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Finance
Q:
You purchased 500 shares of A.M.J. Inc. common stock one year ago for $50 per share. You received a dividend of $2 per share today and decide to take your profits by selling at $54.50 per share. What is your holding period return?
A) 13.0%
B) 9.0%
C) 6.5%
D) 4.0%
Q:
Which of the following types of risk is diversifiable?
A) unsystematic, or company-unique risk
B) betagenic, or ecocentric risk
C) systematic risk
D) market risk
Q:
How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?
A) Wait until the stock market rises.
B) Increase the amount of money invested in the portfolio.
C) Purchase a variety of securities; i.e., diversify.
D) Purchase stocks that have exceptionally high standard deviations.
Q:
Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________.
A) standard deviation; beta
B) security market line; standard deviation
C) beta; standard deviation
D) beta; slope of the characteristic line
Q:
Assume that you expect to hold a $40,000 investment for one year. It is forecasted to have a year end value of $42,000 with a 30% probability; a year end value of $48,000 with a 45% probability; and a year end value of $60,000 with a 25% probability. What is the expected holding period return for this investment?
A) 50%
B) 25%
C) 23%
D) 18%
Q:
Beginning with an investment in one company's securities, as we add securities of other companies to our portfolio, which type of risk declines?
A) systematic risk
B) market risk
C) non-diversifiable risk
D) unsystematic risk
Q:
The prices for the National Gasworks Corporation for the second quarter of 2012 are given below. The price of the stock on April 1, 2012 was $130. Find the holding period return for an investor who purchased the stock on April 1, 2012 and sold it the last day of June 2012.Month EndPriceApril$125.00May138.50June132.75A) -4.2%B) -3.7%C) 2.1%D) 3.7%
Q:
You hold a portfolio with the following securities:SecurityValueBetaExpected ReturnDriscol Corporation20%3.2036.0%Evening Corporation40%1.6020.0%Frolic Corporation40%.206.0%What is the expected return for the portfolio?A) 17.60%B) 20.67%C) 23.54%D) 28.59%
Q:
If we are able to fully diversify, what is the appropriate measure of risk to use?
A) expected return
B) standard deviation
C) beta
D) risk-free rate of return
Q:
Which of the following is/are true?
A) Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.
B) Two points on the Characteristic Line are the T-bill and the market portfolio.
C) The greater the total risk of an asset, the greater the expected return.
D) All securities have a beta between 0 and 1.
Q:
If you hold a portfolio made up of the following stocks:Investment ValueBetaStock X$4,0001.5Stock Y$5,0001.0Stock Z$1,000.5What is the beta of the portfolio?A) 1.33B) 1.24C) 1.15D) 1.00
Q:
A stock's beta is a measure of its
A) unsystematic risk.
B) systematic risk.
C) company-unique risk.
D) diversifiable risk.
Q:
Beta is a statistical measure of
A) unsystematic risk.
B) total risk.
C) the standard deviation.
D) the relationship between an investment's returns and the market return.
Q:
A well-diversified portfolio includes investments in 50 securities. The portfolio's systematic risk is likely to be about
A) 50% of the total risk.
B) 40% of the total risk.
C) 25% of the total risk.
D) zero because risk is eliminated with a portfolio of 50 securities or more.
Q:
Most stocks have betas between
A) -1.00 and 1.00.
B) 0.00 and 1.00.
C) 0.60 and 1.60.
D) 1.00 and 2.00.
Q:
Of the following, which differs in meaning from the other three?
A) systematic risk
B) market risk
C) undiversifiable risk
D) asset-unique risk
Q:
You are considering buying some stock in Continental Grain. Which of the following are examples of non-diversifiable risks?
I. Risk resulting from a general decline in the stock market.
II. Risk resulting from a possible increase in income taxes.
III. Risk resulting from an explosion in a grain elevator owned by Continental.
IV. Risk resulting from a pending lawsuit against Continental.
A) I and II
B) III and IV
C) I only
D) II, III, and IV
Q:
You are considering investing in Ford Motor Company. Which of the following are examples of diversifiable risk?
