chapter 12

If asset A's return us exactly two times asset B's return, then following risks return tradeoff, the Standard deviation of Asset A should be _____ times the standard deviation of Asset B

2 times

If the returns on a stock index can be characterized by a normal distribution with the mean 12%, the possibility that returns will be lower than 12% over the next period equals ___

50%

The probabilty mass between standard deviations around the mean for a normal distribution is ____

95%

The covariance between Lowesʹ and Home Depotʹs returns is closest to ________. A) 0.10 B) 0.31 C) 0.12 D) 0.73

A)

The volatility on Lowesʹ returns is closest to ________. A) 35% B) 11% C) 14% D) 42%

A)

Which of the following equations is INCORRECT? A) xi = Total value of portfolio Value of investment i B) Rp = ̕i xiPi C) Rp = x1P1 + x2P2 + ... + xnPn D) E[Rp] = E[̕i xiRi]

A)

Which of the following statements is FALSE? A) While the sign of a correlation is easy to interpret, its magnitude is not. B) Independent risks are uncorrelated. C) When the covariance equals 0, the returns are uncorrelated. D) To find the risk of a portfolio, we need to know more than the risk and return of the component stocks; we need to know the degree to which the stocksʹ returns move together.

A)

Suppose you invest in 100 shares of Harley-Davidson (HOG) at $40 per share and 230 shares of Yahoo (YHOO) at $25 per share. If the price of Harley-Davidson increases to $50 and the price of Yahoo decreases to $20 per share, what is the return on your portfolio? A) -1.54% B) 12.25% C) -10.50% D) -5.20%

A) -1.54

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%

A) 24.49

A portfolio has three stocks N 240 shares of Yahoo (YHOO), 150 Shares of General Motors (GM), and 40 shares of Standard and Poorʹs Index Fund (SPY). If the price of YHOO is $30, the price of GM is $30, and the price of SPY is $130, calculate the portfolio weight of YHOO and GM. A) 42.6%, 26.6% B) 23.4%, 49.3% C) 12.8%, 16.0% D) 40.5%, 28.0%

A) 42.6%, 26.6%

Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT) at $55 per share, 200 shares of Lowes (LOW) at $35 per share, and 100 shares of Ball Corporation (BLL) at $45 per share. The weight of Abbott Labs in your portfolio is ________. A) 48.89% B) 39.11% C) 29.33% D) 19.56%

A) Value of portfolio = 200 × $55 + 200 × $35 + 100 × $45 = $22,500 xi = value of security / value of portfolio = (200 × $55 ) / $22,500 = 0.48888889 or 48.89%

Which of the following statements is FALSE? A) Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. B) The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio. C) Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. D) A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.

A) Without trading, the portfolio weights will increase for the stocks in the portfolio whose returns are above the overall return

Diversification reduces the risk of a portfolio because ________, and some of the risks are averaged out of the portfolio. A) stocks do not move identically B) stocks have common risks C) stocks are fully predictable D) stocks are not affected by the market

A) stocks do not move identically

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

A) unsystematic risk

Rational Investors __ fluctuations in the value of their investments.

Are averse to

Which of the following statements is FALSE? A) The covariance and correlation allow us to measure the co-movement of returns. B) Correlation is the expected product of the deviations of two returns. C) Because the stocksʹ prices do not move identically, some of the risk is averaged out in a portfolio. D) The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face common risks and their prices move together.

B)

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 ________. B) 22.91% C) 5.00% D) 4.58%

B) 22.91

Suppose you invest in 220 shares of Johnson and Johnson (JNJ) at $70 per share and 240 shares of Yahoo (YHOO) at $20 per share. If the price of Johnson and Johnson increases to $80 and the price of Yahoo decreases to $18 per share, what is the return on your portfolio? A) 12.77% B) 8.51% C) 9.37% D) 10.22%

B) 8.51

Stocks tend to move together if they are affected by ________. A) company specific events B) common economic events C) events unrelated to the economy D) idiosyncratic shocks

B) common economic events

The volatility of Home Depot Share prices is 50% and that of General Motors shares is 50%. When I hold both stocks in my portfolio and the stocks returns have zero correlation, the overall volatility of returns of the portfolio is ________. A) more than 25% B) less than 50% C) more than 50% D) less than 25%

B) less than 50%

) 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) systematic risk

Suppose you invest in 110 shares of Merck (MRK) at $40 per share and 120 shares of Yahoo (YHOO)at $25 per share. If the price of Merck increases to $45 and the price of Yahoo decreases to $22 per share, what is the return on your portfolio? A) 7.70% B) 4.11% C) 2.57% D) 3.47%

C) 2.57

A portfolio has three stocks N 300 shares of Yahoo (YHOO), 300 Shares of General Motors (GM), and 80 shares of Standard and Poorʹs Index Fund (SPY). If the price of YHOO is $20, the price of GM is $30, and the price of SPY is $150, calculate the portfolio weight of YHOO and GM. A) 11.1%, 20.0% B) 16.7%, 28.3% C) 22.2%, 33.3% D) 22.2%, 43.3%

C) 22.2, 33.3

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%

C) 5.48%

The volatility of Home Depot share prices is 30% and that of General Motors shares is 15%. When I hold both stocks in my portfolio and the stocks returns have a correlation of 1, the overall volatility of returns of the portfolio is ________. A) more than 15% B) less than 30% C) unchanged at 30% D) equal to 15%

