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Quiz 3 Chapter 5 and 6
Chapter 5: ___________________________________________________________________________
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1.
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You put up $50 at the
beginning of the year for an investment. The value of the investment grows 4%
and you earn a dividend of $3.50. Your HPR was ____.
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2.
|
The ______ measure of
returns ignores compounding.
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3.
|
If you want to
measure the performance of your investment in a fund, including the timing of
your purchases and redemptions, you should calculate the __________.
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A.
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geometric average
return
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B.
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arithmetic average
return
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C.
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dollar-weighted
return
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4.
|
Which one of the
following measures time-weighted returns and allows for compounding?
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A.
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Geometric average
return
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B.
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Arithmetic average
return
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C.
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Dollar-weighted
return
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D.
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Historical average
return
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5.
|
Rank the following
from highest average historical return to lowest average historical return
from 1926 to 2010.
I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills
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6.
|
Rank the following
from highest average historical standard deviation to lowest average
historical standard deviation from 1926 to 2010.
I. Small stocks
II. Long-term bonds
III. Large stocks
IV. T-bills
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7.
|
You have calculated
the historical dollar-weighted return, annual geometric average return, and
annual arithmetic average return. If you desire to forecast performance for
next year, the best forecast will be given by the ________.
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A.
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dollar-weighted
return
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B.
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geometric average return
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C.
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arithmetic average
return
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8.
|
The complete
portfolio refers to the investment in _________.
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C.
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the risk-free asset
and the risky portfolio combined
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D.
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the risky portfolio
and the index
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9.
|
You have calculated
the historical dollar-weighted return, annual geometric average return, and
annual arithmetic average return. You always reinvest your dividends and
interest earned on the portfolio. Which method provides the best measure of
the actual average historical performance of the investments you have
chosen?
|
A.
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Dollar-weighted
return
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B.
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Geometric average
return
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C.
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Arithmetic average
return
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10.
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The holding period
return on a stock is equal to _________.
|
A.
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the capital gain
yield over the period plus the inflation rate
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B.
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the capital gain
yield over the period plus the dividend yield
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C.
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the current yield
plus the dividend yield
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D.
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the dividend yield
plus the risk premium
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11.
|
Your timing was good
last year. You invested more in your portfolio right before prices went up,
and you sold right before prices went down. In calculating historical
performance measures, which one of the following will be the largest?
|
A.
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Dollar-weighted
return
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B.
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Geometric average
return
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C.
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Arithmetic average
return
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D.
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Mean holding-period
return
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12.
|
Published data on
past returns earned by mutual funds are required to be ______.
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A.
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dollar-weighted returns
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13.
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The arithmetic
average of -11%, 15%, and 20% is ________.
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14.
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The geometric average
of -12%, 20%, and 25% is _________.
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15.
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The dollar-weighted
return is the _________.
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A.
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difference between
cash inflows and cash outflows
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B.
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arithmetic average
return
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C.
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geometric average
return
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D.
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internal rate of
return
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16.
|
An investment earns
10% the first year, earns 15% the second year, and loses 12% the third year.
The total compound return over the 3 years was ______.
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17.
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Annual percentage
rates can be converted to effective annual rates by means of the following
formula:
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18.
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Suppose you pay
$9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the holding-period
return for this investment?
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19.
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Suppose you pay
$9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the
annual percentage rate of return for this investment?
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20.
|
Suppose you pay
$9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the
effective annual rate of return for this investment?
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21.
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You have an APR of
7.5% with continuous compounding. The EAR is _____.
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22.
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You have an EAR of
9%. The equivalent APR with continuous compounding is _____.
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23.
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The market risk
premium is defined as __________.
|
A.
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the difference
between the return on an index fund and the return on Treasury bills
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B.
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the difference
between the return on a small-firm mutual fund and the return on the
Standard & Poor's 500 Index
|
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C.
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the difference
between the return on the risky asset with the lowest returns and the
return on Treasury bills
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D.
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the difference
between the return on the highest-yielding asset and the return on the
lowest-yielding asset
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24.
|
The excess return is
the _________.
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A.
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rate of return that
can be earned with certainty
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B.
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rate of return in
excess of the Treasury-bill rate
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C.
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rate of return to
risk aversion
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25.
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The rate of return on
_____ is known at the beginning of the holding period, while the rate of
return on ____ is not known until the end of the holding period.
|
A.
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risky assets;
Treasury bills
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B.
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Treasury bills;
risky assets
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C.
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excess returns;
risky assets
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26.
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The
reward-to-volatility ratio is given by _________.
|
A.
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the slope of the
capital allocation line
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B.
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the second
derivative of the capital allocation line
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C.
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the point at which
the second derivative of the investor's indifference curve reaches zero
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D.
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the portfolio's
excess return
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27.
|
Your investment has a
20% chance of earning a 30% rate of return, a 50% chance of earning a 10%
rate of return, and a 30% chance of losing 6%. What is your expected return
on this investment?
