Chapter 8
15) Which of the following is true of risk-return trade off? A) Risk can be measured on the basis of variability of return. B) Risk and return are inversely proportional to each other. C) T-bills are more riskier than equity due to imbalances in government policies. D) Riskier investments tend to have lower returns.
A
19) Combining two negatively correlated assets to reduce risk is known as ________. A) diversification B) valuation C) securitization D) risk aversion
A
7) A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return. A) efficient B) risk-free C) risk-neutral D) risk-indifferent
A
10) An efficient portfolio is one that ________. A) guarantees a predetermined rate of return B) maximizes return for a given level of risk C) consists of a single asset, which gives maximum return D) maximizes return at all risk levels
B
18) Nico bought 100 shares of Cisco Systems stock for $30.00 per share on January 1, 2013. He received a dividend of $2.00 per share at the end of 2013 and $3.00 per share at the end of 2014. At the end of 2015, Nico collected a dividend of $4.00 per share and sold his stock for $33.00 per share. What was Nico's realized holding period return? A) -40% B) +40% C) -36.36% D) +36.36%
B
20) Lower (less positive and more negative) the correlation between asset returns, ________. A) lesser the potential diversification of risk B) greater the potential diversification of risk C) lower the potential profit D) lesser the assets have to be monitored
B
15) Combining negatively correlated assets having the same expected return results in a portfolio with ________ level of expected return and ________ level of risk. A) a higher, a lower B) the same, a higher C) the same, a lower D) a lower, a higher
C
24) If a manager requires greater return when risk increases, then he is said to be ________. A) risk-seeking B) risk-indifferent C) risk-averse D) risk-aware
C
23) ________ is the extent of an asset's risk. It is found by subtracting the pessimistic outcome from the optimistic outcome. A) Variance B) Standard deviation C) Probability distribution D) Range
D
26) A(n) ________ distribution shows all possible outcomes and associated probabilities for a given event. A) discrete B) lognormal C) exponential D) probability
D
27) A ________ measures the dispersion around the expected value. A) coefficient of variation B) chi square C) mean D) standard deviation
D
13) Stocks are less riskier than either bonds or bills.
FALSE
4) For a risk-averse manager, required return would decrease for an increase in risk.
FALSE
4) Two assets whose returns move in the same direction and have a correlation coefficient of +1 are very risky assets.
FALSE
5) Two assets whose returns move in the opposite directions and have a correlation coefficient of -1 are either risk-free assets or low-risk assets.
FALSE
6) The real utility of the coefficient of variation is in comparing assets that have equal expected returns.
FALSE
7) Systematic risk is that portion of an asset's risk that is attributable to firm-specific, random causes.
FALSE
7) The risk of an asset can be measured by its variance, which is found by subtracting the worst outcome from the best outcome.
FALSE
9) Most investments decline in value when the interest rates rise and increase in value when interest rates fall.
FALSE
1) An efficient portfolio is a portfolio that maximizes return for a given level of risk or minimizes risk for a given level of return.
TRUE
1) Combining negatively correlated assets can reduce the overall variability of returns.
TRUE
5) Under no circumstances, adding assets to a portfolio would result in greater risk than that of the riskiest asset included in the portfolio.
TRUE
6) A portfolio that combines two assets having perfectly positive correlation returns cannot reduce the portfolio's overall risk below the risk of the least risky asset.
TRUE
6) Most managers are risk-averse, since for a given increase in risk they require an increase in return.
TRUE
6) Nondiversifiable risk reflects the contribution of an asset to the risk, or standard deviation, of the portfolio.
TRUE
7) For a risk-averse manager, the required return increases for an increase in risk.
TRUE
19) The total rate of return on an investment over a given period of time is calculated by ________. A) dividing the asset's cash distributions during the period, plus change in value, by its beginning-of period investment value. B) dividing the asset's cash distributions during the period, plus change in value, by its ending-of period investment value. C) dividing the asset's cash distributions during the period, minus change in value, by its ending-of period investment value. D) dividing the asset's cash distributions during the period, minus change in value, by its beginning-of period investment value.
