividend of $1 per share. What is the average annual capital gain for the past two years? The average annual total return? -11.31 percent; -3.57 percent Reason: Average annual capital gain = [(-$2/$14) + (-$1/$12)]/2 = -0.1131 = -11.31%; Average annual return = [(- $1/$14) + ($0/$12)]/2 = -0.0357 = -3.57% What type of relationship exists between risk and expected return? Positive How can the percentage return on a stock be defined? Dollar return/Money invested
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True or false: A high-risk investment can underperform a low-risk investment over the short term. true The dollar return on a stock investment includes which of these? Dividend income and capital gains or losses How is the total dollar return on a stock investment calculated? (Ending stock value - Beginning stock value) + Dividend income Roger purchased a stock for $16 a share. The stock paid a $1 annual dividend and increased in price by $2 a year for the following three years. What is the arithmetic average annual capital gain? The arithmetic average annual total return? 11.20 percent; 16.81 percent Reason: Average capital gain = ($2/$16 + $2/$18 + $2/$20)/3 = 11.20% Average total return = ($3/$16 + $3/$18 + $3/$20)/3 = 16.81% The percentage total return on a stock investment is expressed as a percentage of what? Initial investment Maria bought a stock one year ago for $16 a share. The stock pays quarterly dividends of $0.12 and is currently valued at $17 a share. How is the percentage return computed? [$17 - $16 + (4 × $0.12)]/$16
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A stock returned 13 percent, 8 percent, -16 percent, and 1 percent annually for the past four years, respectively. What is the arithmetic average return? 1.50 percent Reason: (13% + 8% - 16% + 1%)/4 = 1.5% What is a geometric mean return? The equivalent return that is compounded for N periods Which rate of return is most appropriate for statistical analysis and represents the expected return in any given year? Arithmetic average return Theo purchased a stock at $28 a share and sold it six months later for $23 a share. He received a $0.75 dividend. How is his percentage return calculated? ($23 - $28 + $0.75)/$28 For the past three years, a stock had annual returns of 14 percent, -32 percent, and 4 percent. What is the average arithmetic return? -4.67 percent Reason: (14% - 32% + 4%)/3 = -4.67% Which of these is an accurate measure of returns that is used in performance analysis? Geometric mean return
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The annual returns on a stock for the past four years are: 5.2 percent, -16.8 percent, 22.1 percent, and 11.4 percent. What is the geometric mean return? 4.46 percent Reason: [(1.052)(0.832)(1.221)(1.114)]1/4 - 1 = 0.0446 = 4.46% Which of these best summarizes market performance for the period 1950-2012? The returns on the S&P 500 were more volatile than long-term Treasury bond returns but produced a higher average return in the long-run. Which rate of return best illustrates the historical performance of a security over time? Geometric mean return Standard deviation squared is known as Blank 1: variance Which one of these is correct regarding the standard deviation formula? The deviations must be squared to eliminate all negative values. What does standard deviation measure? total risk
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A stock provided annual returns of 11.2 percent, 16.8 percent, and 0.3 percent for the past three years. What is the geometric mean return? 9.22 percent Reason: [(1.112)(1.168)(1.003)1/3 - 1 = 0.0922 = 9.22% How can you best describe the relationship between the performance of long-term Treasury bonds and the S&P 500 during the period 2000-2012? When one asset class incurred a loss, the other class had a positive rate of return. What benefit is derived from the use of standard deviation when measuring rates of return? Standard deviation quantifies total risk with higher values representing greater risk. Which of these statements regarding the standard deviation formula is correct? Select all that apply. The average return is an arithmetic average. N is the total number of returns. (N - 1) is used when computing historical standard deviations. How is standard deviation defined in relation to investments? Measure of past return volatility, or risk For the past three years, a stock returned 11 percent, 6 percent, and 22 percent. What is the standard deviation? 8.19 percent
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Reason: Average = (0.11 + 0.06 + 0.22)/3 = 0.13; σ = {[(0.11 - 0.13)2 + (0.06 - 0.13)2 + (0.22 - 0.13)2]/(3 - 1)}1/2 = 0.0819 = 8.19% Based on returns for the years 2000-2009, which one of the following exhibited the greatest risk? Stock The variance of the returns on an individual stock is 0.060565. What is the standard deviation? 24.61 percent Reason: σ = (0.060565)1/2 = 0.2461 = 24.61% Based on returns and their volatility for the period 1950-2017, what can be implied about the risk level of long-term Treasury bonds? Long-term Treasury bonds are riskier than Treasury bills. Based on actual performance for the period 1950-2017, which one of the following displayed the least amount of risk and why? Select the best answer. T-bills as their returns were less volatile. True or false: T-bills are considered to be risk-free because their standard deviation of returns is always zero. False
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Which statement is true? Investing in a single stock is generally riskier than investing in the S&P 500. The higher the long-term rate of return on an asset class, the higher its risk level. Risk and expected return are Blank______ correlated. positively Which of these correctly describe the returns on long-term Treasury bonds for the period 1950-2017? Select all that apply. More volatile than T-bill returns on an annual basis Higher returns than T-bill returns over the period Which of the following is considered the risk-free asset? Treasury Bills The difference in standard deviations between individual companies and the entire market is due to mostly the principle of diversification Risk, as it is used in the coefficient of variation (CoV), is best defined as a measure of which one of these? Volatility of returns
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A stock has a variance of 0.02468, a current price of $28 a share, and an average rate of return of 14.4 percent. How is the coefficient of variation (CoV) computed? CoV = (0.024681/2)/0.144 The coefficient of variance is Standard Deviation divided by: Average Return A bond has a standard deviation of 10.7 percent and an average rate of return of 6.4 percent. What is the coefficient of variation (CoV)? 1.67 Reason: CoV = 0.107/0.064 = 1.67 What is the definition of the coefficient of variation? Measure of total risk to reward Which of these will calculate the coefficient of variation (CoV) for a security? Standard deviation/Average return Stock investors cannot avoid which type of risk? market risk What does an increase in the coefficient of variation (CoV) for a security indicate?