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28.
|
Your investment has a
40% chance of earning a 15% rate of return, a 50% chance of earning a 10%
rate of return, and a 10% chance of losing 3%. What is the standard deviation
of this investment?
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29.
|
During the 1926-2010
period the geometric mean return on small-firm stocks was ______.
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30.
|
During the 1926-2010
period the geometric mean return on Treasury bonds was _________.
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31.
|
During the 1926-2010
period the Sharpe ratio was greatest for which of the following asset
classes?
|
C.
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Long-term U.S.
Treasury bonds
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D.
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Bond world
portfolio return in U.S. dollars
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32.
|
During the 1985-2010
period the Sharpe ratio was lowest for which of the following asset
classes?
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C.
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Long-term U.S.
Treasury bonds
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D.
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Equity world
portfolio in U.S. dollars
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33.
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During the 1926-2010
period which one of the following asset classes provided the lowest real
return?
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C.
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Long-term U.S.
Treasury bonds
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D.
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Equity world
portfolio in U.S. dollars
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34.
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Both investors and
gamblers take on risk. The difference between an investor and a gambler is
that an investor _______.
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A.
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is normally risk
neutral
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B.
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requires a risk
premium to take on the risk
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C.
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knows he or she
will not lose money
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D.
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knows the outcomes
at the beginning of the holding period
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35.
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Historical returns
have generally been __________ for stocks of small firms as (than) for stocks
of large firms.
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D.
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none of these
options (There is no evidence of a systematic relationship between returns
on small-firm stocks and returns on large-firm stocks.)
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36.
|
Historically,
small-firm stocks have earned higher returns than large-firm stocks. When
viewed in the context of an efficient market, this suggests that
___________.
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A.
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small firms are
better run than large firms
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B.
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government
subsidies available to small firms produce effects that are discernible in
stock market statistics
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C.
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small firms are
riskier than large firms
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D.
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small firms are not
being accurately represented in the data
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37.
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In calculating the
variance of a portfolio's returns, squaring the deviations from the mean
results in:
I. Preventing the sum of the deviations from
always equaling zero
II. Exaggerating the effects of large
positive and negative deviations
III. A number for which the unit is
percentage of returns
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38.
|
If you are promised a
nominal return of 12% on a 1-year investment, and you expect the rate of
inflation to be 3%, what real rate do you expect to earn?
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39.
|
If you require a real
growth in the purchasing power of your investment of 8%, and you expect the
rate of inflation over the next year to be 3%, what is the lowest nominal
return that you would be satisfied with?
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40.
|
One method of
forecasting the risk premium is to use the _______.
|
A.
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coefficient of
variation of analysts' earnings forecasts
|
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B.
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variations in the
risk-free rate over time
|
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C.
|
average historical
excess returns for the asset under consideration
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D.
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average abnormal
return on the index portfolio
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41.
|
Treasury bills are
paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a
risky portfolio with a standard deviation of 24% only if the risky
portfolio's expected return is at least ______.
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42.
|
In the mean standard
deviation graph, the line that connects the risk-free rate and the optimal
risky portfolio, P, is called the
_________.
|
A.
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capital allocation
line
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C.
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investor's utility
line
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43.
|
Most studies indicate
that investors' risk aversion is in the range _____.
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44.
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Two assets have the
following expected returns and standard deviations when the risk-free rate is
5%:
An investor with a risk aversion of A = 3 would find that
_________________ on a risk-return basis.
|
A.
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only asset A is
acceptable
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B.
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only asset B is
acceptable
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C.
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neither asset A nor
asset B is acceptable
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D.
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both asset A and
asset B are acceptable
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45.
|
Historically, the
best asset for the long-term investor wanting to fend off the threats of
inflation and taxes while making his money grow has been ____.
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46.
|
The formula  is used to calculate the _____________.
|
C.
|
Coefficient of
variation
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47.
|
A portfolio with a
25% standard deviation generated a return of 15% last year when T-bills were
paying 4.5%. This portfolio had a Sharpe ratio of ____.
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48.
|
Consider a Treasury
bill with a rate of return of 5% and the following risky securities:
Security A: E(r) = .15; variance =
.0400
Security B: E(r) = .10; variance =
.0225
Security C: E(r) = .12; variance =
.1000
Security D: E(r) = .13; variance =
.0625
The investor must develop a complete
portfolio by combining the risk-free asset with one of the securities
mentioned above. The security the investor should choose as part of her
complete portfolio to achieve the best CAL would be _________.
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49.
|
You purchased a share
of stock for $29. One year later you received $2.25 as dividend and sold the
share for $28. Your holding-period return was _________.
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50.
|
Security A has a
higher standard deviation of returns than security B. We would expect that:
I. Security A would have a higher risk
premium than security B.
II. The likely range of returns for security
A in any given year would be higher than the likely range of returns for
security B.