A
22) If a manager prefers investments with greater risk even if they have lower expected returns, then he is following a ________ strategy. A) risk-seeking B) risk-indifferent C) risk-averse D) risk-neutral
A
24) The simplest type of probability distribution is a ________. A) bar chart B) normal distribution C) lognormal distribution D) Poisson distribution
A
28) A ________ is a measure of relative dispersion used in comparing the risk of assets with differing expected returns. A) coefficient of variation B) chi square C) mean D) standard deviation
A
31) The ________ the coefficient of variation, the ________ the risk. A) lower, lower B) higher, lower C) lower, higher D) more stable, higher
A
11) An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K, $25,000 will be invested in asset R, with an expected annual return of 12 percent, $10,000 will be invested in asset J, with an expected annual return of 18 percent, and $15,000 will be invested in asset K, with an expected annual return of 8 percent. The expected annual return of this portfolio is ________. A) 12.67% B) 12.00% C) 10.00% D) 11.78%
B
17) Nico bought 500 shares of a stock for $24.00 per share on January 1, 2013. He received a dividend of $2.50 per share at the end of 2013 and $4.00 per share at the end of 2014. At the end of 2015, Nico collected a dividend of $3.00 per share and sold his stock for $20.00 per share. What is Nico's realized total rate of return? A) -12.5% B) 12.5% C) -20.7% D) 20.7%
B
21) Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that ________. A) remains unchanged B) decreases to a level below that of either asset C) increases to a level above that of either asset D) stabilizes to a level between the asset with the higher risk and the asset with the lower risk
B
21) If a manager prefers a higher return investment regardless of its risk, then he is following a ________ strategy. A) risk-seeking B) risk-neutral C) risk-averse D) risk-aware
B
22) A common approach of estimating the variability of returns involving the forecast of pessimistic, most likely, and optimistic returns associated with an asset is called ________. A) marginal analysis B) scenario analysis C) break-even analysis D) DuPont analysis
B
23) Risk aversion is the behavior exhibited by managers who require ________. A) an increase in return, for a given decrease in risk B) an increase in return, for a given increase in risk C) no changes in return, for a given increase in risk D) decrease in return, for a given increase in risk
B
8) An efficient portfolio is defined as ________. A) grouping of assets with same level of risk B) collection of assets with the aim of maximizing the return C) an investment in a single asset D) grouping of assets with the highest possible correlation
B
16) Which of the following is true of risk? A) Risk and return are inversely proportionate to each other. B) Higher the risk associated with a security the lower is its return. C) Risk is a measure of the uncertainty surrounding the return that an investment will earn. D) Riskier investments tend to have lower returns as compared to T-bills which are risk free.
C
25) The ________ of a given outcome is its chance of occurring. A) dispersion B) standard deviation C) probability D) reliability
C
14) Perfectly ________ correlated series move exactly together and have a correlation coefficient of ________, while perfectly ________ correlated series move exactly in opposite directions and have a correlation coefficient of ________. A) negatively, -1, positively, +1 B) negatively, +1, positively, -1 C) positively, -1, negatively, +1 D) positively, +1, negatively, -1
D
20) Last year, Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $60 per share. What rate of return did Mike earn over the year? A) 11.7 percent B) 13.2 percent C) 14.1 percent D) 15.9 percent
D
22) Combining two assets having perfectly positively correlated returns will result in the creation of a portfolio with an overall risk that ________. A) remains unchanged B) decreases to a level below that of either asset C) increases to a level above that of either asset D) lies between the asset with the higher risk and the asset with the lower risk
D
9) The goal of an efficient portfolio is to ________. A) achieve a predetermined rate of return for a given level of risk B) maximize risk in order to maximize profit C) minimize profit in order to minimize risk D) minimize risk for a given level of return
D
1) Investment A guarantees its holder $100 return. Investment B earns $0 or $200 with equal chances (i.e., an average of $100) over the same period. Both investments have equal risk.
FALSE
10) A firm produces goods which has high sales when the economy is expanding and low sales during a recession. This firm's overall risk will be higher if it invests in another product which is counter cyclical.
FALSE
10) In U.S., during the past 75 years, on an average the return on large-company stocks has exceeded the return on small-company stocks.
FALSE
11) A portfolio combining two assets whose returns are less than perfectly positive correlated can increase total risk to a level above that of either of the components.
FALSE
11) In U.S., during the past 75 years, on an average the return on small-company stocks has levelled the return on large-company stocks.
FALSE
12) An investment's total return is the sum of any cash distributions minus the change in the investment's value, divided by the beginning-of-period value.
FALSE
13) For normal probability distributions, 95 percent of the possible outcomes will lie between ±1 standard deviation from the expected return.
FALSE
14) Standard deviation is a measure of relative dispersion that is useful in comparing the risks of assets with different expected returns.
FALSE
15) A normal probability distribution is an asymmetrical distribution whose shape resembles a pyramid.
FALSE
17) Lower the coefficient of variation, the greater the risk and therefore the higher the expected return.
FALSE
18) The risk of a portfolio containing international stocks generally does not contain less nondiversifiable risk than one that contains only domestic stocks.
FALSE
2) The return on an asset is the change in its value plus any cash distribution over a given period of time, expressed as a percentage of its ending value.
FALSE
2) Total security risk is attributable to firm-specific events, such as strikes, lawsuits, regulatory actions, or the loss of a key account.
