finance chapter 9 exam 3

This is the portion of total risk that is attributable to overall economic factors. A. firm specific risk B. market risk C. modern portfolio risk D. total risk

market risk

12. This is the concept and procedure for combining securities into a portfolio to minimize risk. A. firm specific theory B. modern portfolio theory C. optimal portfolio theory D. total portfolio theory

modern portfolio theory

This is defined as a combination of investment assets held by an investor. A. bundle B. market basket C. portfolio D. All of these

portfolio

Which of the following statements is correct with regards to diversification? A. Diversifying reduces the return of the portfolio. B. Diversifying reduces the market risk of the portfolio. C. Diversifying reduces the dollar return of the portfolio. D. None of these statements are correct.

None of these statements are correct.

This is a measure of risk to reward earned by an investment over a specific period of time. A. coefficient of variation B. market deviation C. standard deviation D. total variation

coefficient of variation

We commonly measure the risk-return relationship using which of the following? A. coefficient of variation B. correlation coefficient C. standard deviation D. expected returns

coefficient of variation

This is a measurement of the co-movement between two variables that ranges between -1 and +1. A. coefficient of variation B. correlation C. standard deviation D. total risk

correlation

This is the term for portfolios with the highest return possible for each risk level. A. efficient portfolios B. modern portfolios C. optimal portfolios D. total portfolios

efficient portfolios

This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification. A. firm specific risk B. market risk C. modern portfolio risk D. total risk

firm specific risk

This is a measure summarizing the overall past performance of an investment. A. average return B. dollar return C. market return D. percentage return

average return

. Investment Return MedTech Corp stock was $50.95 per share at the end of last year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500 shares of MedTech, what was your percent return? A. 7.20% B. 8.83% C. 22.67% D. 23.55% Dollar Return = (Ending Value - Beginning Value) + Income = ($62.50 x 500) - ($50.95 x 500 + $0.45 x 500) = $6000 Percentage Return = $6000 ÷ ($50.95 x 500) = .2355 = 23.55%

23.55%

Average Return The past five monthly returns for K and Company are 4.25 percent, 4.13 percent, -2.05 percent, 3.25 percent, and 7.25 percent. What is the average monthly return? A. 1.403% B. 1.744% C. 3.366% D. 4.186% Average Return = (4.25% + 4.13% - 2.05% + 3.25% + 7.25%)/5 = 3.366%

3.366%

Portfolio Return Year-to-date, Company O had earned a -2.10 percent return. During the same time period, Company V earned 8.00 percent and Company M earned 6.25 percent. If you have a portfolio made up of 40 percent Company O, 30 percent Company V, and 30 percent Company M, what is your portfolio return? A. 3.435% B. 5.115% C. 12.15% D. 16.35% Portfolio Return is 0.4 x -2.10% + 0.3 x 8% + 0.3 x 6.25% = 3.435%

3.435%

Standard Deviation The standard deviation of the past five monthly returns for K and Company are 4.25 percent, 4.13 percent, -2.05 percent, 3.25 percent, and 7.75 percent. What is the average monthly return? A. 1.40% B. 3.37% C. 3.53% D. 16.83% Standard Deviation is 3.466% not 3.366%

3.53%

Which of the following statements is correct? A. A dominant portfolio has the best risk-return relationship as compared to other portfolios. B. It is not necessarily true that when an investment achieves a high return that it is risky. C. A low standard deviation means that the investment is less likely to achieve high returns; which means that is more risky. D. None of these statements are correct.

A dominant portfolio has the best risk-return relationship as compared to other portfolios.

Which of the following statements is correct? A. A single stock has a lot of diversifiable risk. B. A single stock has more market risk than a diversified portfolio of stocks. C. Bonds and stocks have a high correlation because they are both financial assets. D. None of these statements are correct.

A single stock has a lot of diversifiable risk.

Portfolio Weights An investor owns $10,000 of Adobe Systems stock, $15,000 of Dow Chemical, and $25,000 of Office Depot. What are the portfolio weights of each stock? A. Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333 B. Adobe System = 0.2, Dow Chemical = 0.3, Office Depot = 0.5 C. Adobe System = 0.3, Dow Chemical = 0.2, Office Depot = 0.5 D. Adobe System = 0.2667, Dow Chemical = 0.3333, Office Depot = 0.4 Total portfolio is $10,000 + $15,000 + $25,000 = $50,000 Adobe System weight = $10,000/$50,000 = 0.2 Dow Chemical weight = $15,000/50,000 = 0.3 Office Depot weight = $25,000/$50,000 = 0.5

Adobe System = 0.2, Dow Chemical = 0.3, Office Depot = 0.5

Which of the following statements is correct? A. The dollar return is a more useful measure to compare performance because it more accurately reflects the change in wealth of the investor. B. A dominant portfolio is one that has the highest risk and highest return within a set of portfolios. C. By adding stocks to your portfolio, it is possible to effectively eliminate nearly all of the market risk. D. None of these statements are correct.

