Question 1

Sharif's portfolio generated returns of 12 percent, 15 percent, -15 percent, 19 percent, and -12 percent over five years. What was his average return over this period?
A)19 percent
B)3.8 percent
C)17 percent
D)2.1 percent

Accepted Answer

To find the average return, sum all the returns and divide by the number of years: (12 + 15 - 15 + 19 - 12) / 5 = 19 / 5 = 3.8 percent.

Question 2

The total risk of the S&P 500 Index is equal to
A)diversifiable risk.
B)nondiversifiable risk.
C)modern portfolio risk.
D)efficient frontier risk.

Accepted Answer

The total risk of the S&P 500 Index is composed of both diversifiable and nondiversifiable risk, but nondiversifiable risk cannot be eliminated through diversification. Therefore, it is classified as nondiversifiable or systematic risk, which affects the entire market or a specific industry. Hence, option B is the correct answer. The other options are not applicable or do not accurately describe the concept of total risk.

Question 3

Which of the following is correct?
A)Over a long time frame, stocks have performed better than long-term Treasury bonds.
B)Average stock returns are not an indication of what an investor may earn in any one year.
C)In some years, long-term Treasury bonds performed better than stocks.
D)All of these choices are correct.

Accepted Answer

All of the choices are correct. A is true as stocks tend to have higher returns over long periods of time. B is true as yearly stock returns can vary greatly and may not reflect the long-term trend. C is true as there have been some years where Treasury bonds outperformed stocks.

Question 4

Sharif's portfolio generated returns of 10 percent, 9 percent, -2 percent, and 6 percent over four years. What was his average return over this period?
A)5.75 percent
B)6.75 percent
C)23 percent
D)27 percent

Accepted Answer

The average return is calculated by summing the returns and dividing by the number of years: (10 + 9 - 2 + 6) / 4 = 5.75 percent.

Question 5

Which of the following describes what will occur as you randomly add stocks to your portfolio?
A)The nondiversifiable risk will decrease.
B)Both the diversifiable and nondiversifiable risk will decrease.
C)The portfolio return will increase.
D)The diversifiable risk will decrease.

Accepted Answer

By adding more stocks to a portfolio, the diversifiable risk (also known as unsystematic risk) will decrease as the portfolio becomes more diversified. However, the nondiversifiable risk (also known as systematic risk) will remain the same as it is inherent in the overall market. The portfolio return may increase, decrease, or remain the same depending on the performance of the added stocks.

Question 6

Which of the following is the correct ranking from least risky to most risky?
A)Long-term Treasury bonds, stocks, Treasury bills
B)Treasury bills, long-term Treasury bonds, stocks
C)stocks, long-term Treasury bond, Treasury bills
D)stocks, Treasury bills, long-term Treasury bonds

Accepted Answer

Treasury bills are considered to be the least risky since they are backed by the government and have a short maturity period, while long-term Treasury bonds carry more risk due to potential inflation and interest rate changes. Stocks are considered to be the most risky as their value is subject to market fluctuations and company performance. Therefore, the ranking from least risky to most risky is Treasury bills, long-term Treasury bonds, and stocks.

Question 7

Which of the following is correct?
A)Total risk is measured by the standard deviation.
B)There is a positive relationship between risk and return.
C)If you observe a high variability in a stock's returns you can infer that the stock is very risky.
D)All of these choices are correct.

Accepted Answer

A) Total risk is measured by the standard deviation, as it represents the variability of the returns around the average.
B) There is a positive relationship between risk and return, meaning that higher returns typically come with higher levels of risk.
C) If you observe a high variability in a stock's returns, it is an indication that the stock is very risky as it experiences unpredictable fluctuations in price. Therefore, all of these choices are correct.

Question 8

Year-to-date, Oracle had earned a 12.57 percent return. During the same time period, Valero Energy earned -9.32 percent and McDonald's earned 3.45 percent. If you have a portfolio made up of 60 percent Oracle, 20 percent Valero Energy, and 20 percent McDonald's, what is your portfolio return?
A)10.10 percent
B)8.45 percent
C)6.70 percent
D)6.37 percent

Accepted Answer

The answer of Year-to-date, Oracle had earned a 12.57 percent...

