Finance Exam 3

The function for computing an average in excel is called

Average

Which of the following statements is true regarding protfolios?

A portfolio is combination of investments held by an investor. A portfolio reduce risk through diversification

Which of the following is the correct equation for the coefficient of variation ( CoV)?

CoV= standard deviation/average return

Diversification is:

Combining many different types of investments whose returns are not perfectly positively correlated for the purpose of reducing risk.

_____ is a standardized measure of the relationship between two variables over time

Correlation

The beta on the market portfolio is always greater than 1. True False

False

The coefficient of variation is a common measure of the risk-versus-return relationship. As an investor, you would want an investment with a high coefficient of variation.

False, a LOW coefficient of variation indicated a better risk-return tradeoff.

The second lesson from capital market history is: The greater the potential reward, the smaller the risk.

False, the greater the risk

If a particular stock is riskier than the market portfolio, then the risk premium on that stock will be lower than the market risk premium. True False

False; Higher

Which risk does an efficient market not reward investors for taking? Market risk Systematic risk Firm-specific risk An efficient market doesn't reward for taking risk.

Firm-specific risk

_______ is a better measure if an investor wants to know the compound rate of growth on an investment

Geometric average return

Which of the following statements is/are true? Select all that are correct. If a firm has a beta = 1, the stock will have a risk premium equal to that of the market. If beta > 1, the stock's risk premium will be larger than the market risk premium. If beta < 1, the stock's risk premium will be less than the market risk premium. None of these statements are correct.

If a firm has a beta = 1, the stock will have a risk premium equal to that of the market. If beta > 1, the stock's risk premium will be larger than the market risk premium. If beta < 1, the stock's risk premium will be less than the market risk premium.

Which of the following statements is/are true? Select all that are correct. If required return > expected return, the stock is under-valued If required return = expected return, the stock is fairly-valued If required return < expected return, the stock is over-valued If required return > expected return, you should buy the stock. If required return < expected return, you should sell the stock.

If required return = expected return, the stock is fairly-valued

What is true regarding firm-specific risk?

It includes the risk factors that are specific to that company or similar companies

Which of the following statements is true regarding the market portfolio? Select all that are correct. It is a portfolio containing all stocks. It is a portfolio containing only publicly-trade stocks. It is usually approximated with the S&P 500 stock market index. It can be approximated with a portfolio of long-term government bonds.

It is a portfolio containing all stocks. It is usually approximated with the S&P 500 stock market index.

Second largest historical risk premium match with:

Large-company stocks

Fourth largest historical risk premium match with:

Long term government

Third largest historical risk premium match with:

Long-term corporate

What following statements is/are true regarding correlation coefficients?

Perfect positive correlation (p=+1) means that two investments move exactly alike over time. A perfect negative correlation (p=-1) means that the two investments move in the exact opposite direction over time Combining assets that are perfectly positively correlated offers no risk reduction. Combining assets whose returns are negatively correlated reduces the overall risk of the portfolio substantially. If one could find perfectly negatively correlated assets, you could eliminate ALL risk.

______is the level of total return needed to be compensated for the risk taken.

Required Rate

Which of the following is the correct formula for the Capital Asset Pricing Model (CAPM)? Note: rf stands for risk-free rate and rm stands for the return on the market. Required Return = rf + beta*(rm - rf) Required Return = rf + beta*(rm) Required Return = beta*(rm - rf) Required Return = rf - beta*(rm - rf)

Required Return = rf + beta*(rm - rf)

_____ is the reward for investing

Return

The fact that most investors like returns but do not like risk menas that they are:

Risk averse

The ____ is the excess return on a risky asset over the risk-free rate. It is the reward for bearing risk

Risk premium

The function for computing the standard deviation of historical returns in excel is called

STDEV.S

Large historical risk premium match with:

Small-Company Stocks

The return on which of the following securities is usually used as the risk-free rate? T-bill long-term corporate bond small-company stock large-company stock

T-bill

What makes stock investing risky

The uncertainty about what your return is going to be

What are the key lessons from capital market history

There is a reward for bearing a specific type of risk. The greater the potential reward, the greater the unavoidable risk.

How exactly does diversification reduce risk?

Through the correlation of asset returns; correlations coefficients closest to -1 reduce the most risk.

_____ is the dollar return characterized as a percentage of money invested

Total percent return

A portfolio's beta is calculated as follows: βp=(w1⋅β1)+(w2⋅β2)+...+(wn⋅βn) True False

True

True or False: As you increase the number of stocks in a portfolio, the firm-specific risk is reduced, but market risk will always be present.

True

True or False: If a portfolio is well-diversified, it will have less risk than the assets that make it up.

True

True or False: The average return can be used as as proxy for the expected future rate of return

True

True or False: The first lesson from capital market history is: there is a reward for bearing risk

True

Which is correct regarding risk?

We can assess the volatility or risk of an investment by calculating the standard deviation of historical returns. It is measured by the dispersion, spread, or volatility of returns. It is the chance that the rate of return expected will not be the rate of return earned

Total dollar return is calculated as

ending value-beg value + income

For stock investments, diversification will virtually eliminate __________. The relevant risk that investors are always exposed to is ___________. market risk; firm-specific risk firm-specific risk; market risk systematic risk; firm-specific risk market risk; systematic risk

firm-specific risk; market risk

What is true regarding market-risk?

it is not diversifiable

The market risk premium is the: return on the market portfolio minus the risk-free rate. rate of return on the U.S. T-bill. return on large-company stocks minus the risk-free rate. return on the market portfolio.

return on the market portfolio minus the risk-free rate.

_____ is the rate of return on a riskless investement

risk free reate

_____ are considered risk free

treasury bills