III. The Sharpe ratio of A will be higher
than the Sharpe ratio of B.
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51.
|
The holding-period
return on a stock was 25%. Its ending price was $18, and its beginning price
was $16. Its cash dividend must have been _________.
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52.
|
An investor invests
70% of her wealth in a risky asset with an expected rate of return of 15% and
a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her
portfolio's expected rate of return and standard deviation are __________ and
__________ respectively.
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53.
|
The holding-period
return on a stock was 32%. Its beginning price was $25, and its cash dividend
was $1.50. Its ending price must have been _________.
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54.
|
Consider the
following two investment alternatives: First, a risky portfolio that pays a
15% rate of return with a probability of 40% or a 5% rate of return with a
probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on
the risky investment is _________.
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55.
|
Consider the
following two investment alternatives: First, a risky portfolio that pays a
20% rate of return with a probability of 60% or a 5% rate of return with a
probability of 40%. Second, a Treasury bill that pays 6%. If you invest
$50,000 in the risky portfolio, your expected profit would be
_________.
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56.
|
You invest $10,000 in
a complete portfolio. The complete portfolio is composed of a risky asset
with an expected rate of return of 15% and a standard deviation of 21% and a
Treasury bill with a rate of return of 5%. How much money should be invested
in the risky asset to form a portfolio with an expected return of 11%?
|
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57.
|
You invest $1,000 in
a complete portfolio. The complete portfolio is composed of a risky asset
with an expected rate of return of 16% and a standard deviation of 20% and a
Treasury bill with a rate of return of 6%. __________ of your complete
portfolio should be invested in the risky portfolio if you want your complete
portfolio to have a standard deviation of 9%.
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58.
|
You invest $1,000 in
a complete portfolio. The complete portfolio is composed of a risky asset
with an expected rate of return of 16% and a standard deviation of 20% and a
Treasury bill with a rate of return of 6%. A portfolio that has an expected
value in 1 year of $1,100 could be formed if you _________.
|
A.
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place 40% of your
money in the risky portfolio and the rest in the risk-free asset
|
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B.
|
place 55% of your
money in the risky portfolio and the rest in the risk-free asset
|
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C.
|
place 60% of your
money in the risky portfolio and the rest in the risk-free asset
|
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D.
|
place 75% of your
money in the risky portfolio and the rest in the risk-free asset
|
|
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59.
|
You invest $1,000 in
a complete portfolio. The complete portfolio is composed of a risky asset
with an expected rate of return of 16% and a standard deviation of 20% and a
Treasury bill with a rate of return of 6%. The slope of the capital
allocation line formed with the risky asset and the risk-free asset is
approximately _________.
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60.
|
You have $500,000
available to invest. The risk-free rate, as well as your borrowing rate, is
8%. The return on the risky portfolio is 16%. If you wish to earn a 22%
return, you should _________.
|
A.
|
invest $125,000 in
the risk-free asset
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B.
|
invest $375,000 in
the risk-free asset
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61.
|
The return on the
risky portfolio is 15%. The risk-free rate, as well as the investor's
borrowing rate, is 10%. The standard deviation of return on the risky
portfolio is 20%. If the standard deviation on the complete portfolio is 25%,
the expected return on the complete portfolio is _________.
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62.
|
You are considering
investing $1,000 in a complete portfolio. The complete portfolio is composed
of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal
weights of X and Y in P are 60% and
40%, respectively. X has an expected rate of return of 14%, and Y has an
expected rate of return of 10%. To form a complete portfolio with an expected
rate of return of 11%, you should invest __________ of your complete
portfolio in Treasury bills.
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63.
|
You are considering
investing $1,000 in a complete portfolio. The complete portfolio is composed
of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal
weights of X and Y in P are 60% and
40% respectively. X has an expected rate of return of 14%, and Y has an
expected rate of return of 10%. To form a complete portfolio with an expected
rate of return of 8%, you should invest approximately __________ in the risky
portfolio. This will mean you will also invest approximately __________ and
__________ of your complete portfolio in security X and Y,
respectively.
|
|
64.
|
You are considering
investing $1,000 in a complete portfolio. The complete portfolio is composed
of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal
weights of X and Y in P are 60% and
40%, respectively. X has an expected rate of return of 14%, and Y has an
expected rate of return of 10%. If you decide to hold 25% of your complete
portfolio in the risky portfolio and 75% in the Treasury bills, then the
dollar values of your positions in X and Y, respectively, would be __________
and _________.
|
|
65.
|
You are considering
investing $1,000 in a complete portfolio. The complete portfolio is composed
of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal
weights of X and Y in P are 60% and
40%, respectively. X has an expected rate of return of 14%, and Y has an
expected rate of return of 10%. The dollar values of your positions in X, Y,
and Treasury bills would be _________, __________, and __________,
respectively, if you decide to hold a complete portfolio that has an expected
return of 8%.