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An increase in the amount of risk per unit of return For the past three years a stock has provided an average return of 11.6 percent with a variance of 0.02789. What is the coefficient of variation (CoV)? 1.44 Reason: CoV = (0.027891/2)/0.116 = 1.44 Which of the following indicates a portfolio is becoming more diversified? Decreasing portfolio standard deviation What type of risk exists in a fully-diversified portfolio? Market risk only What is firm-specific risk? Risk that affects only one firm or one industry Which one of these is correct? Firm-specific risk is diversifiable. Which one of these best describes diversification? Purchasing stocks in eight different industries
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How can firm-specific risk be defined? Risk that can be reduced by diversification How is market risk defined? The portion of total risk that is attributable to over-all economic factors Modern portfolio theory (MPT) is designed to achieve which one of these? Highest return for a given level of risk Nicholas is less risk-adverse than your average investor; returns are his primary investment concern. Which one of these represents an optimal portfolio for him? 11% return; 8% standard deviation Which of the following are examples of diversifiable risk? Select all that apply. Fraud committed by company management Decreased demand for electric cars Which of these represents an optimal portfolio comprised of two stocks? Select all that apply. 14.3 percent return; 24.8 percent standard deviation 14.9 percent return; 25.4 percent standard deviation Market risk applies to which of the following?
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All firms and individuals On a graph with expected return on the vertical axis and standard deviation on the horizontal axis, where is an efficient portfolio located? At the highest return achievable for any selected standard deviation What is the primary focus of modern portfolio theory (MPT)? Minimizing portfolio risk for a given level of return Marta is risk-adverse, which is her primary investment concern. Which one of these represents an optimal portfolio for her? 8 percent return; 7 percent standard deviation Which one of these is correct? Firm-specific risk is diversifiable. Which of these sets represents an optimal portfolio? Select all that apply. 11.5 percent return; 17 percent standard deviation 11 percent return; 15 percent standard deviation What are the characteristics of an efficient portfolio? Maximum expected return for a given level of risk
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What is the shape of the efficient frontier and what does this imply? Upward-sloping; direct relationship between risk and return You want to invest in two stocks that will provide you with the most diversified portfolio. You should select the two stocks with which one of these correlation values? -0.34 How is correlation defined? Measure of the co-movement between the returns on two variables What does a correlation value of zero indicate? No relationship between the co-movements of the security returns Assume a portfolio with a return of 12 percent with a standard deviation of 18 percent is an efficient portfolio. Which one of these is most apt to also be an efficient portfolio? 13 percent return; 19 percent standard deviation Which set of securities will provide the least amount of diversification given their correlation values? Stocks A and B; 0.49 Which of these defines correlation? Statistical value ranging from -1 to +1
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Which one of these is the correct formula for computing the return on a portfolio comprised of unequal amounts of stocks A, B, and C? Rp = (wA × RA) + (wB × RB) + (wC × RC) Lew has a portfolio comprised of $3,000 of stock A, $5,000 of stock B, and $2,000 of stock C. How is the portfolio weight of stock C computed? $2,000/($3,000 + $5,000 + $2,000) What does a correlation value of +0.9 indicate? the stock returns tend to move closely, although not perfectly, together How does correlation relate to total risk? Total risk can be lowered by eliminating firm-specific risk, which is achieved by combining securities with low, or negative correlations. What determines the weights to be used in computing a portfolio rate of return? Select an answer that applies to both equal and unequal portfolio allocations. Market value of each security expressed as a percentage of the total portfolio value Luther invested $1,500 in stock A with a return of 11.6 percent, $500 in stock B with a return of 19 percent, and $1,000 in bond C with a return of 6.7 percent. What is the portfolio return? 11.20 percent Reason:
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Rp = ($1,500/$3,000 × 0.116) + ($500/$3,000 × 0.19) + ($1,000/$3,000 × 0.067) = 0.1120 = 11.20% True or false: Total risk can be reduced by combining two perfectly correlated stocks. False
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Related Questions
What does the capital asset pricing model (CAPM) calculate?   a. The expected rate of return on an individual stock with respect to the risk-free rate of return b. The expected rate of return of an individual stock based on its overall risk c. The expected rate of return of an individual stock with respect to its market risk only d. The expected rate of return of an individual stock reflecting its financial risk Clear my choice
The value of an asset is the present value of the expected returns from the asset during theholding period. An investment will provide a stream of returns during this period, and it isnecessary to discount this stream of returns at an appropriate rate to determine the asset’spresent value. A dividend valuation model such as the following is frequent. where:Pi = the current price of Common Stock iD1 = the expected dividend in Period 1ki = the required rate of return on Stock igi = the expected constant-growth rate of dividends for Stock iA. Identify the three factors that must be estimated for any valuation model, and explain whythese estimates are more difficult to derive for common stocks than for bonds.B. Explain the principal problem involved in using a dividend valuation model to value :(1) companies whose operations are closely correlated with economic cycles.(2) companies that are of very large and mature.(3) companies that are quite small and are growing rapidly.
