DSM 6

What is the percentage return of a stock that was purchased for $45 and sold one year later for $55 if the stock also paid $3 in dividends over that time period?

(3+55-45)/45=28.9%

Diversification is the process o

combining assets to reduce risk and/or increase returns

1. Risk that can be eliminated through diversification is called ______ risk. a. Unique b. Firm-specific c. Diversifiable d. All of the above

d. All of the above

Market risk can also be called:

non-diversifiable risk.

Your great grandparents placed $1 in an investment in 1925. Which of the following securities would have given them the highest average annual return over the past eight decades?

Small stocks

According to the security market line, a security with a beta of 1.5 should provide a risk premium that is _________ times the risk premium existing for the market as a whole

1.5

An asset with a beta of 1.6 will have an expected return of __________ when the risk-free rate is 4% and the expected return on the market is 12%.

16.8%

You purchased Hobo Hats stock last year for $60 a share. Today, you received $2 a share dividend and immediately sold the stock for $63. Your realized return, or holding period return, was _________.

8.33%

If the required return for a security is 15% and the risk-free rate is 6%, the risk premium is

9%

Assume you have the following assets, expected returns, and betas: Asset-Expected Return-Beta A-16%-1.2 B-14%-1.0 C-21%-1.6 What is the beta of a portfolio consisting of 25% invested in Asset A, 45% in Asset B, and 30% in Asset C?

Bp = .25(1.2) + .45(1.0) + .30(1.6) = .30 + .45 + .48 = 1.23.

You are considering two securities. Security A has a historical average annual return of 7% and a standard deviation of 3%. Security B has a historical average annual return of 7% and a standard deviation of 9%. From this information you can conclude that

Security B is more risky than Security A.

The CAPM is a model of

The CAPM is a model of non-diversifiable risk of a security relative to all risky returns. The CAPM generates the return we should expect to earn from investing in an asset with a given level of non-diversifiable risk. The premise of the CAPM is that the expected return on any security should be a factor of the risk-free rate of return plus some risk premium commensurate with the level of non-diversifiable risk, or systematic risk, of the investment. The CAPM assumes market efficiency which means that investors will not be compensated for either diversifiable risks or total risk. Assets will be priced to reflect only their level of systematic risk.

Which of the following would be the best example of systematic risk?

The Federal Reserve tightens the money supply to fight inflation which causes the interest rates to rise.

What is the dollar return of a stock that was purchased for $45 and sold one year later for $55 if the stock also paid $3 in dividends over that time period?

The dollar return of a stock that was purchased for $45 and sold one year later for $55 if the stock also paid $3 in dividends over that time period is $13. The following formula computes percentage returns: Dollar return = (selling price - purchase price) + dividends received So, Dollar return = ($55 - $45) + $3 = $13

What is the expected return of a 3-asset portfolio of XYZ that has 40% invested in Asset X, 33% invested in Asset Y, and the remainder invested in Asset Z if the respective returns for X, Y, and Z are 14%, 18.3%, and 9.5%?

The expected return of a 3-asset portfolio of XYZ that has 40% invested in Asset X, 33% invested in Asset Y, and the remainder invested in Asset Z if the respective returns for X, Y, and Z are 14%, 18.3%, and 9.5% is 14.2%. The return on a portfolio is the weighted average of the individual investment returns where the weights are the fraction of the total portfolio invested in each asset. So, the expected return for this portfolio is: E(Rp) = .40(14%) + .33(18.3%) + .27(9.5%) = 5.6% + 6.0% + 2.6% = 14.2% Note that since the total portfolio weights must sum to 1.0 or 100% that the last weight is simply a plug figure. If the first two stocks represent 73% of the portfolio, then stock Z has to be the remaining 27%.

The beta for a portfolio is determined by calculating

a weighted average of individual stock betas where the weights equal the percentage invested in each stock

The realized rate of return is the

actual return calculated on the investment.

Which of the following is the best description of systematic risk?

any risk that will impact the value of all assets simultaneously

The expected rate of return is the

return forecasted to occur in the future

An investor's required rate of return should be a function of the

risk-free rate of return plus a risk premium for the stock's systematic risk

The beta of a portfolio is the

slope of the risk-return line, or the CAPM risk measure.

__________ risk is the only risk that matters to investors with broadly diversified portfolios

systematic

Under the capital asset pricing model, the relevant risk is

systematic risk

The risk-return tradeoff principle in finance is:

the expectation of receiving higher returns for higher risk investments

A stock's holding period return represents

the total return earned over a specific period through buying and selling an asset.