fin ch 11

) If the returns on a stock index can be characterized by a normal distribution with mean 12%, the probability that returns will be lower than 12% over the next period equals ________. A) 50% B) 25% C) 46% D) 33%

A

) While ________ seems to be a reasonable measure of risk when evaluating a large portfolio, the ________ of an individual security does not explain the size of its average return. A) volatility, volatility B) the mean return, standard deviation C) mode, volatility D) mode, mean return

A

A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are ________. A) not perfectly positively correlated B) perfectly correlated C) susceptible to common risks only D) both B and C

A

Amazon.com stock prices gave a realized return of 15%, 15%, -15%, and -15% over four successive quarters. What is the annual realized return for Amazon.com for the year? A) -4.45% B) -7.12% C) -5.12% D) 0%

A

Amazon.com stock prices gave a realized return of 5%, -5%, 11%, and -11% over four successive quarters. What is the annual realized return for Amazon.com for the year? A) -1.46% B) 2.91% C) 0.00% D) 1.46%

A

Because investors can eliminate unsystematic risk for free by diversifying their portfolios, they ________. A) do not require a risk premium for bearing it B) require a risk premium for bearing it C) are indifferent about credit spread and risk premium D) do not require a credit spread

A

Greg purchased stock in Bear Stearns and Co. at a price of $88 per share one year ago. The company was acquired by JP Morgan at a price of $11 per share. What is Gregʹs return on his investment? A) -87.50% B) -113.75% C) -100.62% D) -96.25%

A

Historically, stocks have delivered a ________ return on average compared to Treasury bills but have experienced ________ fluctuations in values. A) higher, higher B) higher, lower C) lower, higher D) lower, lower

A

If a stock pays dividends at the end of each quarter, with realized returns of R1, R2, R3, and R4 each quarter, then the annual realized return is calculated as ________. A) Rannual = (1 + R1) (1 + R2) (1 + R3)( 1 + R4) - 1 B) Rannual = R1 + R2 + R3 + R4 C) Rannual = (1 + R1) (1 + R2)( 1 + R3)( 1 + R4) D) Rannual = R1 + R2 + R3 + R4 4

A

In general, it is possible to eliminate ________ risk by holding a large portfolio of assets. A) unsystematic B) systematic C) unsystematic and systematic D) market specific

A

Independent risk is more closely related to ________. A) unsystematic risk B) systematic risk C) common risk D) diversification risk

A

Investors demand a higher return for investments that have larger fluctuations in values because ________. A) they do not like risk B) they are risk seeking C) they invest for the long term D) they prefer fluctuations

A

Many former employees at AlphaEnergy, an energy trading and supply company, had a large part of their portfolio invested in AlphaEnergyʹs stock. These employees were bearing a high degree of ________ risk. A) unsystematic B) systematic C) market-specific D) non-diversifiable

A

Rational investors ________ fluctuations in the value of their investments. A) are averse to B) prefer C) are indifferent to D) are in favor of

A

Stocks with high returns are expected to have ________. A) high variability B) low variability C) no relation to variability D) inverse relationship with variability

A

Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $95. What was your dividend yield and capital gains yield on the investment? A) 2%, -5% B) 2%, 5% C) -2%, 5% D) 5%, 2%

A

The standard deviation of returns of ________. I. small stocks is higher than that of large stocks II. large stocks is lower than that of corporate bonds III. corporate bonds is higher than that of Treasury bills Which statement is true? A) I and III B) I, II, and III C) I and II D) I only

A

There is an overall relationship between ________ and ________. Larger stocks have a lower volatility overall. A) size, risk B) mean, standard deviation C) risk aversion, size D) volatility, mean

A

Two slot machines offer to double your money 3 times out of 5. Machine A takes $10 bets and Machine B takes $100 bets on each occasion. A risk-averse investor prefers to bet on ________. A) Machine A B) Machine B C) does not matter D) none of the above

