Question 1

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 coefficient of variation (CV) is calculated as the standard deviation divided by the expected return. For the stock, CV = 20% / 12% = 1.67. For the bond, CV = 15% / 9% = 1.67. Both have the same CV, indicating the same risk-return trade-off.

Question 2

Which statement regarding coefficient of variation is NOT true?
A) is known as the trade-off between market risk and return.
B) is a common relative measure of risk vs. reward.
C) is the standard deviation divided by the average return.
D) A smaller coefficient of variation indicates a better risk-reward relationship.

Accepted Answer

The coefficient of variation is a statistical measure of the dispersion of data points in a data series around the mean, and it is used to assess the risk-reward ratio, not specifically known as the trade-off between market risk and return.

Question 3

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...

Question 4

A stock has an expected return of 12 percent and a standard deviation of 25 percent. Long-term Treasury bonds have an expected return of 5 percent and a standard deviation of 9 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 coefficient of variation (CV) is calculated as the standard deviation divided by the expected return. For the stock, CV = 25% / 12% = 2.08. For the bond, CV = 9% / 5% = 1.8. A lower CV indicates a better risk-return trade-off, so the bond investment has a better risk-return trade-off.

Question 5

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

The high standard deviation indicates a high level of volatility, meaning that while the average return is positive, investors may experience significant fluctuations, including losses, especially over shorter periods within a long-term investment horizon like 25 years.

Question 6

Which of the following statements regarding risk of assets is correct?
A) Every decade since 1950 has seen a lot of stock market volatility.
B) The bond market has experienced the most volatility in the 1980s as interest rates varied dramatically.
C) High risk means that an investor may receive poor returns in the short run.
D) All of the statements are correct.

Accepted Answer

Each statement accurately reflects aspects of asset risk. A) highlights the inherent volatility in the stock market, B) points out a period of significant volatility in the bond market due to fluctuating interest rates, and C) correctly associates high risk with the potential for poor short-term returns.

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

All the statements are correct regarding the principles of finance. A) Total risk in finance is indeed measured by the standard deviation of returns, indicating how much the returns on an investment are expected to deviate from the average return. B) There is a fundamental principle in finance that there is a positive relationship between risk and return, meaning that typically, investments with higher risk are expected to offer higher potential returns. C) High variability in a stock's returns is a direct indicator of high risk, as it shows that the stock's returns fluctuate widely, making it less predictable and hence riskier.

Question 8

The mean return computed by finding the equivalent return that is compounded for N periods is ________.
A) dollar return
B) geometric returns
C) average return
D) percentage return

Accepted Answer

The mean return computed by finding the equivalent return that is compounded for N periods is referred to as geometric returns. This method accounts for the compounding effect over multiple periods, unlike simple average returns.

Question 9

The process of putting money in different types of investments for the purpose of reducing the overall risk of the portfolio is ________.
A) diversification
B) the S&P 500 Index
C) market risk
D) the stock market

Accepted Answer

Diversification is the strategy of spreading investments across various financial assets to reduce exposure to any single asset or risk.

Question 10

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 portfolio return can be calculated by multiplying each asset's return by its weight in the portfolio and then summing these products. For Oracle: 0.60 * 12.57% = 7.542% For Valero Energy: 0.20 * (-9.32%) = -1.864% For McDonald's: 0.20 * 3.45% = 0.69% Adding these together: 7.542% - 1.864% + 0.69% = 6.368%, which rounds to 6.37%.

Question 11

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 the statements are correct. Over long periods, stocks have historically outperformed long-term Treasury bonds, but stock returns can be highly variable from year to year. There have indeed been years where long-term Treasury bonds outperformed stocks, highlighting the importance of diversification and understanding market fluctuations.

Question 12

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 adding all the returns together and then dividing by the number of years. So, (10% + 9% + (-2%) + 6%) / 4 = 23% / 4 = 5.75%.

Question 13

Which statement is NOT true regarding efficient portfolios?
A) Combining stocks that move together over time does not offer much risk reduction.
B) Combining stocks that do not move together provides a lot of risk reduction.
C) both a and b are NOT true
D) none of the above are NOT true

Accepted Answer

All the statements A and B are true regarding efficient portfolios, so none of them are NOT true.

Question 14

The past three monthly returns for Kohl's are 2.25 percent, −1.54 percent, and 1.35 percent. What is the average monthly return?
A) 0.69 percent
B) 1.71 percent
C) 2.06 percent
D) 5.14 percent

Accepted Answer

The average monthly return is calculated by summing the individual monthly returns and then dividing by the number of months. So, (2.25 + (-1.54) + 1.35) / 3 = 0.69 percent.

Question 15

If you invested $30,000 in Disney and $10,000 in Oracle and the two companies returned 6 percent and 12 percent respectively, what was your portfolio's return?
A) 18.0 percent
B) 10.5 percent
C) 9.0 percent
D) 7.5 percent

Accepted Answer

The portfolio's return is calculated by taking the weighted average of the returns. The total investment is $40,000. Disney's contribution is (30,000/40,000)*6% = 4.5% and Oracle's contribution is (10,000/40,000)*12% = 3%. Adding these gives a total portfolio return of 7.5%.

Quiz 9: Characterizing Risk and Return

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?

Which statement regarding coefficient of variation is NOT true?

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 stock has an expected return of 12 percent and a standard deviation of 25 percent. Long-term Treasury bonds have an expected return of 5 percent and a standard deviation of 9 percent. Given this data, which of the following statements is correct?

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?

Which of the following statements regarding risk of assets is correct?

Which of the following is correct?

The mean return computed by finding the equivalent return that is compounded for N periods is ________.

The process of putting money in different types of investments for the purpose of reducing the overall risk of the portfolio is ________.

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 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 statement is NOT true regarding efficient portfolios?

The past three monthly returns for Kohl's are 2.25 percent, −1.54 percent, and 1.35 percent. What is the average monthly return?

If you invested $30,000 in Disney and $10,000 in Oracle and the two companies returned 6 percent and 12 percent respectively, what was your portfolio's return?