Finance 780 Exam 2 - Ch. 10, 11, 5, 6
Given a normal distribution, assume you want to earn a rate of return that plots more than three standard deviations above the mean. What is your probability of earning such a return in any one year?
.14% or less
Which one of the following would tend to indicate that a portfolio is being effectively diversified?
A decrease in the portfolio standard deviation
Which one of the following is an example of systematic risk?
A well respected chairman of the Federal Reserve suddenly resigns
The return earned in a typical year over a multiyear period is called the ______ average return.
Arithmetic
Which one of these measures the interrelationship between two securities?
Covariance
Which one of the following values cannot be negative?
Dividend yield
Which one of these statements is correct?
During the 1930's (Great Depression), long-term government bonds produced a relatively stable rate of return relative to large-company stocks
Suppose a portfolio had an arithmetic average return of 8% for a 4-year period. Which one of these statements must be true regarding this portfolio for the period?
If the standard deviation of the portfolio is greater than zero, then the geometric average portfolio return is less than 8%
Assume the risk-free rate and the market risk premium are both positive. Trevor currently owns a portfolio consisting of risk and risk-free securities. The portfolio has an expected return of 11.2%, a standard deviation of 116.2%, and a beta of 1.21. He has decided that he would prefer a higher expected return. Which one of these actions should he take?
Increase the portfolio weight of the risky assets without affecting the total portfolio value
You are comparing the returns of two portfolios for a 10-year period. Portfolio I has a lower dispersion of returns and a higher average rate of return than Portfolio II. Given this, what do you know with certainty?
Portfolio I has a lower standard of deviation than Portfolio II
Based on the period 1926 to 2015, which category of securities has outperformed all of the other categories?
Small-company stocks
Assume stocks A and B have had identical stock prices every day for the past 3 years. Stock A pays a dividend but stock B does not. Which one of these statements applies to these stocks for the last 3 years?
Stock A's total return has been higher than stock B's every year
What conclusion should you draw from the performance of stocks and bonds over the period 1926 to 2015?
Stocks are riskier than bonds
Over the long-term, which one of the following is a correct statement concerning risk premium?
Stocks tend to have a higher risk premium than bonds
The risk premium is computed by _____ the average rate of return for an investment.
Subtracting the average return on U.S. Treasury bills from
A portfolio consists of five securities that have individual betas of 1.38, 0.87, 1.02, 1.49, and 0.67. You do not know the portfolio weight of each security. What do you know with certainty?
The portfolio beta will be less than 1.49 and greater than 0.67
Which of the following statements is correct concerning the standard deviation of a portfolio?
The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio
Amy has a portfolio with a beta of 1.26 but decided to lower her investment risk. Adding which one of the following securities to her portfolio is most assuredly going to lower the risk of the portfolio?
U.S. Treasury bills
Which one of the following types of securities has tended to produce the lowest real rate of return for the period 1926 to 2015?
U.S. Treasury bills
You plotted the monthly rate of return for two securities against time for the past 48 months. If the pattern of the movements of these two sets of returns rose and fell together the majority, but not all of the time, then the securities have:
a strong positive correlation
Systematic risk is measured by:
beta
The systematic risk of the market is assigned a:
beta of 1
Unsystematic risk:
can be effectively eliminated through portfolio diversification
The correlation between stocks A and B is equal to the:
covariance (AB) divided by the product of the standard deviations of A and B
The primary purpose of portfolio diversification is to:
eliminate asset-specific risk
The average compound return earned per year over a multiyear period is called the _____ average return.
geometric
Assume two securities are negatively correlated. If these two securities are combined into an equally weighted portfolio, the portfolio standard deviation must be:
less than the weighted average of the standard deviations of the individual securities
The expected return on a portfolio is:
limited by the returns on the individual securities within the portfolio
When computing the expected return on a portfolio of stocks the portfolio weights are based on:
market value of the total shares held in each stock
If a stock portfolio is well diversified, then the portfolio variance:
may be less than the variance of the least risky stock in the portfolio
The risk premium for an individual security is computed by:
multiplying the security's beta by the market risk premium
A symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the _____ distribution.
normal
A security that is fairly priced will have a return that lies _____ the security market line:
on
The standard deviation for a set of stock returns can be calculated as the:
positive square root of the variance
According to the capital asset pricing model, the expected return on a security is:
positively and linearly related to the security's beta
If there is no diversification benefit derived from combining two risky stocks into one portfolio, then the:
returns on the two stocks must move perfectly in sync with one another
The excess return you earn by moving from a relatively risk-free investment to a risky investment is called the:
risk premium
The principle of diversification tells us that:
spreading an investment across many diverse assets will lower a portfolio's level of risk
The variance of returns for a portfolio of stocks is computed by dividing the sum of the:
squared deviations by (the numbers of returns minus one)
The beta of a security is calculated by dividing:
the covariance of the security by the variance of the market
The standard deviation of a portfolio will tend to increase when:
the portfolio concentration in a single cyclical industry increases
A stock with a beta of zero would be expected to have a rate of return equal to:
the risk-free rate
The intercept point of the security market line is the rate of return that corresponds to:
the risk-free rate
The capital gains yield plus the dividend yield on a security is called the:
total return
Well-diversified portfolios have negligible:
unsystematic risks
A stock with an actual return that lies above the security market line has:
yielded a higher return than expected for the level of risk assumed