Question 9

Which of the following is incorrect?
A)It is possible to combine assets that all move in the exact same fashion over time and gain the benefits of diversification.
B)Adding long-term Treasury bonds to a stock portfolio will reduce the risk of the portfolio.
C)The optimal portfolio is the one with the lowest amount of risk.
D)All of these choices are correct.

Accepted Answer

Combining assets that move in the exact same fashion does not provide diversification benefits, as diversification relies on combining assets with different movements to reduce risk.

Question 10

The efficient frontier portfolios are
A)portfolios that risk adverse investors will select.
B)portfolios where all the market risk is diversified away.
C)portfolios where the correlation among assets is 0.0.
D)portfolios that dominate all others.

Accepted Answer

The answer of The efficient frontier portfolios are
A)portfolios that risk...

Question 11

The optimal portfolio for you will be
A)the one that offers the lowest correlation.
B)the one that offers the highest returns.
C)the one that reflects the amount of risk that you are willing to take.
D)the one that offers the most diversification.

Accepted Answer

The optimal portfolio for an individual depends on their risk tolerance. If they are willing to take on more risk, they may choose a portfolio with higher returns but also higher volatility. If they are more risk-averse, they may choose a portfolio with lower returns but also lower volatility. Therefore, the portfolio that reflects the amount of risk an individual is willing to take is the best choice.

Question 12

Modern portfolio theory is
A)a concept and procedure for combining securities into a portfolio to minimize risk.
B)a concept and procedure for combining securities into a portfolio to maximize return.
C)a concept and procedure for combining securities into a portfolio to maximize volatility.
D)a concept and procedure for combining securities into a portfolio to maximize dollar return.

Accepted Answer

Modern portfolio theory aims to create a diversified portfolio that minimizes risk by combining securities with different levels of risk and returns. The goal is not to maximize return or volatility, but to balance both in order to achieve an efficient portfolio.

Question 13

From 1950 to 2007, the average return in the stock market, as measured by the S&P 500, was 13.2 percent and a standard deviation of 17 percent. Given this information, which of the following statements is correct?
A)With an average return this high, it is unlikely that an investor will lose money in the stock market in the next year or two.
B)With a standard deviation this high, it is likely that an investor will lose money in some years over a 25-year investment period.
C)This investment is not very good since the standard deviation is greater than the average return.
D)All of these choices are correct.

Accepted Answer

A high standard deviation indicates that there is a significant amount of variability in returns, which means that there is a greater likelihood of both positive and negative returns. Therefore, it is likely that an investor will experience some years of negative returns over a 25-year investment period, despite the high average return.

Question 14

If you invested $1,000 in Disney and $5,000 in Oracle and the two companies returned 15 percent and 18 percent respectively, what was your portfolio's return?
A)15.5 percent
B)17.1 percent
C)16.2 percent
D)17.5 percent

Accepted Answer

The answer of If you invested $1,000 in Disney and...

Question 15

JoJo's portfolio's return is 12 percent. She is invested in Cisco and IBM which had returns of 15 percent and 9 percent respectively. What percentage of JoJo's assets are invested in each firm?
A)40 percent in Cisco and 60 percent in IBM
B)50 percent in Cisco and 50 percent in IBM
C)30 percent in Cisco and 70 percent in IBM
D)unable to determine with the data provided

Accepted Answer

To find the percentage of JoJo's assets invested in each firm, we can use the weighted average formula for the portfolio's return: $12\% = x\% \times 15\% + (1-x)\% \times 9\%$, where $x$ is the fraction of the portfolio invested in Cisco. Solving for $x$ gives $x = 0.5$ or 50%, meaning 50% is invested in Cisco and the remaining 50% in IBM.

Question 16

A stock has an expected return of 12 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 15 percent. Given this data, which of the following statements is correct?
A)The two assets have the same coefficient of variation.
B)The stock investment has a better risk-return trade-off.
C)The bond investment has a better risk-return trade-off.
D)The stock investment and the bond investment have the same diversifiable risk.