A

Which of the following investments had the largest fluctuations overall return over the past eighty years? A) small stocks B) S&P 500 C) corporate bonds D) Treasury bills

A

Which of the following is NOT a diversifiable risk? A) the risk that oil prices rise, increasing production costs B) the risk that the CEO is killed in a plane crash C) the risk of a key employee being hired away by a competitor D) the risk of a product liability lawsuit

A

You own shares in Supernova Inc. that were purchased at a price of $23 per share. Quicksilver Inc. has offered to purchase Supernova Inc. and buy your shares at a price of $34 per share. What will be your return if you tender your shares to Quicksilver Inc. and the deal is completed? A) 47.83% B) 33.48% C) 50.22% D) 45.43%

A

The average annual return for the S&P 500 from 1886 to 2006 is 15%, with a standard deviation of 25%. Based on these numbers, what is a 95% confidence interval for 2007ʹs returns? A) -35%, 65% B) -17.5%, 32.5% C) -25%, 55% D) -20%, 50%

Answer: A Explanation: A) 15% - (2 × 25%) =-35%; 15% + (2 × 25%) =65%

Ford Motor Company had realized returns of 20%, 30%, 30%, and 20% over four quarters. What is the quarterly standard deviation of returns for Ford calculated from this sample? A) 5.77% B) 5.20% C) 6.06% D) 4.62%

Answer: A Explanation: A) Average return =(20%+ 30% + 30% + 20%) / 4 =25%; standard deviation = ((20% - 25%)2 + (30% - 25%)2 + (30% - 25%)2 + (20% - 25%)2 ) / (4 - 1) = 5.77%

Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential blockbuster drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cureʹs blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cureʹs drugs would produce $50 million in net income. The probability of the FDA approving a drug is 50%. What is the expected payoff for Little Cureʹs ten drugs? A) $250 million B) $50 million C) $1 billion D) $0

Answer: A Explanation: A) expected payoff = prob of payoff × amount if successful = 0.5 × $50 = $25 million for each drug $25 million × 10 drugs = $250 million

) Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 40% probability that the firm will have a 20% return and a 60% probability that the firm will have a -30% return. The standard deviation for the return on an individual firm is closest to ________. A) 24.49% B) -10.00% C) 12.25% D) 9.80%

Answer: A Explanation: A) expected return =0.4(20%) + 0.6(-30%) =-10.00% standard deviation = 0.4(0.20 - -0.1)2 + 0.6(-0.30 - -0.1)2 = 0.24494897

The average annual return over the period 1926-2009 for the S&P 500 is 12.8%, and the standard deviation of returns is 21.4%. Based on these numbers, what is a 67% confidence interval for 2010 returns? A) -1.3%, 20.5% B) -8.6%, 34.2% C) -25.8%, 54.7% D) -25.8%, 47.9%

Answer: B Explanation: B) 12.8% - (1 × 21.4%) =-8.6%; 12.8% + (1 × 21.4%) =34.2%

The geometric average annual return for a large capitalization stock portfolio is 10% for ten years and 6% per year for the next five years. The geometric average annual return for the entire 15 year period is ________. A) 9.08% B) 8.65% C) 8.22% D) 9.52%

Answer: B Explanation: B) Compound return for first ten years = (1 + 0.1)10 = 2.5937; compound return for next 5 years = (1 + 0.06)5 = 1.3382; total return over 15 years = 2.5937 × 1.3382 = 3.4710; geometric average annual return = (3.4710)1/15 - 1= 0.0865; geometric average annual return = 8.65%

Which of the following statements is FALSE? A) The geometric average return is a better description of the long-run historical performance of an investment. B) The geometric average return will always be above the arithmetic average return, and the difference grows with the volatility of the annual returns. C) The compounded geometric average return is most often used for comparative purposes. D) We should use the arithmetic average return when we are trying to estimate an investmentʹs expected return over a future horizon based on its past performance.