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66.
|
You have the
following rates of return for a risky portfolio for several recent years:
If you invested $1,000 at the beginning of
2008, your investment at the end of 2011 would be worth ___________.
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67.
|
You have the
following rates of return for a risky portfolio for several recent years:
The annualized (geometric) average return on
this investment is _____.
|
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68.
|
A security with
normally distributed returns has an annual expected return of 18% and
standard deviation of 23%. The probability of getting a return between -28%
and 64% in any one year is _____.
|
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69.
|
The Manhawkin Fund
has an expected return of 16% and a standard deviation of 20%. The risk-free
rate is 4%. What is the reward-to-volatility ratio for the Manhawkin
Fund?
|
|
70.
|
From 1926 to 2010 the
world stock portfolio offered _____ return and _____ volatility than the
portfolio of large U.S. stocks.
|
|
71.
|
The price of a stock
is $55 at the beginning of the year and $50 at the end of the year. If the
stock paid a $3 dividend and inflation was 3%, what is the real
holding-period return for the year?
|
|
72.
|
The price of a stock
is $38 at the beginning of the year and $41 at the end of the year. If the
stock paid a $2.50 dividend, what is the holding-period return for the
year?
|
|
73.
|
You invest all of
your money in 1-year T-bills. Which of the following statements is (are)
correct?
I. Your nominal return on the T-bills is
riskless.
II. Your real return on the T-bills is
riskless.
III. Your nominal Sharpe ratio is zero.
|
|
74.
|
Which one of the
following would be considered a risk-free asset in real terms as opposed to
nominal?
|
C.
|
Short-term
corporate bonds
|
|
D.
|
U.S. T-bill whose
return was indexed to inflation
|
|
|
75.
|
What is the geometric
average return of the following quarterly returns: 3%, 5%, 4%, and 7%?
|
|
76.
|
What is the geometric
average return over 1 year if the quarterly returns are 8%, 9%, 5%, and
12%?
|
|
77.
|
If the nominal rate
of return on investment is 6% and inflation is 2% over a holding period, what
is the real rate of return on this investment?
|
|
78.
|
According to
historical data, over the long run which of the following assets has the best
chance to provide the best after-inflation, after-tax rate of return?
|
A.
|
Long-term Treasury
bonds
|
|
|
79.
|
The buyer of a new
home is quoted a mortgage rate of .5% per month. What is the APR on the
loan?
|
|
80.
|
A loan for a new car
costs the borrower .8% per month. What is the EAR?
|
|
81.
|
The CAL provided by
combinations of 1-month T-bills and a broad index of common stocks is called
the ______.
|
|
82.
|
Which of the
following arguments supporting passive investment strategies is (are)
correct?
I. Active trading strategies may not
guarantee higher returns but guarantee higher costs.
II. Passive investors can free-ride on the
activity of knowledge investors whose trades force prices to reflect
currently available information.
III. Passive investors are guaranteed to earn
higher rates of return than active investors over sufficiently long time
horizons.
|
|
83.
|
You have the
following rates of return for a risky portfolio for several recent years.
Assume that the stock pays no dividends.
What is the geometric average return for the
period?
|
|
84.
|
You have the
following rates of return for a risky portfolio for several recent years.
Assume that the stock pays no dividends.
What is the dollar-weighted return over the
entire time period?
|
Chapter 6:
___________________________________________________________________________
|
1.
|
Risk that can be
eliminated through diversification is called ______ risk.
|
|
2.
|
The _______ decision
should take precedence over the _____ decision.
|
A.
|
asset allocation;
stock selection
|
|
B.
|
bond selection;
mutual fund selection
|
|
C.
|
stock selection;
asset allocation
|
|
D.
|
stock selection;
mutual fund selection
|
|
|
3.
|
Many current and
retired Enron Corp. employees had their 401k retirement accounts wiped out
when Enron collapsed because ________.
|
A.
|
they had to pay
huge fines for obstruction of justice
|
|
B.
|
their 401k accounts
were held outside the company
|
|
C.
|
their 401k accounts
were not well diversified
|
|
|
4.
|
Based on the outcomes
in the following table, choose which of the statements below is (are)
correct?
I. The covariance of security A and security
B is zero.
II. The correlation coefficient between
securities A and C is negative.