D. None of these statements are correct.

Jane Adams invests all her money in the stock of one firm. Which of the following must be true? A. Her return will have more volatility than the return in the overall stock market. B. Her return will have less volatility than the return in the overall stock market. C. Her return will have the same volatility as the return in the overall stock market. D. There is no relationship between her return and the return in the overall stock market.

Her return will have more volatility than the return in the overall stock market.

Which of the following is correct regarding the coefficient of variation? A. It measures the amount of standard deviation for each one percent of covariance. B. It measures the amount of return achieved for each one percent of risk taken. C. It measures the amount of risk taken for each one percent of return achieved. D. None of these statements are correct.

It measures the amount of risk taken for each one percent of return achieved.

Total Risk Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 10 percent and standard deviation of 15 percent. The average return and standard deviation of Idol Staff are 15 percent and 25 percent; and of Poker-R-Us are 12 percent and 35 percent. A. Rail Haul, Poker-R-Us, Idol Staff B. Idol Staff, Poker-R-Us, Rail Haul C. Poker-R-Us, Idol Staff, Rail Haul D. Idol Staff, Rail Haul, Poker-R-Us Rank by standard deviation

Poker-R-Us, Idol Staff, Rail Haul

Dominant Portfolios Determine which one of these three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an expected return of 14 percent and risk of 19 percent. The expected return and risk of portfolio Yellow are 15 percent and 18 percent, and for the Purple portfolio are 16 percent and 21 percent. A. Portfolio Blue dominates Portfolio Yellow B. Portfolio Yellow dominates Portfolio Blue C. Portfolio Purple dominates Portfolio Blue D. Portfolio Purple dominates Portfolio Yellow Portfolio Yellow dominates Portfolio Blue because it has both a higher expected return and a lower risk level.

Portfolio Yellow dominates Portfolio Blue

Risk versus Return Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 10 percent and standard deviation of 15 percent. The average return and standard deviation of Idol Staff are 15 percent and 25 percent; and of Poker-R-Us are 12 percent and 35 percent. A. Rail Haul, Idol Staff, Poker-R-Us B. Idol Staff, Poker-R-Us, Rail Haul C. Poker-R-Us, Idol Staff, Rail Haul D. Idol Staff, Rail Haul, Poker-R-Us Rank by coefficient of variation: Rail Haul CoV = 15/10 = 1.5, Idol Staff CoV = 25/15 = 1.67, Poker-R-Us CoV = 35/12 = 2.92

Rail Haul, Idol Staff, Poker-R-Us

This index tracks 500 companies which allows for a great deal of diversification. A. Nasdaq B. Fortune 500 C. S&P 500 D. Wall Street Journal

S&P 500

Jenna receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. It also claims that this stock is a "safe bet" for the future. Which of the following statements is correct regarding this information? A. This investment newsletter is most likely correct because they most likely have some special knowledge about the stock. B. The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet." C. It is common for individual stocks to double the return of the S&P500 and still be a "safe bet." D. None of these statements are correct.

The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet."

Which statement is true? A. The larger the standard deviation, the lower the total risk. B. The larger the standard deviation, the higher the total risk C. The larger the standard deviation, the more portfolio risk. D. The standard deviation is not an indication of total risk.

The larger the standard deviation, the higher the total risk

Which of these statements is true? A. When people purchase a stock, they know exactly what their dollar and percent return are going to be. B. Many people purchase stocks as they find comfort in the certainty for this safe form of investing. C. When people purchase a stock, they know the short-term return, but not the long term return. D. When people purchase a stock, they do not know what their return is going to be - either short term or in the long run.

When people purchase a stock, they do not know what their return is going to be - either short term or in the long run.

Which of the following makes this a true statement: The shape of the efficient frontier implies that A. diminishing returns apply to risk-taking in the investment world. B. increasing returns apply to risk-taking in the investment world. C. returns are not impacted by risk-taking in the investment world. D. None of these complete the sentence to make it true.

diminishing returns apply to risk-taking in the investment world.

To find the percentage return of an investment, A. multiply the dollar return by the investment's value at the beginning of the period. B. divide the dollar return by the investment's value at the beginning of the period. C. multiply the dollar return by the investment's value at the end of the period. D. divide the dollar return by the investment's value at the end of the period.

divide the dollar return by the investment's value at the beginning of the period.

This includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment. A. average return B. dollar return C. market return D. portfolio

dollar return

This is another term for market risk. A. firm specific risk B. modern portfolio risk C. nondiversifiable risk D. total risk

nondiversifiable risk

This is the investor's combination of securities that achieves the highest expected return for a given risk level. A. efficient portfolio B. modern portfolio C. optimal portfolio D. total portfolio

optimal portfolio

This is the dollar return characterized as a percentage of money invested. A. average return B. dollar return C. market return D. percentage return

percentage return

This is defined as the volatility of an investment, which includes firm specific risk as well as market risk. A. diversifiable risk B. market risk C. standard deviation D. total risk

total risk