Answer: B Explanation: B) The geometric average return will always be below the arithmetic average return, and the difference grows with the volatility of the annual returns.

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 20% probability that they will have a 20% return and a 80% probability that they will have a -30% return. What is the expected return for an individual firm? A) -12% B) -20% C) 10% D) 20%

Answer: B Explanation: B) expected return =0.2 × (20%) + 0.8 × (-30%) =-20%

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return. The standard deviation for the return on an portfolio of 20 type S firms is closest to ________. A) 13.75% B) 22.91% C) 5.00% D) 4.58%

Answer: B Explanation: B) expected return =0.7(20%) + 0.3(-30%) =5% standard deviation = 0.7(0.20 - 0.05)2 + 0.3(-0.30 - 0.05)2 = 0.22912878 Since all these firms move the same, there is no adjustment to the standard deviation.

McCoy paid a one-time special dividend of $3.20 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $62.93. What was your capital gain yield from holding McCoy? A) 4.07% B) 6.11% C) 33.89% D) 40.70%

Answer: C Explanation: C) ($62.93 - $47.00) / $47.00 =33.89%

The average annual return over the period 1926-2009 for the S&P 500 is 12.0%, and the standard deviation of returns is 21.3%. Based on these numbers, what is a 95% confidence interval for 2010 returns? A) -1.5%, 21.8% B) -10.7%, 32.8% C) -30.6%, 54.6% D) -30.6%, 76.4%

Answer: C Explanation: C) 12.0% - (2 × 21.3%) =-30.6%; 12.0% + ( 2 × 21.3%) = 54.6%

The average annual return for the S&P 500 from 1886 to 2006 is 5%, with a standard deviation of 15%. Based on these numbers, what is a 95% confidence interval for 2007ʹs returns? A) -12.5%, 17.5% B) -15%, 25% C) -25%, 35% D) -25%, 25%

Answer: C Explanation: C) 5% - (2 × 15%) =-25%; 5% + (2 × 15%) =35%

The Ishares Bond Index fund (TLT) has a mean and annual standard deviation of returns of 5% and 10%, respectively. What is the 66% confidence interval for the returns on TLT? A) -7%, 10% B) 5%, 10% C) -5%, 15% D) -10%, 10%

Answer: C Explanation: C) 66% confidence interval =from mean - standard deviation to mean + standard deviation; from 5% - 10% = -5% to 5% + 10% = 15%

The average annual return for the S&P 500 from 1886 to 2006 is 9.5%, with a standard deviation of 18%. Based on these numbers, what is a 95% confidence interval for 2007ʹs returns? A) -13.25%, 22.75% B) -16.5%, 35.5% C) -26.5%, 45.5% D) -11.5%, 30.5%

Answer: C Explanation: C) 9.5% - (2 × 18%) =-26.5%; 9.5% + (2 × 18%) =45.5%

Ford Motor Company had realized returns of 15%, 30%, -15%, and -30% over four quarters. What is the quarterly standard deviation of returns for Ford? A) 24.65% B) 32.86% C) 27.39% D) 30.12%

Answer: C Explanation: C) Average return = (15% + 30% + -15% + -30%) / 4 = 0%; standard deviation = ((15%)2 + (30%)2 + (-15%)2 + (-30%)2 ) / (4 - 1)1/2 = 27.39%

Bear Stearnsʹ stock price closed at $98, $103, $58, $29, $4 over five successive weeks. The weekly standard deviation of the stock price calculated from this sample is ________. A) $30.07 B) $49.40 C) $42.96 D) $34.37

Answer: C Explanation: C) Average return =$(98 + 103 + 58 + 29 + 4) / 5 =$58.4; standard deviation = (($98 - 58.4)2 + (103 - 58.4)2 + (58 - 58.4)2 + (29 - 58.4)2 + (4 - 58.4)2) / (5 - 1)1/2 = $42.96

Which of the following statements is FALSE? A) The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk. B) When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified. C) Fluctuations of a stockʹs return that are due to firm-specific news are common risks. D) The volatility in a large portfolio will decline until only the systematic risk remains. .