Accepted Answer

The answer of A stock has an expected return of...

Question 17

Sally wants to invest in only two stocks. Which pair of stocks should Sally select?
A)Stocks A and B move downward at the same time.
B)Stocks C and D move in opposite directions at the same time.
C)Stocks E and F move upward at the same time.
D)Stocks G and H move randomly at the same time.

Accepted Answer

Investing in stocks that move in opposite directions can help diversify Sally's portfolio and potentially reduce her overall risk. If one stock goes down, the other may go up, balancing out the losses. Therefore, pairing stocks C and D, which move in opposite directions, would be the best choice for Sally.

Question 18

Which of the following are investor diversification problems?
A)Many employees hold mostly their employer's stocks as investments.
B)Many households hold relatively few individual stocks-the median is three.
C)Investors seem to prefer local firms thereby limiting diversification opportunities.
D)All of these choices are correct.

Accepted Answer

All three options describe diversification problems faced by investors. Holding mostly one's employer's stock can lead to concentrated risk if the company does poorly. Holding a small number of individual stocks also increases risk as there is less diversification. Preferring local firms can limit diversification opportunities and lead to a lack of exposure to different industries and regions.

Question 19

Which of the following is correct?
A)Investors can reduce the risk in their portfolio by investing in international stocks since they tend to have low correlation with our own stock market.
B)Combining both stocks and bonds will likely reduce risk in a portfolio because the two assets have low correlation.
C)Your optimal portfolio is an efficient portfolio with your desired risk level.
D)All of these choices are correct.

Accepted Answer

All of the choices are correct. 
A) Investing in international stocks can reduce portfolio risk because they tend to have low correlation with domestic stocks, thus providing diversification benefits. 
B) Combining stocks and bonds in a portfolio can reduce risk as the two assets have low correlation, and bonds provide a steady stream of income while diversifying the portfolio. 
C) An efficient portfolio with the desired risk level is the optimal portfolio as it maximizes returns while minimizing risk, in accordance with the investor's preferences.

Question 20

A stock has an expected return of 15 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 11 percent. Given this data, which of the following statements is correct?
A)The two assets have the same coefficient of variation.
B)The stock investment has a better risk-return trade-off.
C)The bond investment has a better risk-return trade-off.
D)The stock investment and the bond investment have the same diversifiable risk.

Accepted Answer

The answer of A stock has an expected return of...

Quiz 9: Characterizing Risk and Return

Sharif's portfolio generated returns of 12 percent, 15 percent, -15 percent, 19 percent, and -12 percent over five years. What was his average return over this period?

The total risk of the S&P 500 Index is equal to

Which of the following is correct?

Sharif's portfolio generated returns of 10 percent, 9 percent, -2 percent, and 6 percent over four years. What was his average return over this period?

Which of the following describes what will occur as you randomly add stocks to your portfolio?

Which of the following is the correct ranking from least risky to most risky?

Which of the following is correct?

Year-to-date, Oracle had earned a 12.57 percent return. During the same time period, Valero Energy earned -9.32 percent and McDonald's earned 3.45 percent. If you have a portfolio made up of 60 percent Oracle, 20 percent Valero Energy, and 20 percent McDonald's, what is your portfolio return?

Which of the following is incorrect?

The efficient frontier portfolios are

The optimal portfolio for you will be

Modern portfolio theory is

From 1950 to 2007, the average return in the stock market, as measured by the S&P 500, was 13.2 percent and a standard deviation of 17 percent. Given this information, which of the following statements is correct?

If you invested $1,000 in Disney and $5,000 in Oracle and the two companies returned 15 percent and 18 percent respectively, what was your portfolio's return?

JoJo's portfolio's return is 12 percent. She is invested in Cisco and IBM which had returns of 15 percent and 9 percent respectively. What percentage of JoJo's assets are invested in each firm?

A stock has an expected return of 12 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 15 percent. Given this data, which of the following statements is correct?

Sally wants to invest in only two stocks. Which pair of stocks should Sally select?

Which of the following are investor diversification problems?

Which of the following is correct?

A stock has an expected return of 15 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 11 percent. Given this data, which of the following statements is correct?