III. The correlation coefficient between
securities B and C is positive.
|
|
5.
|
Asset A has an
expected return of 15% and a reward-to-variability ratio of .4. Asset B has
an expected return of 20% and a reward-to-variability ratio of .3. A
risk-averse investor would prefer a portfolio using the risk-free asset and
______.
|
D.
|
The answer cannot
be determined from the data given.
|
|
|
6.
|
Adding additional
risky assets to the investment opportunity set will generally move the
efficient frontier _____ and to the ______.
|
|
7.
|
An investor's degree
of risk aversion will determine his or her ______.
|
A.
|
optimal risky portfolio
|
|
C.
|
optimal mix of the
risk-free asset and risky asset
|
|
D.
|
capital allocation
line
|
|
|
8.
|
The ________ is equal
to the square root of the systematic variance divided by the total
variance.
|
B.
|
correlation
coefficient
|
|
D.
|
reward-to-variability
ratio
|
|
|
9.
|
Which of the
following statistics cannot be negative?
|
D.
|
Correlation
coefficient
|
|
|
10.
|
Asset A has an
expected return of 20% and a standard deviation of 25%. The risk-free rate is
10%. What is the reward-to-variability ratio?
|
|
11.
|
The correlation
coefficient between two assets equals _________.
|
A.
|
their covariance divided
by the product of their variances
|
|
B.
|
the product of
their variances divided by their covariance
|
|
C.
|
the sum of their
expected returns divided by their covariance
|
|
D.
|
their covariance
divided by the product of their standard deviations
|
|
|
12.
|
Diversification is
most effective when security returns are _________.
|
|
13.
|
The expected rate of
return of a portfolio of risky securities is _________.
|
A.
|
the sum of the
securities' covariances
|
|
B.
|
the sum of the
securities' variances
|
|
C.
|
the weighted sum of
the securities' expected returns
|
|
D.
|
the weighted sum of
the securities' variances
|
|
|
14.
|
Beta is a measure of
security responsiveness to _________.
|
|
15.
|
The risk that can be
diversified away is __________.
|
|
16.
|
Approximately how
many securities does it take to diversify almost all of the unique risk from
a portfolio?
|
|
17.
|
Consider an
investment opportunity set formed with two securities that are perfectly
negatively correlated. The global minimum-variance portfolio has a standard
deviation that is always _________.
|
A.
|
equal to the sum of
the securities' standard deviations
|
|
|
18.
|
Market risk is also
called __________ and _________.
|
A.
|
systematic risk;
diversifiable risk
|
|
B.
|
systematic risk;
nondiversifiable risk
|
|
C.
|
unique risk;
nondiversifiable risk
|
|
D.
|
unique risk;
diversifiable risk
|
|
|
19.
|
Firm-specific risk is
also called __________ and __________.
|
A.
|
systematic risk;
diversifiable risk
|
|
B.
|
systematic risk;
nondiversifiable risk
|
|
C.
|
unique risk;
nondiversifiable risk
|
|
D.
|
unique risk;
diversifiable risk
|
|
|
20.
|
Which one of the
following stock return statistics fluctuates the most over time?
|
D.
|
Correlation
coefficient
|
|
|
21.
|
Harry Markowitz is
best known for his Nobel Prize-winning work on _____________.
|
A.
|
strategies for
active securities trading
|
|
B.
|
techniques used to
identify efficient portfolios of risky assets
|
|
C.
|
techniques used to
measure the systematic risk of securities
|
|
D.
|
techniques used in
valuing securities options
|
|
|
22.
|
Suppose that a stock
portfolio and a bond portfolio have a zero correlation. This means that
______.
|
A.
|
the returns on the
stock and bond portfolios tend to move inversely
|
|
B.
|
the returns on the
stock and bond portfolios tend to vary independently of each other
|
|
C.
|
the returns on the stock
and bond portfolios tend to move together
|
|
D.
|
the covariance of
the stock and bond portfolios will be positive
|
|
|
23.
|
You put half of your
money in a stock portfolio that has an expected return of 14% and a standard
deviation of 24%. You put the rest of your money in a risky bond portfolio
that has an expected return of 6% and a standard deviation of 12%. The stock
and bond portfolios have a correlation of .55. The standard deviation of the
resulting portfolio will be ________________.
|
A.
|
more than 18% but
less than 24%
|
|
C.
|
more than 12% but
less than 18%
|
|
|
24.
|
On a standard
expected return versus standard deviation graph, investors will prefer
portfolios that lie to the _____________ of the current investment
opportunity set.
|
|
25.
|
The term complete portfolio refers to a
portfolio consisting of _________________.
|
A.
|
the risk-free asset
combined with at least one risky asset
|
|
B.
|
the market
portfolio combined with the minimum-variance portfolio
|
|
C.
|
securities from
domestic markets combined with securities from foreign markets
|
|
D.
|
common stocks
combined with bonds
|
|
|
26.
|
Rational risk-averse investors
will always prefer portfolios _____________.
|
A.
|
located on the
efficient frontier to those located on the capital market line
|
|
B.
|
located on the
capital market line to those located on the efficient frontier
|
|
C.
|
at or near the minimum-variance
point on the efficient frontier
|
|
D.
|
that are risk-free
to all other asset choices
|
|
|
27.
|
The optimal risky
portfolio can be identified by finding:
I. The minimum-variance point on the
efficient frontier
II. The maximum-return point on the efficient
frontier and the minimum-variance point on the efficient frontier
III. The tangency point of the capital market
line and the efficient frontier
IV. The line with the steepest slope that
connects the risk-free rate to the efficient frontier
|
|
28.
|
The _________
reward-to-variability ratio is found on the ________ capital market
line.
|
|
29.
|
A portfolio is
composed of two stocks, A and B. Stock A has a standard deviation of return
of 24%, while stock B has a standard deviation of return of 18%. Stock A
comprises 60% of the portfolio, while stock B comprises 40% of the portfolio.