Answer: C Explanation: C) Fluctuations of a stockʹs return that are due to firm-specific news are not common risks

Which of the following statements is FALSE? A) Expected return should rise proportionately with volatility. B) Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return. C) Smaller stocks have lower volatility than larger stocks. D) The largest stocks are typically more volatile than a portfolio of large stocks.

Answer: C Explanation: C) Smaller stocks have higher volatility than larger stocks.

Which of the following statements is FALSE? A) Investments with higher volatility have rewarded investors with higher average returns. B) Investments with higher volatility should have a higher risk premium and, therefore, higher returns. C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities. D) Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on.

Answer: C Explanation: C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the volatility does not explain the size of returns of individual securities.

Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 60% probability that the firm will have a 20% return and a 40% probability that the firm will have a -30% return. The standard deviation for the return on a portfolio of 20 type I firms is closest to ________. A) 0.00% B) 12.25% C) 5.48% D) 24.49%

Answer: C Explanation: C) expected return =0.6(20%) + 0.4(-30%) =0% standard deviation = 0.6(0.20 - 0)2 + 0.4(-0.30 - 0)2 = 0.24494897 Since all these firms move independently, stdev = stdev(single firm) / number of obs = 0.24494897 / 20 = 0.05477226

McCoy paid a one-time special dividend of $3.40 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $63.52. What was your realized return from holding McCoy? A) 4.24% B) 6.36% C) 33.91% D) 42.38%

Answer: D Explanation: D) ($3.40 + $63.52 - $47.00) / $47.00 =42.38%

The average annual return over the period 1926-2009 for small stocks is 21.2%, and the standard deviation of returns is 21.2%. Based on these numbers, what is a 95% confidence interval for 2010 returns? A) -10.6%, 31.8% B) 0%, 42.4% C) -21.2%, 42.4% D) -21.2%, 63.6%

Answer: D Explanation: D) 21.2% - (2 × 21.2%) =-21.2%; 21.2% + ( 2 × 21.2%) =63.6%

Ford Motor Company had realized returns of 10%, 20%, -10%, and -10% over four quarters. What is the quarterly standard deviation of returns for Ford? A) 12.75% B) 14.25% C) 13.50% D) 15.00%

Answer: D Explanation: D) Average return = (10% + 20% - 10% - 10%) / 4 =2.5%; standard deviation = ((10% - 2.5)2 + (20% - 2.5)2 + (-10% - 2.5)2 + (-10% - 2.5)2 ) / (4 - 1)1/2 = 15.00%

Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is ________. A) 1.55% B) 1.03% C) 0.90% D) 1.29%

Answer: D Explanation: D) Average return = (4% + 3% + 2%+ 5%) / 4 =3.5%; standard deviation = ((4% - 3.5%)2 + (3% - 3.5%)2 + (2% - 3.5%)2 + (5% -3.5%)2 ) / (4 - 1) = 1.29%

Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential blockbuster drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cureʹs blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cureʹs drugs would produce $100 million in net income. The probability of the FDA approving a drug is 40%. What is the expected payoff for Big Cureʹs blockbuster drug? A) $100 million B) $0 C) $1 billion D) $400 million

Answer: D Explanation: D) expected payoff = prob of payoff × amount if successful = 0.4 × $1 billion = $400 million

Which type of investment has historically had the lowest volatility?

Answer: Investments in Treasury bills have historically witnessed the lowest volatility.

Which type of investment has historically had the highest volatility?

Answer: Investments in small stocks have historically witnessed the highest volatility

6) Is volatility a reasonable measure of risk when evaluating the investment in a single stock?

Answer: No. In the case of an investment in a single stock, the volatility does not explain the size of its average return, because the stock has its own unique risk that can be diversified away.

What care, if any, should be taken when selecting stocks for an investment portfolio?