The sum of the expected dividend and the expected capital gains yield is called a. Required rate of return b. expected total return c. expected rate of return d. value of the stock e. realized rate of return
Calculate the dividend payment of a stock?
Estimate an investments future value?
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n the formula ke >= (D1/P0) + g, what does (D1/P0) represent? Select one: a. The expected capital gains yield from a common stock b. The interest payment from a bond c. The expected dividend yield from a common stock d. The dividend yield from a preferred stock
Provide answer
1. The rate at which a stock's price is expected to appreciate (or depreciate) is called the yield. A. current B. total C. dividend D. capital gains 2. The underlying assumption of the dividend growth model is that a stock is worth: A. the present value of the future income that the stock generates. B. the same amount to every investor regardless of his desired rate of return. C. an amount computed as the next annual dividend divided by the market rate of retum. D. an amount computed as the next annual dividend divided by the required rate of return. 3. The total rate of return earned on a stock is composed of which two of the following? 1. current yield II. yield to maturity III. dividend yield IV. capital gains yield A. I and II only B. I and IV only C. II and III only D. III and IV only 4. Which one of the following correctly defines the constant dividend growth model? A. R = (D₁ Po) + g B. Po = (D₁R) + g C. R=(Po Do) + g D. Po = Do ] (R-g) 5. How much are you willing to pay for one…
Please make sure the answers are clear n easy to read.
For the following stock investment, find (a) the total purchase price, (b) the total dividend amount, (c) the capital gain or loss, (d) the total return, and (e) the percentage return. Ignore broker and SEC fees. (a) What is the total purchase price? $ (b) What is the total dividend amount? (c) What is the capital gain or loss? (d) What is the total return on investment? (e) What is the percentage return? (Round to the nearest percent.) Number of shares Purchase price per share Dividend per share Sale price per share 70 $40 $2 $82
Identify the components of the total return of a stock. More than one answer may be correct. Multiple select question. Taxes Capital gains yield Dividend yield Past prices
The Expected Rate of Profit Formula looks at:     A. Expected Profit & Money Invested   B. Common Stock & Preferred Stock   C. Expected Profit & Bonds   D. All of the above
Which statement is false regarding the Capital Asset Pricing Model?      A. The beta coefficient of a stock is constant.   B. The risk free rate is usually based on the treasury bill yield.   C. Market risk premium is the difference between market return and the risk free rate.   D. The cost of retained earnings is equal to the cost of new shares issued.
The dividend yield (i.e. D1/P0) is a good measure of the expected return on a common stock under which of the following circumstances? g = 0 g > 0 g < 0 g is expected to remain constant over time under no circumstances
The required rate of return on a stock consists of two components, dividend growth rate on the stock measures which of the one component   Capital gains yield   Dividend yield   Market growth rate   Discount rate
Which one of the following is an example of mental accounting? Multiple Choice O associating a security's gains or losses based on its purchase price calculating the gain or loss on a security on a daily basis O computing the amount of tax due on the gain from a stock sale considering the gain realized when a stock pays a dividend comparing the gains and losses on a portfolio to those of the overall market
Illustrate the impact of changes in the dividend, the growth rate, the expected return on the market, and the beta on the value of a stock.
Which of the following is needed to calculate a firm’s WACC?    A. the cost of carrying inventory    B. the amount of capital necessary to make the investment    C. the cost of preferred stock    D. the probability distribution of expected returns E. both b and c
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