ch 5 172
Which of the following statistics cannot be negative? Correlation coefficient E(r) Covariance Variance
Variance
The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________.
(.003)/(.1*.05)=.6
Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio?
(.2-.1)/(.25)=.4
If the nominal interest rate is 5.9% and the inflation rate is 2.5%. What is the real interest rate?
(1 + n) = (1 + r) × (1 + i) ... (1 + 0.059) = (1 + r) × (1 + 0.025) ... solving for r = 0.0332 or 3.32%
The historical average rate of return on the large company stocks since 1926 has been
12%
On January 1, you sold short one round lot (that is, 100 shares) of Lowe's stock at $17 per share. On March 1, a dividend of $3 share was paid. On April 1, you covered the short sale by buying the stock at a price of $12 per share. You paid 65 cents per share in commissions for each transaction. What is the value of your account on April 1?
17 -12 -3 -1.30(2x.65) =.7 (*100) = 70
Asset allocation refers to the _________. A. allocation of the investment portfolio across broad asset classes B. analysis of the value of securities C. choice of specific assets within each asset class D. none of the answers define asset allocation
A
If you believe the economy is about to go into a recession you might change your asset allocation by selling _______ and buying ______. A. growth stocks; long-term bonds B. long-term bonds; growth stocks C. defensive stocks; growth stocks D. defensive stocks; long-term bonds
A
Market risk is also called __________ and _________. A. systematic risk; nondiversifiable risk B. unique risk; diversifiable risk C. unique risk; nondiversifiable risk D. systematic risk; diversifiable risk
A
Real assets in the economy include all but which one of the following? A. Common stock B. Buildings C. Consumer durables D. Land
A
Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________. A. less than 1 B. between 0 and 1 C. less than or equal to 0 D. 1
A
Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities A. I, II and III B. I only C. II and III only D. I and II only
A
__________ assets generate net income to the economy and __________ assets define allocation of income among investors. A. Real, financial B. Financial, real C. Real, real D. Financial, financial
A
Consider two firms producing DVDs. One uses a highly automated robotics process, while the other uses human workers on an assembly line and pays overtime when there is heavy production demand. Requirement 1: Which firm will have higher profits in a boom? A. Firm using robotics B. Firm using human workers Requirement 2: Which firm's stock will have a higher beta? A. Firm using robotics B. Firm using human workers
A A
Diversification is most effective when security returns are _________. A. positively correlated B. negatively correlated C. high D. uncorrelated
B
The material wealth of society is determined by the economy's _________, which is a function of the economy's _________. A. investment bankers, financial assets B. productive capacity, real assets C. productive capacity, financial assets D. investment bankers, real assets
B
Assume that the Federal Reserve increases the money supply. This will cause ____________. I. interest rates to decrease II. consumption and investment to decrease III. inflation to fall A. I, II and III B. I and II only C. I only D. II and III only
C
Debt securities promise _________. I. a fixed stream of income II. a stream of income that is determined according to a specific formula III. a share in the profits of the issuing entity A. I only B. II or III only C. I or II only D. I and III only
C
Security selection refers to the ________. A. allocation of the investment portfolio across broad asset classes B. analysis of the value of securities C. choice of specific securities within each asset class D. top down method of investing
C
Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B. A. slightly more B. slightly less C. 20% more D. 20% less
C
Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. A. A real asset was created in this transaction. B. A financial asset was destroyed in this transaction. C. A new financial asset was created in this transaction. D. A financial asset was traded for a real asset in this transaction.
C
Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______. A. the returns on the stock and bond portfolios tend to move inversely B. the returns on the stock and bond portfolios tend to move together C. the returns on the stock and bond portfolios tend to vary independently of each other D. the covariance of the stock and bond portfolios will be positive
C
The term excess return refers to ______________. A. the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk B. the portion of the return on a security that represents tax liability and therefore cannot be reinvested C. the difference between the rate of return earned and the risk-free rate D. returns earned illegally by means of insider trading
C
Risk that can be eliminated through diversification is called ______ risk. A. firm-specific B. diversifiable C. unique D. all
D
Which one of the following firms would be described as having below-average sensitivity to the state of the economy? A. An asset play firm B. A cyclical firm C. A defensive firm D. A stalwart firm
D
__________ are examples of financial intermediaries. A. Commercial banks B. Insurance companies C. Investment companies D. All
D
For each pair of firms, choose the one that you think would be more sensitive to the business cycle. Requirement 1: General Autos or General Pharmaceuticals. Requirement 2: Friendly Airlines or Happy Cinemas.
General Autos correct, Friendly Airlines
Beta is a measure of security responsiveness to _________.
market risk
