Chapter 7
If two assets with return correlation coefficients less than one make up a portfolio, then the portfolio does not take advantage of any diversification benefits. A) True B) False
B) False
If you are building a portfolio, then you desire assets that have a correlation coefficient of one. A) True B) False
B) False
If you are calculating the variance and standard deviation of returns for a stock, the variance will always be larger than the standard deviation. A) True B) False
B) False
In a game of chance, the probability of winning a $50 is 40 percent and the probability of losing a $50 prize is 60 percent. What is the expected value of a prize in the game? A) -$10 B) $0 C) $10 D) $25
$50(0.4) - $50 (0.6) = -$10 A
The expected return for the asset below is 18.75 percent. If the return distribution for the asset is described as in the following table, what is the variance for the asset's returns? Return Probability 0.1 0.25 0.2 0.5 0.25 0.25 A) 0.002969 B) 0.000613 C) 0.015195 D) 0.054486
(0.1)(0.25 - 0.1875)2 + (0.2)(0.5 - 0.1875) 2 + (0.25)(0.25 - 0.1875) 2 = 0.002969 A) 0.002969
Given the historical information in the chapter, the beta of a small stock should be greater than the beta of a corporate bond. A) True B) False
A) True
If the covariance between the returns of two assets is equal to zero, then the correlation coefficient must also be zero. A) True B) False
A) True
Complete diversification means that the portfolio is no longer subject to market risk. A) True B) False
B) False
The best measure of risk within an investment is its variance. A) True B) False
B) False
In a game of chance, the probability of winning a $50 prize is 40 percent, and the probability of winning a $100 prize is 60 percent. What is the expected value of a prize in the game? A) $50 B) $75 C) $80 D) $100
C) $80 $50(0.4) + $100 (0.6) = $80
Which of the following represents a plot of the relation between expected return and systemic risk? A) The beta coefficient. B) The covariance of returns line. C) The security market line. D) The variance.
C) The security market line.
The expected return for a portfolio without borrowing A) should never be less than the expected return of the asset with lowest expected return. B) should never be greater than the expected return of the asset with highest expected return. C) may not be an event with even a positive probability of occurrence. D) All of the above.
D) All of the above.
If you are dealing with percentage returns, then which of the following is generally true? A) The variance of the return distribution is generally smaller than the standard deviation. B) The variance of the return distribution is generally larger than the standard deviation. C) The variance of the return distribution is measured in the same units as expected return. D) None of the above is generally true.
D) None of the above is generally true
Which of the following investment classes had the greatest average return based on recent historical data? A) Intermediate-Term Government Bonds B) Long-Term Government Bonds C) Large U.S. Stocks D) Small U.S. Stocks
D) Small U.S. Stocks
Which of the following investment classes had the greatest variability in returns for recent historical data? A) Intermediate-Term Government Bonds B) Long-Term Government Bonds C) Large U.S. Stocks D) Small U.S. Stocks
D) Small U.S. Stocks
Which of the following is the best measure of the systematic risk in a portfolio? A) variance B) standard deviation C) covariance D) beta
D) beta
The income component of return for a common stock comes from the dividend cash flow stream. A) True B) False
A) True
se the following table to calculate the expected return for the asset. Return Probability 0.1 0.25 0.2 0.5 0.25 0.25 A) 15.00% B) 17.50% C) 18.75% D) 20.00%
(0.1)(0.25) + (0.2)(0.5) + (0.25)(0.25) = 0.1875 C) 18.75%
If you were to compare the returns of an individual stock to a market index, select the answer below that is most true. A) The returns of the individual stock will show more variability than those of the market index. B) The returns of the individual stock will show less variability than those of the market index. C) The returns of the individual stock will show the same level of variability than those of the market index, if they have the same beta. D) None of the above.
A) The returns of the individual stock will show more variability than those of the market index.