FALSE
20) On average in U.S., during the past 75 years, the return on U.S. Treasury bills has exceeded the return on long-term government bonds.
FALSE
3) A financial manager's goal for the firm is to create a portfolio that maximizes return for a given level of risk.
FALSE
3) As any investor can create a portfolio of assets that will eliminate all, or virtually all, nondiversifiable risk, the only relevant risk is diversifiable risk.
FALSE
3) For a risk-seeking manager, no change in return would be required for an increase in risk.
FALSE
4) Diversifiable risk is the relevant portion of risk attributable to market factors that affect all firms.
FALSE
9) Unsystematic risk is the relevant portion of an asset's risk attributable to market factors that affect all firms.
FALSE
1) The range of an asset's risk is found by subtracting the worst outcome from the best outcome.
TRUE
1) Total security risk is the sum of a security's nondiversifiable and diversifiable risk.
TRUE
10) The required return on an asset is an increasing function of its nondiversifiable risk.
TRUE
10) The term "risk" is used interchangeably with "uncertainty" to refer to the variability of returns associated with a given asset.
TRUE
11) In the most basic sense, risk is a measure of the uncertainty surrounding the return that an investment will earn.
TRUE
11) The empirical measurement of beta can be approached by using least-squares regression analysis to find the regression coefficient (bj) in the equation for the slope of the "characteristic line."
TRUE
12) A normal probability distribution is a symmetrical distribution whose shape resembles a bell-shaped curve.
TRUE
12) Investors should recognize that betas are calculated using historical data and that past performance relative to the market average may not accurately predict future performance.
TRUE
12) The creation of a portfolio by combining two assets having perfectly positively correlated returns cannot reduce the portfolio's overall risk below the risk of the least risky asset.
TRUE
13) The risk of a portfolio containing international stocks generally contains less nondiversifiable risk than one that contains only domestic stocks.
TRUE
14) The inclusion of assets from countries with business cycles that are not highly correlated with the U.S. business cycle reduces the portfolio's responsiveness to market movements.
TRUE
14) The interest rate risk associated with Treasury bonds is much higher than with bills.
TRUE
15) Returns from internationally diversified portfolios tend to be superior to those yielded by purely domestic ones.
TRUE
16) Higher the coefficient of variation, the greater the risk and therefore the higher the expected return.
TRUE
16) The inclusion of assets from countries that are less sensitive to the U.S. business cycle reduces the portfolio's responsiveness to market movement and to foreign currency fluctuation.
TRUE
17) When the U.S. currency gains in value, the dollar value of a foreign-currency-denominated portfolio of assets decline.
TRUE
18) Standard deviation measures the dispersion of an investment's return around the expected return.
TRUE
19) In U.S., during the past 75 years, on an average the return on U.S. Treasury bills has exceeded the inflation rate.
TRUE
2) Even if assets are not negatively correlated, lower the positive correlation between them, the lower the resulting risk.
TRUE
2) Larger the difference between an asset's worst outcome from its best outcome, the higher the risk of an asset.
TRUE
2) New investments must be considered in light of their impact on the risk and return of the portfolio of assets because the risk of any single proposed asset investment is not independent of other assets.
TRUE
21) On average in U.S., during the past 75 years, the return on large-company stocks has exceeded the return on long-term corporate bonds.
TRUE
3) In general, the lower the correlation between asset returns, the greater the potential diversification of risk.
TRUE
3) Risk can be assessed by means of scenario analysis and probability distributions.
TRUE
4) A portfolio of two negatively correlated assets has less risk than either of the individual assets.
TRUE
4) An approach for assessing risk that uses a number of possible return estimates to obtain a sense of the variability among outcomes is called scenario analysis.
TRUE
5) Diversified investors should be concerned solely with nondiversifiable risk because it can create a portfolio of assets that will eliminate all, or virtually all, diversifiable risk.
TRUE
5) For a risk-indifferent manager, no change in return would be required for an increase in risk.
TRUE
5) Greater the range of an asset, more the variability, or risk, the asset is said to possess.
TRUE
6) The standard deviation of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.
TRUE
7) A portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.
TRUE
8) Coefficient of variation is a measure of relative dispersion used in comparing the risks of assets with differing expected return.
TRUE
8) Interest rate risk is the chance that changes in interest rates will adversely affect the value of an investment.
TRUE
8) Uncorrelated assets have correlation coefficient close to zero.
TRUE
8) Unsystematic risk can be eliminated through diversification.
TRUE
9) Combining uncorrelated assets can reduce risk—not as effectively as combining negatively correlated assets, but more effectively than combining positively correlated assets.
TRUE
9) The more certain the return from an asset, the less variability and therefore the less risk.
TRUE