If the variance of return on the portfolio is .0380, the correlation
coefficient between the returns on A and B is _________.
|
|
30.
|
The standard
deviation of return on investment A is .10, while the standard deviation of
return on investment B is .05. If the covariance of returns on A and B is
.0030, the correlation coefficient between the returns on A and B is
_________.
|
|
31.
|
A portfolio is composed
of two stocks, A and B. Stock A has a standard deviation of return of 35%,
while stock B has a standard deviation of return of 15%. The correlation
coefficient between the returns on A and B is .45. Stock A comprises 40% of
the portfolio, while stock B comprises 60% of the portfolio. The standard
deviation of the return on this portfolio is _________.
|
|
32.
|
The standard
deviation of return on investment A is .10, while the standard deviation of return
on investment B is .04. If the correlation coefficient between the returns on
A and B is -.50, the covariance of returns on A and B is _________.
|
|
33.
|
Consider two
perfectly negatively correlated risky securities, A and B. Security A has an
expected rate of return of 16% and a standard deviation of return of 20%. B
has an expected rate of return of 10% and a standard deviation of return of
30%. The weight of security B in the minimum-variance portfolio is
_________.
|
|
34.
|
An investor can
design a risky portfolio based on two stocks, A and B. Stock A has an
expected return of 18% and a standard deviation of return of 20%. Stock B has
an expected return of 14% and a standard deviation of return of 5%. The
correlation coefficient between the returns of A and B is .50. The risk-free
rate of return is 10%. The proportion of the optimal risky portfolio that
should be invested in stock A is _________.
|
|
35.
|
An investor can
design a risky portfolio based on two stocks, A and B. Stock A has an
expected return of 18% and a standard deviation of return of 20%. Stock B has
an expected return of 14% and a standard deviation of return of 5%. The
correlation coefficient between the returns of A and B is .50. The risk-free
rate of return is 10%. The expected return on the optimal risky portfolio is
_________.
|
|
36.
|
An investor can
design a risky portfolio based on two stocks, A and B. Stock A has an
expected return of 18% and a standard deviation of return of 20%. Stock B has
an expected return of 14% and a standard deviation of return of 5%. The
correlation coefficient between the returns of A and B is .50. The risk-free
rate of return is 10%. The standard deviation of return on the optimal risky
portfolio is _________.
|
|
37.
|
An investor can
design a risky portfolio based on two stocks, A and B. Stock A has an
expected return of 21% and a standard deviation of return of 39%. Stock B has
an expected return of 14% and a standard deviation of return of 20%. The
correlation coefficient between the returns of A and B is .4. The risk-free
rate of return is 5%. The proportion of the optimal risky portfolio that
should be invested in stock B is approximately _________.
|
|
38.
|
An investor can
design a risky portfolio based on two stocks, A and B. Stock A has an
expected return of 21% and a standard deviation of return of 39%. Stock B has
an expected return of 14% and a standard deviation of return of 20%. The
correlation coefficient between the returns of A and B is .4. The risk-free
rate of return is 5%. The expected return on the optimal risky portfolio is
approximately _________. (Hint: Find weights first.)
|
|
39.
|
An investor can
design a risky portfolio based on two stocks, A and B. Stock A has an expected
return of 21% and a standard deviation of return of 39%. Stock B has an
expected return of 14% and a standard deviation of return of 20%. The
correlation coefficient between the returns of A and B is .4. The risk-free
rate of return is 5%. The standard deviation of the returns on the optimal
risky portfolio is _________.
|
|
40.
|
An investor can
design a risky portfolio based on two stocks, A and B. The standard deviation
of return on stock A is 24%, while the standard deviation on stock B is 14%.
The correlation coefficient between the returns on A and B is .35. The
expected return on stock A is 25%, while on stock B it is 11%. The proportion
of the minimum-variance portfolio that would be invested in stock B is
approximately _________.
|
|
41.
|
An investor can
design a risky portfolio based on two stocks, A and B. The standard deviation
of return on stock A is 20%, while the standard deviation on stock B is 15%.
The correlation coefficient between the returns on A and B is 0%. The
expected return on the minimum-variance portfolio is approximately
_________.
|
|
42.
|
An investor can
design a risky portfolio based on two stocks, A and B. The standard deviation
of return on stock A is 20%, while the standard deviation on stock B is 15%.