If the distribution of returns for an asset has a variance of zero, then covariance of returns between that asset and the returns any other asset must equal zero. A) True B) False
A) True
If the price of an asset has not increased or decreased since the original purchase of the asset, then the total return of the asset (if no dividends were paid during the period) is equal to the capital appreciation component return. A) True B) False
A) True
If the returns for two assets have a correlation coefficient of one, then there are no benefits of diversification by combining these assets in a two-asset portfolio. A) True B) False
A) True
If you are trying to determine whether to purchase Security A or Security B as the only holding in your portfolio, then you can consider the coefficient of variation in order to understand the risk-return relationship of the individual securities. A) True B) False
A) True
If you know the risk-free rate, the market risk-premium, and the beta of a stock, then using the CAPM you will be able to calculate the expected rate of return for the stock. A) True B) False
A) True
In order for the total return of a stock to be equal to -100 percent, the income return component for that stock must be zero. A) True B) False
A) True
The appropriate measure of risk for a diversified portfolio is beta. A) True B) False
A) True
The capital appreciation component of a stock's return considers the increase in price of a stock divided by the beginning of period price of the stock. A) True B) False
A) True
The normal distribution is completely described by its mean and standard deviation where 50 percent of the distribution's probability is less than the mean and 50 percent greater than the mean. A) True B) False
A) True
The variance is denominated in squared units, whereas the standard deviation is denominated in the same units as the expected value. A) True B) False
A) True
Utilizing the fact that two or more asset values do not always move in the same direction at the same time in order to reduce the risk of a portfolio is called diversification. A) True B) False
A) True
Whenever the outcome of an event has a number of different possibilities that have equal probability of occurrence, then the expected value of the outcome is equal to the simple average of the individual events. A) True B) False
A) True
Which of the following investors should be willing to pay the highest price for an asset? A) An investor with a single-asset portfolio. B) An investor with a 50-asset portfolio. C) An investor who is not completely diversified. D) An investor who is so risk-averse that he does not recognize the benefits of diversification.
An investor with a single-asset portfolio. B)
If the capital appreciation return from owning a stock is positive, then the total return from owning the same stock can be negative. A) True B) False
B) False
If the expected return of a bet, which is based on a coin toss, is $15, then that means that the outcome of the bet will be a $15 cash inflow to the person making the bet. A) True B) False
B) False
If you were to completely diversify your portfolio by purchasing a portion of every asset in the investment universe, then the expected return of your portfolio is equal to the risk-free rate. A) True B) False
B) False
Robert paid $100 for a stock one year ago. The total return on the stock was 10 percent. Therefore, the stock must be selling for $110 today. A) True B) False
B) False
The capital appreciation component of a stock's return considers the increase in price of a stock divided by the end of period price of the stock. A) True B) False
B) False
The coefficient of variation divides the variance of the returns of an asset by the expected return of that asset. A) True B) False
B) False
The coefficient of variation is a good measure of the amount of risk that an asset will contribute to a diversified portfolio of assets. A) True B) False
B) False
The coefficient of variation is useful when deciding which individual stocks to add to your diversified portfolio. A) True B) False
B) False
The expected return of the market portfolio is equal to the market risk premium. A) True B) False
B) False
The market risk-premium is equal to expected return on the market portfolio. A) True B) False
B) False
The standard deviation of a distribution can be a negative value. A) True B) False
B) False
The variance is equal to the square root of the standard deviation. A) True B) False
B) False
The variance of a distribution can be a negative value. A) True B) False
B) False
You have placed a wager such that you will either receive nothing if you lose the bet or you will receive $10 if you win the bet. If the expected cash receipt of the wager is $9, then there is a 100 percent probability that you will win the wager. A) True B) False
B) False
Which of the following statements is most correct? A) The greater the risk associated with an investment, the lower the return investors expect from it. B) When choosing between two investments that have the same level of risk, investors prefer the investment with the higher return. C) If two investments have the same expected return, investors prefer the riskiest alternative. D) When choosing between two investments that have the same level of risk, investors prefer the investment with the lower return.
B) When choosing between two investments that have the same level of risk, investors prefer the investment with the higher return.
A portfolio with a level of systematic risk the same as that of the market has a beta that is A) equal to zero. B) equal to one. C) less than the beta of the risk-free asset. D) less than zero.
B) equal to one.
