CF chapter 7

38. 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

A) -$10

73. 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 10.8 percent for Stock 1 and 9.7 percent for Stock 2. Prob Stock 1 Stock 2 0.4 0.09 0.11 0.5 0.11 0.08 0.1 0.17 0.13 A) 0.000094 B) 0.00051600 C) 0.00032100 D) 0.71750786

A) 0.000094

69. Sayers purchased a stock with a coefficient of variation equal to 0.125. The expected return on the stock is 20 percent. What is the variance of the stock? A) 0.000625 B) 0.025000 C) 0.625000 D) 0.790500

A) 0.000625

42. 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

A) 0.002969

79. Horse Stock returns have exhibited a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns? A) 0.028025 B) 0.217327 C) 0.359100 D) 0.993094

A) 0.028025

77. 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? A) 0.090437 B) 0.096200 C) 0.90437 D) 0.96200

A) 0.090437

74. Given the returns for two stocks with the following information, calculate the correlation coefficient of the returns for the two stocks. Assume the expected return for Stock 1 is 10.8 percent and 9.7 percent for Stock 2. Prob Stock 1 Stock 2 0.4 0.09 0.11 0.5 0.11 0.08 0.1 0.17 0.13 A) 0.2309676767 B) -0.00002548 C) 0.00032100 D) 0.17671455 hhy

A) 0.2309676767

92. Holding Period Return: George Wilson purchased Bright Light Industries common stock for $47.50 on January 31, 2010. The firm paid dividends of $1.10 during the last 12 months. George sold the stock today (January 30, 2011) for $54.00. What is George's holding period return? Round off the nearest 0.01%. A) 16.00% B) 14.35% C) 11.28% D) 19.60%

A) 16.00%

51. 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 was the stock's rate of return income during the year? (Round your answer to the nearest percent.) A) 6% B) 15% C) 24% D) 26%

A) 6%

65. 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.

62. Niles is making an investment with an expected return of 12 percent. If the standard deviation of the return is 4.5 percent, and if Niles is investing $100,000, then what dollar amount is Niles 95 percent sure that he will have at the end of the year? A) $100,000.00 B) $104,597.50 C) $116,500.00 D) $119,402.50

B) $104,597.50

55. Genaro needs to capture a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property? A) $112,500 B) $125,000 C) $137,500 D) $150,000

B) $125,000

93. Expected Return: Security Analysts that have evaluated Concordia Corporation have determined that there is a 15% chance that the firm will generate earnings per share of $2.40; a 60% probability that the firm will generate earnings per share of $3.10; and a 25% probability that the firm will generate earnings per share of $3.80. What are the expected earnings per share for Concordia Corporation? (Round off to the nearest $0.01) A) $3.10 B) $3.17 C) $2.75 D) $2.91

B) $3.17

54. Babs purchased a piece of real estate last year for $85,000. The real estate is now worth $102,000. If Babs needs to have a total return of 25 percent during the year, then what is the dollar amount of income that she needed to have to reach her objective? A) $3,750 B) $4,250 C) $4,750 D) $5,250

B) $4,250

49. Julio purchased a stock one year ago for $27. The stock is now worth $32, and the total return to Julio for owning the stock was 37 percent. What is the dollar amount of dividends that he received for owning the stock during the year? A) $4 B) $5 C) $6 D) $7

B) $5

66. Tommie has made an investment that will generate returns that are subject to the state of the economy during the year. Use the following information to calculate the standard deviation of the return distribution for Tommie's investment. State Return Probability Weak 0.13 0.3 OK 0.2 0.4 Great 0.25 0.3 A) 0.0453 B) 0.0467 C) 0.0481 D) 0.0495

B) 0.0467

80. Batman Stock has exhibited a standard deviation in stock returns of 0.5, whereas Superman Stock has exhibited a standard deviation of 0.6. The correlation coefficient between the stock returns is 0.5. What is the variance of a portfolio composed of 70 percent Batman and 30 percent Superman? A) 0.1549 B) 0.2179 C) 0.4668 D) 0.5500

B) 0.2179

68. 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? A) 0.0278 B) 0.5556 C) 1.800 D) 36.00

B) 0.5556

47. The expected return for Stock V is 24.5 percent. If we know the following information about Stock Z, then what is the probability of the Dynamite state of the world occurring? Return Probability Poor 0.15 0.2 Lukewarm 0.28 0.7 Dynamite! 0.19 ? A) 5% B) 10% C) 15% D) 20%

B) 10%

72. You invested $3,000 in a portfolio with an expected return of 10 percent and $2,000 in a portfolio with an expected return of 16 percent. What is the expected return of the combined portfolio? A) 6.2% B) 12.4% C) 13.0% D) 13.6%

B) 12.4%

57. 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.) A) 12% B) 16% C) 32% D) 40%

B) 16%

85. The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what is the expected return on Elsenore? A) 11.20% B) 19.20% C) 24.00% D) 32.00%

B) 19.20%

88. The expected return on Kiwi Computers stock is 16.6 percent. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, then what is Kiwi's beta? A) 1.26 B) 2.10 C) 2.80 D) 3.15

B) 2.10

60. If a random variable is drawn from a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations larger than the mean? A) 1.25% B) 2.50% C) 3.75% D) 5.00%

B) 2.50%

50. 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.) A) 17% B) 20% C) 29% D) 35%

B) 20%

46. The expected return for Stock Z is 30 percent. If we know the following information about Stock Z, then what return will it produce in the Lukewarm state of the world? Return Probability Poor 0.2 0.25 Lukewarm ? 0.5 Dynamite! 0.4 0.25 A) 20% B) 30% C) 40% D) It is impossible to determine.

