Exam 4 FIN - 350
If the Federal Reserve takes action to raise interest rates in the economy, this will most likely affect which risk facing businesses in the United States?
Interest rate risk
Expected return formula
rs = Rf + ( Rm ) x B
A risk of a portfolio is simply equal to the weighted average variance of the securities that comprise it.
False
A strong form efficient market is one in which prices reflect all public knowledge including past and current information.
False
During the past 75 years, corporate bonds have provided investors with higher average annual returns and stocks.
False
If I financial asset has a historical variance of 25, then it standard deviation must be 12.5%.
False
If stock A has a higher standard deviation then stop B, it will also have a greater coefficient of variation.
False
If the expected return is 10%, the standard deviation is 3%, and 60% of the time returns will be expected to fall between 10% and 13%.
False
In an efficient market, both expected and unexpected news should cause stock prices to move up or down.
False
Most market risk can be eliminated through diversification.
False
Most non-diversifiable risk can be eliminated by creating a portfolio of around 30 stocks.
False
Restock that went from $40 per share at the beginning of the year to $45 at the end of the year and paid a two dollar dividend provided an investor with a 14% return.
False
The capital asset pricing model states but the expected return on an asset depends on its level of unsystematic risk.
False
The coefficient of variation is a measure of total return on a stock.
False
The term "ex ante" Refers to the past or historical information.
False
The variance is the square root of the standard deviation.
False
The variance or standard deviation measures the risk per unit of return.
False
Weak form efficient market is one in which prices reflect all public and private knowledge, including past and current information.
False
When we speak of ex ante returns, we are referring to historical information or data.
False
What is true about beta?
It can be used to determine a range of returns based on the average return, the normal distribution, and probabilities.
Suppose an asset has been found with a negative level of systematic risk, ( this is a negative beta ). What should be the expected return?
Less than the risk-free rate
What must be the probabilities of the different states of nature sum to?
1.0
In the context of investing, what is a portfolio?
Any combination of financial assets or investments.
Beta formula
B = ( rs - Rf ) / ( Rm - Rf )
How is the dollar return for a stock over a given period computed?
Change in price plus dividends received.
Total return formula
Current price - past price + dividends / past price
How is the percentage return for a stock over a given period computed?
Dollar return divided by beginning of period price.
The expected return on a per folio depends on what?
Expected return and weight of each asset in the portfolio.
Risk free formula
Rf = ( rs - ( B x Rm ) ) / ( 1 - B )
Market risk premium formula
Rm = ( rs - ( Rf x ( 1 - B) ) ) / B
Moshe purchased a stock for $30 last year. He found out today that he had a -100% return on his investment. What happened?
The stock is worth $0 today. And the stock paid no dividends during the year.
A portfolio is any combination of financial assets or investments.
True
A weak form efficient market is a market in which prices reflect all past information.
True
Beta measures the variability of an assets returns related to the market portfolio.
True
Diversification occurs when we invest in several different assets rather than just a single one.
True
Future returns and risk cannot be predicted precisely from past measures.
True
If standard deviation is used to measure the risk of stocks, one problem that arises is the inability to tell which stock is riskier I looking at the standard deviation alone.
True
In an efficient market, investors cannot consistently earn above average profits after taking risk differences into account.
True
In general, large company stocks are more risky than treasury bonds.
True
In general, securities with higher historical standard deviation have provided higher returns.
True
In general, securities with lower returns have lower historical standard deviation.
True
Standard deviation is the square root of the variance.
True
The existence of chartists or technicians suggests that some investors believe that markets are not weak form efficient.
True
The expected rate of return on a portfolio is the weighted average of the expected returns of the individual assets in the portfolio.
True
The greatest level of risk reduction through diversification can be achieved when combining two securities whose returns are perfectly negatively correlated.
True
The only relevant risk for investors that whole diversified portfolios of securities is nondiversifiable risk.
True
The return on a portfolio is simply equal to the weighted average return of the securities that comprise it.
True
When choosing between two investments that have the same level of risk, investors prefer the investment with the higher return.
True
