Chapter 7 - Risk & Return - FIN 3290

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?

$80 $50(0.4) + $100 (0.6) = $80

Given the returns for two stocks with the following information, calculate the covariance of the returns for the two stocks. Assume the expected return is 14.4 percent for Stock 1 and 15.9 percent for Stock 2.

-0.00079 The formula is Cov(x,y)= E[(x-e(x)] [y-e(y)] So we have 0.5(.11-.144)(.18-.159)+ 0.3(.17-.144)(.15-.159)+0.2(.19-.144)(.12-.159) If you multiply all this out you will get e (-.000786) Cov(R1,R2) = . (0.5(0.11-0.144)(0.18-0.159)+0.3(0.17-0.144)(0.15-0.159)+0.2(0.19-0.144)(0.12-0.159) = -0.00079

Which of the following investment classes had the greatest average return based on recent historical data?

Small U.S. Stocks

You have observed that the average size of a particular goldfish is 1.5 inches long. The standard deviation of the size of the goldfish is 0.25 inches. What is the size of a goldfish such that 95 percent of the goldfish are smaller? Assume a normal distribution for the size of goldfish.

1.99

Most of the risk-reduction benefits from diversification can be achieved in a portfolio consisting of

15 to 20 stocks

Use the following table to calculate the expected return for the asset.

15.75% (0.5)(0.1) + (0.1)(0.15) + (0.15)(0.5) + (0.25)(0.25) = 0.1575

Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.)

16%

Francis purchased a stock one year ago for $20, and it is now worth $24. The stock paid a dividend of $3 during the year. What was the stock's rate of return from capital appreciation during the year? (Round your answer to the nearest percent.)

20% The stock is now worth $4.00 more than it was 1 year ago. There for the capital appreciation is $4.00 on a $20 investment. $4/$20 = .2 = 20%

The beta of RicciCo.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what is the expected return on RicciCo.?

37.80%

You know that the average college student eats 0.75 pounds of food at lunch. If the standard deviation of that eating is 0.2 pounds of food, then what is the total amount of food that a cafeteria should have on hand to be 95 percent confident that it will not run out of food when feeding 50 college students.

57.10 pounds

Gwen purchased a stock one year ago for $25, and it is now worth $31. The stock paid a dividend of $1.50 during the year. What is the income component of the return on that stock during the year? (Round your answer to the nearest percent.)

6%

You have invested 20 percent of your portfolio in Homer, Inc., 40 percent in Marge Co., and 20 percent in Bart Resources. What is the expected return of your portfolio if Homer, Marge, and Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectfully?

8.2%

Which of the following investors should be willing to pay the highest price for an asset?

An investor who is so risk-averse that he does not recognize the benefits of diversification. An investor with a single-asset portfolio. *****An investor with a 50-asset portfolio. An investor who is not completely diversified.

Which of the following investment classes had the greatest variability in returns for recent historical data?

Small U.S. Stocks

A portfolio with a level of systematic risk the same as that of the market has a beta that is

equal to one

Which of the following is the best measure of the systematic risk in a portfolio?

standard deviation covariance variance *****beta

Elrond has made an investment that will generate returns that are subject to the state of the economy. Use the following information to calculate the standard deviation of the return distribution for Elrond's investment.

0.0557

The covariance of the returns between Einstein Stock and Bohr Stock is 0.0087. The standard deviation of Einstein is 0.26, and the standard deviation of Bohr is 0.37. What is the correlation coefficient between the returns of the two stocks?

0.090437

Braniff Ground Services stock has an expected return of 9 percent and a variance of 0.25 percent. What is the coefficient of variation for Braniff?

0.5556

Aquaman Stock has exhibited a standard deviation in stock returns of 0.7, whereas Green Lantern Stock has exhibited a standard deviation of 0.8. The correlation coefficient between the stock returns is 0.1. What is the standard deviation of a portfolio composed of 70 percent Aquaman and 30 percent Green Lantern?

0.56676