The correlation coefficient between the returns on A and B is 0%. The
standard deviation of return on the minimum-variance portfolio is
_________.
|
|
43.
|
A measure of the
riskiness of an asset held in isolation is ____________.
|
|
44.
|
Semitool Corp. has an
expected excess return of 6% for next year. However, for every unexpected 1%
change in the market, Semitool's return responds by a factor of 1.2. Suppose
it turns out that the economy and the stock market do better than expected by
1.5% and Semitool's products experience more rapid growth than anticipated,
pushing up the stock price by another 1%. Based on this information, what was
Semitool's actual excess return?
|
|
45.
|
The part of a stock's
return that is systematic is a function of which of the following variables?
I. Volatility in excess returns of the stock
market
II. The sensitivity of the stock's returns to
changes in the stock market
III. The variance in the stock's returns that
is unrelated to the overall stock market
|
|
46.
|
Stock A has a beta of
1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive
to changes in the market than are the returns of stock B.
|
|
47.
|
Which risk can be
partially or fully diversified away as additional securities are added to a
portfolio?
I. Total risk
II. Systematic risk
III. Firm-specific risk
|
|
48.
|
According to Tobin's
separation property, portfolio choice can be separated into two independent
tasks consisting of __________ and __________.
|
A.
|
identifying all
investor imposed constraints; identifying the set of securities that
conform to the investor's constraints and offer the best risk-return
trade-offs
|
|
B.
|
identifying the
investor's degree of risk aversion; choosing securities from industry
groups that are consistent with the investor's risk profile
|
|
C.
|
identifying the
optimal risky portfolio; constructing a complete portfolio from T-bills and
the optimal risky portfolio based on the investor's degree of risk aversion
|
|
D.
|
choosing which
risky assets an investor prefers according to the investor's risk-aversion
level; minimizing the CAL by lending at the risk-free rate
|
|
|
49.
|
You are constructing
a scatter plot of excess returns for stock A versus the market index. If the
correlation coefficient between stock A and the index is -1, you will find
that the points of the scatter diagram ___________ and the line of best fit
has a ______________.
|
A.
|
all fall on the
line of best fit; positive slope
|
|
B.
|
all fall on the
line of best fit; negative slope
|
|
C.
|
are widely scattered
around the line; positive slope
|
|
D.
|
are widely
scattered around the line; negative slope
|
|
|
50.
|
The term excess return refers to
______________.
|
A.
|
returns earned
illegally by means of insider trading
|
|
B.
|
the difference
between the rate of return earned and the risk-free rate
|
|
C.
|
the difference
between the rate of return earned on a particular security and the rate of
return earned on other securities of equivalent risk
|
|
D.
|
the portion of the
return on a security that represents tax liability and therefore cannot be
reinvested
|
|
|
51.
|
You are recalculating
the risk of ACE stock in relation to the market index, and you find that the
ratio of the systematic variance to the total variance has risen. You must
also find that the ____________.
|
A.
|
covariance between
ACE and the market has fallen
|
|
B.
|
correlation
coefficient between ACE and the market has fallen
|
|
C.
|
correlation
coefficient between ACE and the market has risen
|
|
D.
|
unsystematic risk
of ACE has risen
|
|
|
52.
|
A stock has a
correlation with the market of .45. The standard deviation of the market is
21%, and the standard deviation of the stock is 35%. What is the stock's
beta?
|
|
53.
|
The values of beta
coefficients of securities are __________.
|
C.
|
always between
positive 1 and negative 1
|
|
D.
|
usually positive
but are not restricted in any particular way
|
|
|
54.
|
A security's beta
coefficient will be negative if ____________.
|
A.
|
its returns are
negatively correlated with market-index returns
|
|
B.
|
its returns are
positively correlated with market-index returns
|
|
C.
|
its stock price has
historically been very stable
|
|
D.
|
market demand for
the firm's shares is very low
|
|
|
55.
|
The market value
weighted-average beta of firms included in the market index will always be
_____________.
|
D.
|
none of these
options (There is no particular rule concerning the average beta of firms
included in the market index.)
|
|
|
56.
|
Diversification can
reduce or eliminate __________ risk.
|
|
57.
|
To construct a
riskless portfolio using two risky stocks, one would need to find two stocks
with a correlation coefficient of ________.
|
|
58.
|
Some diversification
benefits can be achieved by combining securities in a portfolio as long as
the correlation between the securities is _____________.
|
D.
|
less than or equal
to 0
|
|
|
59.
|
If an investor does
not diversify his portfolio and instead puts all of his money in one stock,
the appropriate measure of security risk for that investor is the
________.
|
A.
|
stock's standard
deviation
|
|
B.
|
variance of the
market
|
|
D.
|
covariance with the
market index
|
|
|
60.
|
Which of the
following provides the best example of a systematic-risk event?
|
A.
|
A strike by union
workers hurts a firm's quarterly earnings.
|
|
B.
|
Mad Cow disease in
Montana hurts local ranchers and buyers of beef.
|
|
C.
|
The Federal Reserve
increases interest rates 50 basis points.
|
|
D.
|
A senior executive
at a firm embezzles $10 million and escapes to South America.
|
|
|
61.
|
Which of the
following statements is (are) true regarding time diversification?