I. Risk resulting from possibility of a stock market crash.
II. Risk resulting from uncertainty regarding a possible strike against Ford.
III. Risk resulting from an expensive recall of a Ford product.
IV. Risk resulting from interest rates decreasing.
A) I only
B) I and IV
C) I, II, III, IV
D) II, III
Q:
Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12. Wendy sold the shares on 12/31/12 for $3.45. Genetics stock has a beta of 1.9, the risk-free rate of return is 4%, and the market risk premium is 9%. Wendy's holding period return is
A) 15.0%.
B) 16.5%.
C) 17.6%.
D) 21.1%.
Q:
An investor currently holds the following portfolio:Amount Invested8,000 shares of Stock A$16,000Beta = 1.315,000 shares of Stock B$48,000Beta = 1.825,000 shares of Stock C$96,000Beta = 2.2The investor is worried that the beta of his portfolio is too high, so he wants to sell some stock C and add stock D, which has a beta of 1.0, to his portfolio. If the investor wants his portfolio to have a beta of 1.72, how much stock C must he replace with stock D?A) $18,000B) $24,000C) $31,000D) $36,000
Q:
Which of the following statements is MOST correct concerning diversification and risk?
A) Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio.
B) Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category.
C) Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated.
D) Asset allocation is important for pension funds but not for individual investors.
Q:
Which of the following statements is MOST correct concerning diversification and risk?
A) Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.
B) Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk.
C) Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification.
D) Proper diversification generally results in the elimination of risk.
Q:
The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.
Q:
The market rewards the patient investor, for between 1926 and 2008, there has never been a time when an investor lost money if she held an all-stock portfolio for ten years.
Q:
Because risk is measured by variability of returns, how long we hold our investments does not matter very much when it comes to reducing risk.
Q:
Beta represents the average movement of a company's stock returns in response to a movement in the market's returns.
Q:
The slope of the characteristic line of a security is that security's beta.
Q:
The characteristic line for any well-diversified portfolio is horizontal.
Q:
The relevant risk to an investor is that portion of the variability of returns that cannot be diversified away.
Q:
Beta is a measurement of the relationship between a security's returns and the general market's returns.
Q:
Portfolio performance is determined mainly by stock selection and market timing, with less emphasis on asset allocation.
Q:
The beta of a T-bill is one.
Q:
The beta of a T-bill is zero.
Q:
Unique security risk can be eliminated from an investor's portfolio through diversification.
Q:
A security with a beta of one has a required rate of return equal to the overall market rate of return.
Q:
A well-diversified portfolio typically has systematic risk equal to about 40% of the portfolio's total risk.
Q:
Total risk equals systematic risk plus unsystematic risk.
Q:
Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities.
Q:
An all-stock portfolio is more risky than a portfolio consisting of all bonds.
Q:
Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds.
Q:
A stock with a beta of 1.4 has 40% more variability in returns than the average stock.
Q:
Asset allocation is not recommended by financial planners because mixing different types of assets, such as stocks with bonds, makes it more difficult to track performance and adjust portfolios to changing market conditions.
Q:
Diversifying among different kinds of assets is called asset allocation.
Q:
A stock with a beta of 1 has systematic or market risk equal to the "typical" stock in the marketplace.
Q:
Proper diversification generally results in the elimination of risk.
Q:
The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.
Q:
If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the highest risk investment?A) common stock of large firmsB) U.S. Treasury billsC) common stock of small firmsD) long-term government bonds
Q:
If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the least risky investment?
A) common stock of large firms
B) U.S. Treasury bills
C) common stock of small firms
D) long-term government bonds
Q:
The category of securities with the highest historical risk premium is
A) large company stocks.
B) small company stocks.
C) government bonds.
D) small company corporate bonds.
Q:
Of the following different types of securities, which is typically considered most risky?
A) long-term corporate bonds
B) long-term government bonds
C) common stocks of large companies
D) common stocks of small companies
Q:
Investment A has an expected return of 15% per year, while Investment B has an expected return of 12% per year. A rational investor will choose
A) Investment A because of the higher expected return.
B) Investment B because a lower return means lower risk.
