Question 1

The ________ is a statistical measure of the relationship between series of numbers.
A) coefficient of variation
B) standard deviation
C) correlation
D) probability

Accepted Answer

Correlation is the statistical measure of the relationship between series of numbers, indicating how closely two variables are related to each other. The coefficient of variation is a measure of the relative variability of a distribution, whereas the standard deviation is a measure of the spread or dispersion of a set of data. Probability is the measure of the likelihood of a specific event occurring.

Question 2

A collection of assets is called a(n)
A) grouping.
B) portfolio.
C) investment.
D) diversity.

Accepted Answer

A collection of assets is commonly referred to as a portfolio, whether it be a financial portfolio or an art portfolio. Grouping, investment, and diversity may all be related to portfolios, but they do not specifically refer to the collection of assets themselves.

Question 3

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are each very risky assets.

Accepted Answer

The answer of Two assets whose returns move in the...

Question 4

A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.
A) efficient
B) coefficient
C) continuous
D) risk-indifferent

Accepted Answer

An efficient portfolio is one that offers the maximum return for a given level of risk, or the minimum risk for a given level of return. It is achieved by diversifying the investments in such a way that the overall risk of the portfolio is reduced without reducing the expected return. Therefore, an efficient portfolio is the best choice for investors who want to optimize their risk-return tradeoff.

Question 5

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.

Accepted Answer

The risk and return of a portfolio are impacted by the individual investments within it. No investment exists in isolation, and their performance can be influenced by a range of factors within the broader market. As a result, it's crucial to consider how any new investment will affect the overall portfolio's risk and expected return.

Question 6

Champion Breweries must choose between two asset purchases. The annual rate of return and related probabilities given below summarize the firm's analysis.  For each asset, compute
(a) the expected rate of return.
(b) the standard deviation of the expected return.
(c) the coefficient of variation of the return.
(d) Which asset should Champion select?

Accepted Answer

The answer of Champion Breweries must choose between two asset...

Question 7

An efficient portfolio is one that
A) maximizes risk for a given level of return.
B) maximizes return for a given level of risk.
C) minimizes return for a given level of risk.
D) maximizes return at all risk levels.

Accepted Answer

An efficient portfolio is one that maximizes return for a given level of risk, meaning it achieves the best possible risk-return tradeoff. This is because investors are generally risk-averse, so they want to achieve the highest return possible for their desired level of risk. Therefore, an efficient portfolio finds the optimal balance between risk and return to produce the best possible outcome for investors.

Question 8

Given the following probability distribution for assets X and Y, compute the expected rate of return, variance, standard deviation, and coefficient of variation for the two assets. Which asset is a better investment?

Accepted Answer

The answer of Given the following probability distribution for assets...

Question 9

An efficient portfolio is a portfolio that maximizes return for a given level of risk or minimizes risk for a given level of return.

Accepted Answer

An efficient portfolio is designed to maximize return for a given level of risk, or minimize risk for a given level of return. It is achieved through diversification and asset allocation, and aims to find the optimal balance between risk and return.

Question 10

The standard deviation of a portfolio is a function only of the standard deviations of the individual securities in the portfolio and the proportion of the portfolio invested in those securities.

Accepted Answer

The answer of The standard deviation of a portfolio is...

Question 11

Assuming the following returns and corresponding probabilities for asset A, compute its standard deviation and coefficient of variation.

Accepted Answer

The answer of Assuming the following returns and corresponding probabilities...

Question 12

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

Accepted Answer

Perfectly positively correlated series move exactly together and have a correlation coefficient of +1, while perfectly negatively correlated series move exactly in opposite directions and have a correlation coefficient of -1. The answer that reflects this is D; positively and +1 are associated, while negatively and -1 are associated.

Question 13

The goal of an efficient portfolio is to
A) maximize risk for a given level of return.
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.

Accepted Answer

The goal of an efficient portfolio is to minimize risk while achieving a given level of return or to maximize the return while minimizing the risk. Therefore, option D is the correct one as it seeks to minimize risk for a given level of return.

Question 14

The financial manager's goal for the firm is to create a portfolio that maximizes return in order to maximize the value of the firm.

Accepted Answer

The answer of The financial manager's goal for the firm...

Question 15

Nico bought 100 shares of Cisco Systems stock for $24.00 per share on January 1, 2002. He received a dividend of $2.00 per share at the end of 2002 and $3.00 per share at the end of 2003. At the end of 2004, Nico collected a dividend of $4.00 per share and sold his stock for $18.00 per share. What was Nico's realized holding period return? What was Nico's compound annual rate of return? Explain the difference?

Accepted Answer

The answer of Nico bought 100 shares of Cisco Systems...

Question 16

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) unable to be determined from the information provided.

Accepted Answer

To find the expected return of the portfolio, we need to take a weighted average of the returns of each asset, where the weights are the proportion of the portfolio invested in each asset. Thus, the expected return of the portfolio is:

(0.5 x 0.12) + (0.2 x 0.18) + (0.3 x 0.08) = 0.06 + 0.036 + 0.024 = 0.12 or 12.00%

Question 17

Two assets whose returns move in the opposite directions and have a correlation coefficient of -1 are both either risk-free assets or low-risk assets.

Accepted Answer

Assets with a correlation coefficient of -1 can have different levels of risk, including high-risk assets. The correlation coefficient only measures the direction and strength of the relationship between the returns, not the level of risk.

Question 18

The College Copy Shop is in process of purchasing a high-tech copier. In their search, they have gathered the following information about two possible copiers A and B.   (a) Compute expected rate of return for each copier.
(b) Compute variance and standard deviation of rate of return for each copier.
(c) Which copier should they purchase?

Accepted Answer

The answer of The College Copy Shop is in process...

Question 19

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.

Accepted Answer

This statement is true. The formula to calculate the standard deviation of a portfolio takes into account the standard deviation of each security, the proportion of the portfolio invested in each security, and the correlation between the returns of the securities.

Question 20

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

Accepted Answer

When negatively correlated assets are combined, their risk cancels out to a certain extent, resulting in a lower level of overall risk without sacrificing expected return. Therefore, the expected return remains the same in this case but the level of risk decreases. Therefore, option C is the correct choice.

Quiz 8: Risk and Return

The ________ is a statistical measure of the relationship between series of numbers.

A collection of assets is called a(n)

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are each very risky assets.

A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.

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.

An efficient portfolio is one that