I. The standard deviation of the average
annual rate of return over several years will be smaller than the 1-year
standard deviation.
II. For a longer time horizon, uncertainty
compounds over a greater number of years.
III. Time diversification does not reduce
risk.
|
|
62.
|
You find that the
annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding
period, the Sharpe ratio would equal _______.
|
|
63.
|
The beta of this stock is ____.
|
|
64.
|
This stock has greater systematic risk than a
stock with a beta of ___.
|
|
65.
|
The characteristic line for this stock is Rstock = ___ + ___ Rmarket.
|
|
66.
|
_______________ percent of the variance is
explained by this regression.
|
|
67.
|
The stock is ______ riskier than the typical
stock.
|
|
68.
|
Decreasing the number
of stocks in a portfolio from 50 to 10 would likely ________________.
|
A.
|
increase the
systematic risk of the portfolio
|
|
B.
|
increase the
unsystematic risk of the portfolio
|
|
C.
|
increase the return
of the portfolio
|
|
D.
|
decrease the
variation in returns the investor faces in any one year
|
|
|
69.
|
If you want to know
the portfolio standard deviation for a three-stock portfolio, you will have
to ______.
|
A.
|
calculate two
covariances and one trivariance
|
|
B.
|
calculate only two
covariances
|
|
C.
|
calculate three
covariances
|
|
D.
|
average the
variances of the individual stocks
|
|
|
70.
|
Which of the
following correlation coefficients will produce the least diversification
benefit?
|
|
71.
|
Which of the
following correlation coefficients will produce the most diversification
benefits?
|
|
72.
|
What is the most
likely correlation coefficient between a stock-index mutual fund and the
S&P 500?
|
|
73.
|
Investing in two
assets with a correlation coefficient of -.5 will reduce what kind of
risk?
|
|
74.
|
Investing in two
assets with a correlation coefficient of 1 will reduce which kind of
risk?
|
D.
|
None of these
options (With a correlation of 1, no risk will be reduced.)
|
|
|
75.
|
A portfolio of stocks
fluctuates when the Treasury yields change. Since this risk cannot be
eliminated through diversification, it is called __________.
|
|
76.
|
As you lengthen the
time horizon of your investment period and decide to invest for multiple
years, you will find that:
I. The average risk per year may be smaller
over longer investment horizons.
II. The overall risk of your investment will
compound over time.
III. Your overall risk on the investment will
fall.
|
|
77.
|
You are considering
adding a new security to your portfolio. To decide whether you should add the
security, you need to know the security's:
I. Expected return
II. Standard deviation
III. Correlation with your portfolio
|
|
78.
|
Which of the
following is a correct expression concerning the formula for the standard
deviation of returns of a two-asset portfolio where the correlation
coefficient is positive?
|
A.
|
σ2rp< (W12σ12 + W22σ22)
|
|
B.
|
σ2rp = (W12σ12 + W22σ22)
|
|
C.
|
σ2rp = (W12σ12 - W22σ22)
|
|
D.
|
σ2rp> (W12σ12 + W22σ22)
|
|
|
79.
|
What is the standard
deviation of a portfolio of two stocks given the following data: Stock A has
a standard deviation of 18%. Stock B has a standard deviation of 14%. The
portfolio contains 40% of stock A, and the correlation coefficient between
the two stocks is -.23.
|
|
80.
|
What is the standard
deviation of a portfolio of two stocks given the following data: Stock A has
a standard deviation of 30%. Stock B has a standard deviation of 18%. The
portfolio contains 60% of stock A, and the correlation coefficient between
the two stocks is -1.
|
|
81.
|
The expected return
of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio
standard deviation is 12%, what is the reward-to-variability ratio of the
portfolio?
|
|
82.
|
A project has a 60%
chance of doubling your investment in 1 year and a 40% chance of losing half
your money. What is the standard deviation of this investment?
|
|
83.
|
A project has a 50%
chance of doubling your investment in 1 year and a 50% chance of losing half
your money. What is the expected return on this investment project?
|
|
84.
|
The figures below
show plots of monthly excess returns for two stocks plotted against excess
returns for a market index.
Which stock is likely to further reduce risk
for an investor currently holding her portfolio in a well-diversified portfolio
of common stock?
|
C.
|
There is no
difference between A or B.
|
|
D.
|
The answer cannot
be determined from the information given.
|
|
|
85.
|
The figures below
show plots of monthly excess returns for two stocks plotted against excess
returns for a market index.
Which stock is riskier to a nondiversified
investor who puts all his money in only one of these stocks?
|
C.
|
Both stocks are
equally risky.
|
|
D.
|
The answer cannot
be determined from the information given.
|
|
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