C) Investment A if A and B are of equal risk.
D) Investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B.
Q:
Negative historical returns are not possible during periods of high volatility (high standard deviations of returns) due to the risk-return trade-off.
Q:
Investment A and Investment B both have the same expected return, but Investment A is more risky than Investment B. In the technical jargon of modern portfolio theory, Investment A is said to "dominate" Investment B.
Q:
Small company stocks have historically had higher average annual returns than large company stocks, and also a higher risk premium.
Q:
Historically, investments with the highest returns have the lowest standard deviations because investors do not like risk.
Q:
You are considering the three securities listed below.ReturnsProbabilityStock AStock BStock C20%2%-3%5%50%10%8%8%30%15%20%12%a. Calculate the expected return for each security.b. Calculate the standard deviation of returns for each security.c. Compare Stock A with Stocks B and C. Is Stock A preferred over the others?
Q:
You are considering a security with the following possible rates of return: Probability
Return (%) 0.15
9.5 0.25
13.6 0.50
14.9 0.10
25.3 a. Calculate the expected rate of return.
b. Calculate the standard deviation of the returns.
Q:
How is risk defined?
Q:
Bay Land, Inc. has the following distribution of returns: State
Return
Probability Boom
0.3
0.25 Normal
0.4
0.15 Bust
0.3
0.30 Assuming that these returns are normally distributed, what is the probability that Bay Land, Inc. will return less than 7.25%? Show all work, and clearly explain and state your answer.
Q:
You are given the following probability distribution for XYZ common stock's returns during the next year, which are assumed to be normally distributed. Show all work below, and complete the following:ReturnProbability12%20%16%60%20%20%a. Calculate the standard deviation of the returns, and round to the nearest one-half percent.b. Draw a graphical representation of XYZ's normal distribution below (ye old bell-shaped curve). LABEL THE AXES OF THE GRAPH OR THE FOLLOWING RESULTS WILL BE MEANINGLESS. Using your result in part A for the standard deviation (rounded to the nearest one-half percent)explain and indicate on the graph, the probability that XYZ will return more than 13.5%, assuming a normal distribution.
Q:
You must add one of two investments to an already well- diversified portfolio.Security ASecurity BExpected Return = 14%Expected Return = 12%Standard Deviation ofStandard Deviation ofReturns = 15.0%Returns = 11%Beta = 1.5Beta = 1.5If you are a risk-averse investor, which one is the better choice?A) Security AB) Security BC) Either security would be acceptable.D) Cannot be determined with information given
Q:
Assume that you expect to hold a $20,000 investment for one year. It is forecasted to have a year end value of $21,000 with a 30% probability; a year end value of $24,000 with a 45% probability; and a year end value of $30,000 with a 25% probability. What is the standard deviation of the holding period return for this investment?
A) 12.06%
B) 14.36%
C) 16.36%
D) 33.45%
Q:
You must add one of two investments to an already well- diversified portfolio.Security ASecurity BExpected Return = 14%Expected Return = 14%Standard Deviation ofStandard Deviation ofReturns = 15.8%Returns = 19.7%Beta = 1.8Beta = 1.5If you are a risk-averse investor, which one is the better choice?A) Security AB) Security BC) Either security would be acceptable.D) Cannot be determined with information given
Q:
You are going to invest all of your funds in one of three projects with the following distribution of possible returns:PROJECT 1 PROJECT 2ProbabilityReturnStandard DeviationBetaProbabilityReturnStandard DeviationBeta50% Chance22%12%1.130% Chance36%19.5%1.050% Chance-4%40% Chance10.5%30% Chance-20%PROJECT 3ProbabilityReturnStandard DeviationBeta10% Chance28%12%1.270% Chance18%20% Chance-8%If you are a risk averse investor, which one should you choose?A) Project 1B) Project 2C) Project 3D) Either Project 1 or Project 2 because they have the same expected return
Q:
You are thinking of adding one of two investments to an already well- diversified portfolio.Security ASecurity BExpected Return = 14%Expected Return = 16%Standard Deviation ofStandard Deviation ofReturns = 16%Returns = 20%Beta = 1.2Beta = 1.2If you are a risk-averse investor, which one is the better choice?A) Security AB) Security BC) Either security would be acceptable because they have the same beta.D) Security B, but only if Security B's required return is greater than 12%.
