finance ch 6

According to historical data, in the last 106 years returns on stocks in the U.S. have been negative about ____ of the time.

26%

80. Which of the following statements is true? a. While asset classes with higher standard deviations tend to have higher returns, this relationship seems to break down for specific securities. b. Asset classes with higher standard deviations tend to have higher returns, and this relationship tends to hold true when examining specific securities as well. c. Asset classes with higher standard deviations tend to have higher returns, but when we examine specific assets within those classes we find that high standard deviation securities tend to have lower returns. d. None of the above

A. While asset classes with higher standard deviations tend to have higher returns, this relationship seems to break down for specific securities.

Which of the following statements is true? a. While finance teaches that investments with higher risk should have higher returns there is no historical evidence in the capital markets to suggest this relationship exists. b. Finance teaches that investments with higher risk should have higher returns and historical evidence in the capital markets suggests this relationship exists. c. When individuals decide how to invest their money they must weigh the expected benefits (returns) against the costs of additional risk. d. Both (a) and (c) are true. e. Both (b) and (c) are true.

E. both b and c

Why are Treasury bills among the safest investments in the world? a. They are short-term investments and therefore extremely sensitive to interest rate changes. b. They are long-term investments and therefore extremely insensitive to interest rate changes. c. They are short-term investments and therefore fairly insensitive to interest rate changes. d. They are backed by the full faith and credit of the U.S. government. e. Both (c) and (d).

E. both c and d c. They are short-term investments and therefore fairly insensitive to interest rate changes. d. They are backed by the full faith and credit of the U.S. government.

Which of the following is an example of unsystematic risk?

IBM posts lower than expected earnings.

What is the risk premium?

It is the difference in annual returns between common stocks and Treasury bills.

What is the purpose of diversification?

Lower the overall risk of your portfolio.

If you were to plot the return of asset classes on a graph with the standard deviation of returns on the horizontal axis and expected returns on the vertical axis, then which security class is most likely to be in the farthest upper right hand corner of the graph?

STOCKS

Which statement is TRUE regarding diversification?

The greater the systematic risk, the greater the return required by the investor.

What is one of the most important lessons from capital market history?

There is a positive relationship between risk and return.

If we are able to eliminate all of the unsystematic risk in a portfolio then, what is the result?

a portfolio that contains only systematic risk

The total return of an asset captures a. income paid by an asset over time. b. the capital gain or loss on the asset over time. c. the book value of the asset over time. d. a and b are both correct.

both a and b

Which of the following statements is true? a. It is very difficult for investors to remove their exposure to unsystematic risk. b. It is very easy for investors to remove their exposure to systematic risk. c. It is very easy for investors to remove their exposure to unsystematic risk. d. Both (a) and (b) are true e. None of the above statements is true

c. It is very easy for investors to remove their exposure to unsystematic risk.

Which statement is FALSE regarding risk and return? a. For broad asset classes, the relationship between risk and return is nearly linear. b. Adding multiple stocks to a portfolio can reduce non- systematic risk. c. There is a nearly linear relationship between risk and return for individual stocks. d. Because investors can easily eliminate risk through diversification, investors should only be rewarded for non- diversifiable risk.

c. There is a nearly linear relationship between risk and return for individual stocks.

Which statements are TRUE regarding risk and return? Statement I: Diversification is the process of removing systematic risk from a portfolio. Statement II: In general, the greater the risk, the greater the return required by an investor. Statement III: Investors should focus on real returns if they are concerned about the purchasing power of their wealth.

c. statement ii and iii only

What do you call the portion of your total return on a stock investment that is caused by an increase in the value of the stock.

capital gain

Which of the following is not part of the procedure for valuing a risky asset?

determining whether the project is mutually exclusive or not

If the standard deviation of a diversified portfolio is 20% and if the stocks in that portfolio are positively correlated, then what would we expect the average standard deviation of stocks in that portfolio to be?

greater than 20%

Inflation, recession, and higher interest rates are economic events that are characterized as:

market risk

Based upon a histogram of nominal returns on equities for the last 100 years, we can conjecture that stock returns follow a ____ distribution.

normal

You have the choice of introducing either Stock X or Stock Y into your fully diversified portfolio. Both stocks have 5 units of systematic risk while Stock X has 6 units of unsystematic risk and Stock Y has 8 units of unsystematic risk. Which stock offers the greatest opportunity from diversification?

stock Y

Stock X has 3 units of systematic risk and 2 units of unsystematic risk while Stock Y has 3 units of systematic risk and 4 units of unsystematic risk. If Stock X is priced to generate an 8% return for investors then what do we know about the return that Stock Y should be priced to return?

stock Y should be priced to return 8%

You are presented with 4 distinct investment opportunities involving a Treasury Bill, a Treasury Bond, a Corporate Bond, and a Stock. You are told that each of these investments are expected to produce (after the cash is paid out then no other cash flows are anticipated) $100 one year from now. Which asset should be the least expensive today, in terms of dollars that you will have to pay for the asset?

stocks

A normal distribution is ____.

symmetrical

Investors should expect to be compensated for bearing ____ risk, but they should not expect to be compensated for bearing ____ risk.

systematic; unsystematic

The statistical term, variance is defined as

the expected value of squared deviations from the mean.

Which of the following is an example of systematic risk?

the national trade deficit is higher than expected

the additional return offered by a more risky investment relative to a safer one is called

the risk premium

Which of the following asset classes would give you the greatest probability of achieving a return that is closest to its expected return?

treasury BILLS