Answer: Stocks should be selected such that their returns are inversely correlated, so that the risks get cancelled out as we pool more stocks in the portfolio.

What is the diversification achieved by an investor if he invests in Exxon Mobil, Dell, and Bank of America?

Answer: The three stocks Exxon Mobil, Dell, and Bank of America belong to three different sectors and should have a high level of independent risk. Thus, the portfolio of these three stocks should have considerable diversification benefits.

What are the two components of realized return from a stock investment?

Answer: The total realized return earned from a stock investment comprises two components: dividend yield and capital gains yield.

What is the diversification achieved by an investor if he invests in Dell, IBM, and Microsoft?

Answer: There will not be much diversification achieved by investing in Dell, IBM, and Microsoft, because all three have similar business and thus, high common risk.

Comment on the accuracy of the statement that as we put more stocks in a portfolio, its risk gets eliminated to zero.

Answer: This is an inaccurate statement as the portfolio risk does not get eliminated, but the portfolio is left with only systematic risk. The unsystematic risk gets eliminated.

When looking at investment portfolios historically, was there a pattern between returns and volatility?

Answer: Yes, there is a direct relationship between return and volatility, i.e., high volatility investments have generally yielded higher returns.

Is volatility a reasonable measure of risk when evaluating large portfolios?

Answer: Yes, volatility is a reasonable measure of risk for large portfolios, once it is fully diversified.

) If the Federal Reserve were to change from an expansionary to a contractionary monetary policy, this would be an example of ________. A) unsystematic risk B) systematic risk C) independent risk D) diversification risk

B

) Suppose you invested $93 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.53 today and then you sold it for $94. What was your dividend yield and capital gains yield on the investment? A) 0.54%, 1.13% B) 0.57%, 1.08% C) 0.57%, 1.13% D) 1.08%, 1.18%

B

A companyʹs stock price jumped when it announced that its revenue had decreased because of the quality issues of its products. This is an example of ________. A) market risk B) unsystematic risk C) systematic risk D) undiversifiable risk

B

Amazon.com stock prices gave a realized return of 15%, 15%, 15%, and 10% over four successive quarters. What is the annual realized return for Amazon.com for the year? A) 60.57% B) 67.30% C) 53.84% D) 74.03%

B

Fluctuations of a stockʹs return that are due to market-wide news representing common risk is the ________. A) idiosyncratic risk B) systematic risk C) unique risk D) unsystematic risk

B

IGM Realty had stock prices of $33, $33, $38, $36, and $28 at the end of the last five quarters. If IGM pays a dividend of $1 at the end of each quarter, what is the annual realized return on IGM? A) -5.62% B) -4.49% C) -4.72% D) -4.94%

B

If asset Aʹs return is exactly two times asset Bʹs return, then following risk return tradeoff, the standard deviation of asset A should be ________ times the standard deviation of asset B. A) 3 B) 2 C) 1 D) 4

B

Suppose the quarterly arithmetic average return for a stock is 10% per quarter and the stock gives a return of 15% each over the next two quarters. The arithmetic average return over the six quarters is ________. A) 15.17% B) 11.67% C) 12.83% D) 16.33%

B

Suppose you invested $79 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.41 today and then you sold it for $66. What was your return on the investment? A) -20.72% B) -$15.94% C) -18.33% D) -17.53%

B

The S&P 500 index delivered a return of 25%, 15%, -35%, and -5% over four successive years. What is the arithmetic average annual return for four years? A) -5% B) 0% C) 5% D) 3%

B

The risk premium of a security is determined by its ________ risk and does not depend on its ________ risk. A) systematic, undiversifiable B) systematic, unsystematic C) undiversifiable, diversifiable D) diversifiable, undiversifiable

B

The risk that is linked across outcomes is called ________. A) diversifiable risk B) common risk C) uncorrelated risk D) independent risk

B

When investing for a long term, investors care about the volatility of ________ returns and not the volatility of ________ returns. A) average, cumulative B) cumulative, average C) mean, cumulative D) mean, average

B

Which of the following investments offered the lowest overall return over the past eighty years? A) small stocks B) Treasury bills C) S&P 500 D) corporate bonds

B

Which of the following statements is TRUE? A) On average, smaller stocks have lower volatility than Treasury bills. B) Portfolios of smaller stocks are typically less volatile than individual small stocks. C) On average, smaller stocks have lower returns than larger stocks. D) On average, Treasury bills have higher returns than stocks.

