Question 1

We commonly measure the risk-return relationship using which of the following?
A)coefficient of variation
B)correlation coefficient
C)standard deviation
D)expected returns

Accepted Answer

The coefficient of variation is a metric that measures the level of risk per unit of return. It is calculated by dividing the standard deviation of the investment's returns by its expected return. Therefore, it is a comprehensive measure that incorporates both risk and return, making it a suitable choice for measuring the risk-return relationship. The correlation coefficient and standard deviation only measure risk, while expected returns only measure return.

Question 2

To find the percentage return of an investment
A)multiply the dollar return by the investment's value at the beginning of the period.
B)divide the dollar return by the investment's value at the beginning of the period.
C)multiply the dollar return by the investment's value at the end of the period.
D)divide the dollar return by the investment's value at the end of the period.

Accepted Answer

To find percentage return of an investment, divide the dollar return by the investment's value at the beginning of the period and then multiply it by 100 to convert it into a percentage. This gives the percentage return on the investment over the given time period.

Question 3

Which of these is the portion of total risk that is attributable to overall economic factors?
A)firm specific risk
B)market risk
C)modern portfolio risk
D)total risk

Accepted Answer

Market risk is the portion of total risk that is attributable to overall economic factors such as stock market volatility, interest rates, and inflation. Firm specific risk, modern portfolio risk, and total risk are all different concepts that do not refer to economic factors specifically.

Question 4

Which of the following is an index that tracks 500 companies, which allows for a great deal of diversification?
A)Nasdaq
B)Fortune 500
C)S&P 500
D)Wall Street Journal

Accepted Answer

The S&P 500 is an index that tracks the performance of 500 large companies listed on stock exchanges in the United States. It is considered a good choice for diversification as it includes companies from various sectors, such as technology, healthcare, financials, and consumer goods. The Nasdaq is also an index that tracks companies, but it focuses mainly on technology and biotech companies. The Fortune 500 is a list of the largest US companies by revenue, but it is not an index that can be invested in. The Wall Street Journal is a financial news publication and not an index.

Question 5

Which of these includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment?
A)average return
B)dollar return
C)market return
D)portfolio

Accepted Answer

Dollar return includes both the capital gain/loss and the income received from a specific investment. The other options do not take into account capital gain/loss.

Question 6

Which of these is a measure of risk to reward earned by an investment over a specific period of time?
A)coefficient of variation
B)market deviation
C)standard deviation
D)total variation

Accepted Answer

The coefficient of variation is a measure of risk to reward earned by an investment over a specific period of time. It is calculated by dividing the standard deviation of the investment's returns by its expected return. Therefore, A is the best choice.

Question 7

Which of these statements is true?
A)When people purchase a stock, they know exactly what their dollar and percent return are going to be.
B)Many people purchase stocks as they find comfort in the certainty for this safe form of investing.
C)When people purchase a stock, they know the short-term return, but not the long-term return.
D)When people purchase a stock, they do not know what their return is going to be-either short term or in the long run.

Accepted Answer

When people purchase a stock, they cannot predict with certainty what their return is going to be, either in the short term or in the long run, as stock prices fluctuate constantly based on various economic and company-specific factors. While research and analysis can help investors make informed decisions, there is always a level of risk and uncertainty involved in investing in stocks.

Question 8

Which of these is the dollar return characterized as a percentage of money invested?
A)average return
B)dollar return
C)market return
D)percentage return

Accepted Answer

Dollar return is the actual amount of profit or loss earned on an investment, while the percentage return is the dollar return expressed as a percentage of the initial investment. Therefore, the percentage return is the best choice as it characterizes the dollar return as a percentage of money invested.

Question 9

Which of the following is the concept and procedure for combining securities into a portfolio to minimize risk?
A)firm specific theory
B)modern portfolio theory
C)optimal portfolio theory
D)total portfolio theory

Accepted Answer

Modern Portfolio Theory is the concept and procedure for combining securities into a portfolio to minimize risk. It is based on the idea that the risk of a portfolio can be reduced by diversification, or holding a variety of assets that are not perfectly correlated with each other. This theory was proposed by Harry Markowitz in 1952 and has been widely used in the investment industry since then. The other options (A, C, and D) are not valid concepts or procedures related to portfolio management.

Question 10

Which of these is the investor's combination of securities that achieves the highest expected return for a given risk level?
A)efficient portfolio
B)modern portfolio
C)optimal portfolio
D)total portfolio

Accepted Answer

The optimal portfolio is the combination of securities that provides the highest expected return for a given level of risk. It is obtained by analyzing the risk and return of different securities and determining the ideal combination of those securities in a portfolio. The efficient portfolio and modern portfolio both refer to portfolios that are diversified and have a balance of risk and return, but the optimal portfolio specifically refers to the portfolio that achieves the highest return for a given level of risk. The total portfolio is the combination of all investments an individual holds, and may not necessarily be optimized for the highest expected return.

Question 11

Which of the following is another term for market risk?
A)firm specific risk
B)modern portfolio risk
C)nondiversifiable risk
D)total risk

Accepted Answer

Market risk also known as systematic risk or nondiversifiable risk represents the risk that an investor cannot avoid because it is associated with the overall market and economy.