Q:
Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return. What is the standard deviation of return for this investment?
A) 5.89%
B) 16.1%
C) 2.43%
D) 15.7%
Q:
You are considering investing in a project with the following possible outcomes:StatesProbability of OccurrenceInvestment ReturnsState 1: Economic boom18%20%State 2: Economic growth42%16%State 3: Economic decline30%3%State 4: Depression10%-25%Calculate the expected rate of return and standard deviation of returns for this investment, respectively.A) 8.72%, 12.99%B) 7.35%, 12.99%C) 3.50%, 1.69%D) 2.18%, 1.69%
Q:
Rogue Recreation, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 5%, while Lake Tours, Inc. has normally distributed returns with an expected return of 15% and a standard deviation of 15%. Which of the following is true?
A) Lake Tours' investors are not being adequately compensated for relevant risk.
B) Rogue Rec is likely to experience returns larger than those of Lake Tours.
C) Lake Tours is more likely to have negative returns than Rogue Rec.
D) Rational investors will prefer Lake Tours, Inc. over Rogue Recreation, Inc.
Q:
Assume that you have $100,000 invested in a stock that is returning 14%, $150,000 invested in a stock that is returning 18%, and $200,000 invested in a stock that is returning 15%. What is the expected return of your portfolio?
A) 13.25%
B) 14.97%
C) 15.67%
D) 15.78%
Q:
Assume that you have $330,000 invested in a stock that is returning 11.50%, $170,000 invested in a stock that is returning 22.75%, and $470,000 invested in a stock that is returning 10.25%. What is the expected return of your portfolio?
A) 15.6%
B) 12.9%
C) 18.3%
D) 14.8%
Q:
What is the present value of the following perpetuities?
a. $200 per year discounted at 6% annually
b. $500 per year discounted at 9% annually
c. $1,000 per year discounted at 5% annually
d. $550 per year discounted at 8% annually
Q:
An investment will pay $500 in three years, $700 in five years and $1000 in nine years. If your opportunity rate is 6%, what is the present value of this investment?
Q:
You invest $1,000 at a variable rate of interest. Initially the rate is 4% compounded annually for the first year, and the rate increases one-half of one percent annually for five years (year two's rate is 4.5%, year three's rate is 5.0%, etc.). How much will you have in the account after five years?
A) $1,276
B) $1,359
C) $1,462
D) $1,338
Q:
You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts? Year
End of Year Deposit 1
$350 2
$500 3
$725 4
$400 A) $1,622
B) $2,207
C) $2,384
D) $2,687
Q:
An investment is expected to yield $300 in three years, $500 in five years, and $300 in seven years. What is the present value of this investment if our opportunity rate is 5%?
A) $735
B) $864
C) $885
D) $900
Q:
What is the value on 1/1/13 of the following cash flows: Date Cash Received
Amount of Cash 1/1/14
$14,000 1/1/15
$20,000 1/1/16
$30,000 1/1/17
$43,000 1/1/18
$57,000 Use a 7% discount rate, and round your answer to the nearest $10.
A) $153,270
B) $128,490
C) $112,350
D) $107,330
Q:
You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment?
A) 0.055
B) 0.010
C) 0.110
D) 0.220
Q:
You won the lottery and can receive either (1) $60,000 today, or (2) $10,000 one year from today plus $25,000 two years from today plus $35,000 three years from today. You plan to use the money to pay for your child's college education in 15 years. You should
A) take the $60,000 today because of the time value of money regardless of current interest rates.
B) take option two because you get $70,000 rather than $60,000 regardless of current interest rates.
C) take the $60,000 today only if the current interest rate is at least 16.67%.
D) take the $60,000 today if you can earn 6.81% per year or more on your investments.
Q:
The present value of a $100 perpetuity discounted at 5% is $5,000.
Q:
A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.