B

) As we increase the number of stocks in a portfolio, the standard deviation of returns of the portfolio ________. A) increases B) remains unchanged C) decreases D) doubles

C

If returns on stock A are more volatile than the returns on stock B, the geometric average return of stock A will be ________ the geometric average return of stock B when their arithmetic average returns are same. A) same as B) higher than C) lower than D) always same as

C

Suppose you invested $59 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of 0.38 today and then you sold it for $66. What was your return on the investment? A) 8.76% B) 13.76% C) 12.51% D) 10.01%

C

Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.63 today and then you sold it for $65. What was your return on the investment? A) 6.57% B) 7.51% C) 9.38% D) 10.32%

C

The S&P 500 index delivered a return of 20%, -10%, 20%, and 5% over four successive years. What is the arithmetic average annual return for four years? A) 10.50% B) 13.13% C) 8.75% D) 9.63%

C

Which of the following investments offered the highest overall return over the past eighty years? A) Treasury bills B) S&P 500 C) small stocks D) corporate bonds

C

Which of the following is NOT a systematic risk? A) the risk that oil prices rise, increasing production costs B) the risk that the economy slows, reducing demand for your firmʹs products C) the risk that your new product will not receive regulatory approval D) the risk that the Federal Reserve raises interest rates

C

Your investment over one year yielded a capital gains yield of 5% and no dividend yield. If the sale price was $114 per share, what was the cost of the investment? A) $119.43 B) $103.14 C) $108.57 D) $114.00

C

) You purchased Alpha Innovative Inc. stock at a price of $25 per share. Its price was $15 after six months and the company declared bankruptcy at the end of the next six months. The realized return over the last year is ________. A) -99% B) -75% C) -150% D) -100%

D

Suppose that a stock gave a realized return of 20% over a two-year time period and a 10% return over the third year. The geometric average annual return is ________. A) 8.28% B) 12.43% C) 14.08% D) 16.57%

D

Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $100. What was your dividend yield and capital gains yield on the investment? A) 2%, 2% B) 0%, 2% C) 3%, 2% D) 2%, 0%

D

The S&P 500 index delivered a return of 10%, 15%, 15%, and -30% over four successive years. What is the arithmetic average annual return for four years? A) 3.00% B) 3.50% C) 2.25% D) 2.50%

D

The excess return is the difference between the average return on a security and the average return for ________. A) Treasury bonds B) a portfolio of securities with similar risk C) a broad-based market portfolio like the S&P 500 index D) Treasury bills

D

The probability mass between two standard deviations around the mean for a normal distribution is ________. A) 66% B) 90% C) 75% D) 95%

D

The risk premium of a stock is NOT affected by its ________. A) undiversifiable risk B) market risk C) systematic risk D) unsystematic risk

D

The risk premium of a stock is not affected by its ________. A) undiversifiable risk B) typical risk C) systematic risk D) unsystematic risk

D

You purchase a 30-year, zero-coupon bond for a price of $25. The bond will pay back $100 after 30 years and make no interim payments. The annual compounded return (geometric average return) on this investment is ________. A) 4.49% B) 5.68% C) 4.02% D) 4.73%

D

Rational investors may be willing to choose an investment that has additional risk but does not offer additional reward. T/F

F

There is a clear link between the volatility of returns for individual stocks and the returns for individual stocks. T/F

F

Historical evidence on the returns of large portfolios of stock and bonds shows that investments with higher volatility have rewarded investors with higher returns. T/F

T