Question 12

Which of the following makes this a true statement: The shape of the efficient frontier implies that
A)diminishing returns apply to risk-taking in the investment world.
B)increasing returns apply to risk-taking in the investment world.
C)returns are not impacted by risk-taking in the investment world.
D)None of these choices complete the sentence to make it true.

Accepted Answer

The shape of the efficient frontier curves downwards from left to right, indicating that as an investor takes on more risk, the potential returns initially increase at an increasing rate, but eventually reach a point when the returns start diminishing. This is in line with the principle of diminishing returns, which states that as more units of a variable input (in this case, risk) are added to a fixed input (investment portfolio), the overall output (returns) will eventually start to decrease. Therefore, A) is the correct answer as it completes the sentence and makes it a true statement.

Question 13

MedTech Corp. stock was $50.95 per share at the end of last year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500 shares of MedTech, what was your percent return?
A)7.20 percent
B)8.83 percent
C)22.67 percent
D)23.55 percent

Accepted Answer

The percent return can be calculated by considering both the dividend received and the increase in stock price. The total return per share is the sum of the dividend received and the increase in stock price, which is $0.45 + ($62.50 - $50.95) = $12.00. The percent return is then calculated as (Total Return per Share / Initial Price per Share) * 100 = ($12.00 / $50.95) * 100 = 23.55%.

Question 14

Which of these is defined as a combination of investment assets held by an investor?
A)bundle
B)market basket
C)portfolio
D)All of these choices are correct.

Accepted Answer

A portfolio is a combination of investment assets held by an investor, such as stocks, bonds, real estate, and cash. Bundles and market baskets are not commonly used terms in finance when referring to an investor's holdings.

Question 15

Which of these is the term for portfolios with the highest return possible for each risk level?
A)efficient portfolios
B)modern portfolios
C)optimal portfolios
D)total portfolios

Accepted Answer

The answer of Which of these is the term for...

Question 16

Which of the following is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification?
A)firm specific risk
B)market risk
C)modern portfolio risk
D)total risk

Accepted Answer

Firm specific risk, also known as idiosyncratic risk, is the portion of total risk that is specific to a particular company or industry and can be reduced through diversification. It is the risk that is unique to a particular firm and cannot be eliminated through diversification of the overall market. Market risk, on the other hand, refers to the risk inherent in the overall market and cannot be diversified away, while modern portfolio risk and total risk are broader concepts that encompass all types of risk.

Question 17

Which statement is true?
A)The larger the standard deviation, the lower the total risk.
B)The larger the standard deviation, the higher the total risk.
C)The larger the standard deviation, the more portfolio risk.
D)The standard deviation is not an indication of total risk.

Accepted Answer

The standard deviation measures the degree of uncertainty or volatility of returns. Therefore, the larger the standard deviation, the higher the variability of returns and the higher the risk. Overall, standard deviation is a measure of total risk.

Question 18

Which of the following is defined as the volatility of an investment, which includes firm specific risk as well as market risk?
A)diversifiable risk
B)market risk
C)standard deviation
D)total risk

Accepted Answer

Total risk includes both firm specific risk (diversifiable risk) and market risk. Standard deviation can be used to measure total risk as well, but it does not specifically include firm specific risk. Market risk (B) only includes the risk of the overall market, and not firm specific risk.

Question 19

Which of these is a measure summarizing the overall past performance of an investment?
A)average return
B)dollar return
C)market return
D)percentage return

Accepted Answer

Average return measures the overall past performance of an investment by calculating the average of all the returns earned over a certain period of time. It takes into account both positive and negative returns, giving investors a better understanding of overall profitability.

Question 20

Which of the following is a measurement of the co-movement between two variables that ranges between -1 and +1?
A)coefficient of variation
B)correlation
C)standard deviation
D)total risk

Accepted Answer

The measurement that ranges between -1 and +1 and reflects the co-movement between two variables is the correlation coefficient. It is a standardized measure of the degree to which two variables are related, with a positive correlation indicating that the variables move in the same direction, a negative correlation indicating that they move in opposite directions, and a correlation near zero indicating weak or no relationship. The coefficient of variation is a measure of relative risk and variability, the standard deviation is a measure of the dispersion of a data set, and total risk can refer to various types of risk in finance or business.

Quiz 9: Characterizing Risk and Return

We commonly measure the risk-return relationship using which of the following?

To find the percentage return of an investment

Which of these is the portion of total risk that is attributable to overall economic factors?

Which of the following is an index that tracks 500 companies, which allows for a great deal of diversification?

Which of these includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment?

Which of these is a measure of risk to reward earned by an investment over a specific period of time?

Which of these statements is true?

Which of these is the dollar return characterized as a percentage of money invested?

Which of the following is the concept and procedure for combining securities into a portfolio to minimize risk?

Which of these is the investor's combination of securities that achieves the highest expected return for a given risk level?

Which of the following is another term for market risk?

Which of the following makes this a true statement: The shape of the efficient frontier implies that

MedTech Corp. stock was $50.95 per share at the end of last year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500 shares of MedTech, what was your percent return?

Which of these is defined as a combination of investment assets held by an investor?

Which of these is the term for portfolios with the highest return possible for each risk level?

Which of the following is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification?

Which statement is true?

Which of the following is defined as the volatility of an investment, which includes firm specific risk as well as market risk?

Which of these is a measure summarizing the overall past performance of an investment?

Which of the following is a measurement of the co-movement between two variables that ranges between -1 and +1?