B) 30%

86. 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.? A) 28.80% B) 37.80% C) 48.60% D) 57.60%

B) 37.80%

90. The expected return on KarolCo. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of KarolCo is 2.3, then what is the risk premium on the market? A) 2.5% B) 5.0% C) 7.5% D) 10.0%

B) 5.0%

71. 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? A) 7.7% B) 8.2% C) 8.7% D) 9.2%

B) 8.2%

83. 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.

B) An investor with a 50-asset portfolio.

91. 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.

84. 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.

52. Gunther earned a 62.5 percent return on a stock that he purchased one year ago. The stock is now worth $12, and he received a dividend of $1 during the year. How much did Gunther originally pay for the stock? A) $7.00 B) $7.50 C) $8.00 D) $8.50

C) $8.00

37. 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

75. 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. Prob Stock 1 Stock 2 0.5 0.11 0.18 0.3 0.17 0.15 0.2 0.19 0.12 A) 0.001204001 B) 0.000549003 C) -0.00079 D) -0.3372012

C) -0.00079

45. The return distribution for an asset is as shown in the following table. What are the missing values if the expected return is 10 percent? Return Probability 0.1 0.25 x 0.5 x 0.25 A) 0.20 B) 0.15 C) 0.10 D) None of the above

C) 0.10

81. 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? A) 0.32122 B) 0.54562 C) 0.56676 D) 0.75000

C) 0.56676

58. 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. A) 1.01 inches B) 1.09 inches C) 1.91 inches D) 1.99 inches

C) 1.91 inches

87. The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz? A) 8.40% B) 10.80% C) 13.80% D) 19.20%

C) 13.80%

82. Most of the risk-reduction benefits from diversification can be achieved in a portfolio consisting of A) 5 to 10 stocks B) 10 to 15 stocks C) 15 to 20 stocks D) 20 to 25 stocks

C) 15 to 20 stocks

41. Use the following table to calculate the expected return for the asset. Return Probability 0.05 0.1 0.1 0.15 0.15 0.5 0.25 0.25 A) 12.50% B) 13.75% C) 15.75% D) 16.75%

C) 15.75%

70. You have invested 40 percent of your portfolio in an investment with an expected return of 12 percent and 60 percent of your portfolio in an investment with an expected return of 20 percent. What is the expected return of your portfolio? A) 15.2% B) 16.0% C) 16.8% D) 17.6%

C) 16.8%

40. Use 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%

C) 18.75%

59. 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 95percent confident that it will not run out of food when feeding 50 college students. A) 17.90 pounds B) 21.05 pounds C) 53.95 pounds D) 57.10 pounds

C) 53.95 pounds

61. If a random variable is drawn from a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations below the mean? A) 95.00% B) 96.25% C) 97.50% D) 98.75%

C) 97.50%

95. 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.

76. Given the returns for two stocks with the following information, calculate the correlation coefficient 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. Prob Stock 1 Stock 2 0.5 0.11 0.18 0.3 0.17 0.15 0.2 0.19 0.12 A) 0.001204001 B) 0.000549003 C) -0.00271370 D) -0.971689

D) -0.971689

43. The expected return for the asset shown in the following table is 18.75 percent. If the return distribution for the asset is described as below, what is the standard deviation 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

D) 0.054486

67. 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 variance of the return distribution for Elrond's investment. State Return Probability Weak 0.10 0.8 OK 0.17 0.1 Great 0.28 0.1 A) 0.0536 B) 0.0543 C) 0.0550 D) 0.0557

D) 0.0557

78. The covariance of the returns between Wildcat Stock and Sun Devil Stock is 0.09875. The variance of Wildcat is 0.2116, and the variance of Sun Devil is 0.1369. What is the correlation coefficient between the returns of the two stocks? A) 0.170200 B) 0.293347 C) 0.340823 D) 0.578731

D) 0.578731

94. Standard Deviation: View Point Industries has forecast a rate of return of 20.00% if the economy booms (25.00% probability); a rate of return of 15.00% if the economy in in a growth phase (45.00% probability); a rate of return of 2.50% if the economy in in decline (20.00% probability); and a rate of return of -15.00% if the economy in a depression (10.00% probability). What is View Point's standard deviation of returns? A) 17.31% B) 9.25% C) 15.00% D) 10.46%

D) 10.46%

56. Books Brothers stock was priced at $15 per share two years ago. The stock sold for $13 last year and now it sells for $18. What was the total return for owning Books Brothers stock during the most recent year? Assume that no dividends were paid and round to the nearest percent. A) 17% B) 20% C) 23% D) 38%

D) 38%

48. Ahmet purchased a stock for $45 one year ago. The stock is now worth $65. During the year, the stock paid a dividend of $2.50. What is the total return to Ahmet from owning the stock? (Round your answer to the nearest whole percent.) A) 5% B) 44% C) 35% D) 50%

D) 50%

89. The expected return on Mike's Seafood stock is 17.9 percent. If the expected return on the market is 13 percent and the beta for Kiwi is 1.7, then what is the risk-free rate? A) 4.5% B) 5.0% C) 5.5% D) 6.0%

D) 6.0%

36. 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.

53. Moshe purchased a stock for $30 last year. He found out today that he had a -100 percent return on his investment. Which of the following must be true? A) The stock is worth $30 today. B) The stock is worth $0 today C) The stock paid no dividends during the year. D) Both b and c must be true.

D) Both b and c must be true.

44. 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.

63. 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

64. 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

39. 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