C) unchanged at 30%

The volatility of Home Depot share prices is 30% and that of General Motors shares is 30%. When I hold both stocks in my portfolio with an equal amount in each, and the stocks returns have a correlation of minus 1, the overall volatility of returns of the portfolio is ________. A) more than 30% B) unchanged at 30% C) zero D) equal to 60%

C) zero

The risk that is linked across outcomes is called____

Common risks

The volatility of Home Depot share prices is 20% and that of General Motors shares is 20%. When I hold both stocks in my portfolio, the overall volatility of the portfolio is ________. A) 20% B) 16% C) 18% D) not possible to calculate as information is inadequate

D)

A portfolio has three stocks N 110 shares of Yahoo (YHOO), 210 Shares of General Motors (GM), and 70 shares of Standard and Poorʹs Index Fund (SPY). If the price of YHOO is $20, the price of GM is $20, and the price of SPY is $130, calculate the portfolio weight of YHOO and GM. A) 10.6%, 13.5% B) 9.9%, 25.7% C) 13.5%, 24.4% D) 14.2%, 27.1%

D) 14.2, 27.1

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

D) unsystematic risk

As we increase the number of stocks in a portfolio, the standard deviation of returns of the portfolio ___

DECREASE

A stock whose return does not depend on overall economic conditions has a low systematic risk. T/F

FALSE

If two stocks are perfectly negatively correlated, a portfolio with equal weighting in each stock will always have a volatility (standard deviation) of 0. T/F

FALSE

Investors should earn a risk premium for bearing unsystematic risk. T/F

FALSE

Rational Investors may be willing to choose an investments than has a additional risk by does not offer additional reward

FALSE

Stocks have both diversifiable risk and undiversifiable risk, but only diversifiable risk is rewarded with higher expected returns. T/F

FALSE

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

FALSE

When we form an equally weighted portfolio of stocks and keep increasing the number of stocks in the portfolio, the volatility of the portfolio also increases. T/F

FALSE

The geometric will always be abover the arthimetic average return, and the difference grows with the volatility of the annual returns. T/F

FALSE: BELOW

Smaller stocks have LOWER volatility than larger stocks

FALSE: HIGHER

Volatility seems to be a reasonable measure of risk when evaluating returns on larger portfolios and the returns of individual securities.

FALSE; DOES NOT EXPLAIN

The standard deviation of returns of ___

I and III I small stocks is higher than that of large stocks III corporate bonds is higher than that of Treasury Bill

If returns on Stock A are made volatile than the returns on stock B, the geometric average returns of stock A will be ___ the geometric average return on stock B when their arithemetic average returns are the same.

Lower than

Two slot machines offer double your money 3 times out of 5. A takes $10 bets on each occasion. and Machine B takes $100 bets on each occasion. A risk-averse investor prefers to bet on.

MACHINE A

A portfolio of stocks can achieve diversification benefits if the stocks that compromise the portfolio are ___

Not perfectly positively correlated

Which of the following statements is FALSE?

On average, larger stocks have higher volatility than smaller stocks.

Which of the following statements is TRUE?

Portfolios of smaller stocks are typically less voliate than individual small stocks

If a stock pays a dividend at the end of each quarter, wit realized returns R1, R2, R3, and R4 each quarter, then the annual realized return is calculated as;

Rannual= (1+R1)(1+R2)(1+R3)(1+R4)-1

Which of the following investments have the highest overall return over the past 80 years?

Small stocks

Which of the following investments had the largest fluctuations overall return over the past 80 . years?

Smallstocks

A portfolio comprises two stocks, A and B, with equal amounts of money invested in each. If stock A's stock price increases and that of stock B decreased, the weight of stock A in the portfolio will increase. T/F

TRUE

A portfolio stock where each stock has a large component of independent risk benefits when such stocks are held in a portfolio, b/c the independent risks are average out. This is also refered to as diversification. T/F

TRUE

Correlation is the degree to which the returns of two stocks share common risks. T/F

TRUE

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

TRUE

In the United states over the long term, small stocks have provided the highest return followed by the large stocks in the S&P 500. T/F

TRUE

Independent risks can be diversed by holding a large number of uncorrelated assets with independent risks. T/F

TRUE

The risk inflation rates are likely to increase in the next year is an example of common risk. T/F

TRUE

The volatility of an individual stock is more than the volatility of a well-diversified portfolio of stocks. T/F

TRUE

When we combine stocks in a portfolio, the amount of risk that is eliminated depends on the degree to which the stocks face common risks and move together. T/F

TRUE

The excess return is the difference between the average return on a security and the average return for ____

Treasury Bill

Which of the following investments offered the lowest overall return over the past 80 years?

Treasury Bill

On average stocks have deleivered higher returns than bonds on the long run. T/F

True

Because investors can eliminate unsystematic risks "for free" by diversifying their portfolios they ___

do not require a risk premium for bearing it

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?

expected return = .2* (20%) + .8 * (-30%) = -20%

Stocks with high returns are expected to have ___

high variability

Historically, stocks have delivered a ___ return on average compared to Treasury Bill but have expected ___ fluctuations in values.

higher, higher

The Ishares Bond Index fund 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?

mean-standard deviation + standard deviation. (5%-10%)+10%

There is an overall relationship between ____ and ____. Larger stocks have a lower volatility overall

size, risk

Investors demand a higher return for investments that larger fluctuations in values b.c

they do not like risks

In general, it is possible to eliminate ____ risk by holding a large portfolio of assets.

unsystematic

A company's stock price jumped when it announced that its revenue has decreased because of the quality issues of its products. This is an example of ____

unsystematic risks

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 te its average return

volatility, volatility