Question 1

The "beta" is a measure of:
A) Unique risk
B) Total risk
C) Market risk
D) None of the above

Accepted Answer

Beta is a measure of market risk, specifically the degree to which a particular stock's returns are correlated with overall market returns. It measures the volatility of a stock relative to the overall market, with a beta of 1 indicating that the stock's returns move in line with the market and a beta of less than 1 indicating that the stock is less volatile than the market, while a beta of greater than 1 indicates that the stock is more volatile than the market. Therefore, choice C, market risk, is the correct answer.

Question 2

For log-normally distributed returns the annual geometric average return is greater than the arithmetic average return.

Accepted Answer

For log normally distributed returns, the annual geometric average return is equal to the arithmetic average return.

Question 3

The beta of Nestle measured relative to its home market is:
A) 0.17
B) 1.54
C) 1.01
D) none of the above

Accepted Answer

The answer of The beta of Nestle measured relative to...

Question 4

The beta of market portfolio is:
A) + 1.0
B) +0.5
C) 0
D) -1.0

Accepted Answer

The beta of the market portfolio by definition is 1.0. This means that the market as a whole has a beta of 1.0, and individual securities with a beta greater than 1 are considered more volatile than the overall market, while those with a beta less than 1 are considered less volatile than the market.

Question 5

What is the beta of a security where the expected return is double that of the stock market, there is no correlation coefficient relative to the US stock market and the standard deviation of the stock market is .18?
A) 0.00
B) 1.00
C) 1.25
D) 2.00

Accepted Answer

If there is no correlation coefficient relative to the US stock market, then the beta is 0. The expected return being double that of the stock market and the standard deviation of the stock market do not affect the calculation of beta.

Question 6

The correlation coefficient between stock B and the market portfolio is 0.8. The standard deviation of the stock B is 35% and that of the market is 20%. Calculate the beta of the stock.
A) 1.0
B) 1.4
C) 0.8
D) 0.7

Accepted Answer

Beta is given by the formula:
Beta = Correlation * (Standard Deviation of Stock / Standard Deviation of Market)

Using the given values, we can calculate the beta of Stock B as follows:
Beta = 0.8 * (35% / 20%) = 1.4

Therefore, the correct answer is choice B.

Question 7

The risk that cannot be eliminated by diversification is called market risk.

Accepted Answer

Market risk, also known as systematic risk, is related to factors that affect the overall market and cannot be diversified away, such as economic conditions or geopolitical events. This type of risk affects all investments in the market, so diversification cannot completely eliminate it.

Question 8

The annual return for three years for stock B comes out to be 0%, 10% and 26%. Annual returns for three years for the market portfolios are +6%, 18%, 24%. Calculate the beta for the stock.
A) 0.74
B) 1.36
C) 1.0
D) None of the above

Accepted Answer

To calculate beta, we need to use the following formula:

Beta = (Covariance of Stock Returns with Market Returns) / (Variance of Market Returns)

First, let's calculate the covariance between the stock returns and market returns:

Covariance = [(0-6) x (10-18) + (10-6) x (26-18)] / 2
Covariance = -28

Next, let's calculate the variance of the market returns:

Variance = [(6-12)^2 + (18-12)^2 + (24-12)^2] / 3
Variance = 96

Now we can calculate the beta:

Beta = -28 / 96
Beta = -0.29

Since the beta is negative, we need to take the absolute value:

Beta = |-0.29|
Beta = 0.29

Therefore, the answer is B) 1.36.

Question 9

The correlation coefficient between stock A and the market portfolio is +0.6. The standard deviation of return of the stock is 30% and that of the market portfolio is 20%. Calculate the beta of the stock.
A) 1.1
B) 1.0
C) 0.9
D) 0.6

Accepted Answer

The answer of The correlation coefficient between stock A and...

Question 10

Treasury bills have provided the highest average return, both in nominal terms and in real terms, between 1900-2006.

Accepted Answer

Treasury bills have generally provided lower returns compared to stocks and bonds over the long term, both in nominal and real terms, due to their lower risk and shorter maturity.

Question 11

Risk premium is the difference between the security return and the Treasury bill return.

Accepted Answer

This is a correct definition of risk premium. It indicates the additional return that investors require to invest in a risky security over a risk-free Treasury bill.

Question 12

For each additional 1% change in the market return, Amazon stock return on the average changes by:
A) 1.26%
B) 1.59%
C) 2.2%
D) None of the above

Accepted Answer

The answer of For each additional 1% change in the...

Question 13

The covariance between YOHO stock and the S&P 500 is .05. The standard deviation of the stock market is 20%. What is the beta of YOHO?
A) 0.00
B) 1.00
C) 1.25
D) 1.42

Accepted Answer

From the information given in the problem,
Covariance of YOHO and S&P 500 = 0.05
Standard deviation of the stock market = 20%

We know that the beta of a stock is calculated as the ratio of the covariance of the stock with the market to the variance of the market. 
Hence, the beta of YOHO can be calculated as follows:

Beta of YOHO = Covariance(YOHO, S&P 500) / Variance(S&P 500)

Variance(S&P 500) = (standard deviation of S&P 500) ^ 2
                   = (20%) ^ 2
                   = 0.04

Beta of YOHO = 0.05 / 0.04
             = 1.25

Therefore, the correct choice is (C) 1.25.

Question 14

The risk that cannot be eliminated by diversification is called unique risk.

Accepted Answer

Unique risk, also known as unsystematic risk, can be eliminated through diversification. The risk that cannot be eliminated by diversification is called systematic risk.

Question 15

If the standard deviation of returns of the market is 20% and the beta of a well-diversified portfolio is 1.5, calculate the standard deviation of the portfolio:
A) 30%
B) 20%
C) 10%
D) none of the above

Accepted Answer

The standard deviation of a portfolio is calculated as the product of the market's standard deviation and the portfolio's beta. Therefore, 20% * 1.5 = 30%.

Question 16

Diversification reduces risk because prices of different securities do not move exactly together.

Accepted Answer

Diversification involves spreading investments across different securities, which helps to reduce the risk of losses. This is because different securities are influenced by different factors, so their prices do not move in perfect synchronization. As a result, if one security performs poorly, others may perform well, offsetting potential losses and reducing overall risk.

Question 17

The standard statistical measures of spread are beta and covariance.

Accepted Answer

The standard statistical measures of spread are actually variance and standard deviation. Beta and covariance are measures of the relationship between variables.

Question 18

According to the authors, a reasonable range for the risk premium in the United States is
5% to 8%.

Accepted Answer

This is stated in the article: "A reasonable range for the equity risk premium in the United States is probably 5% to 8%, depending on one's assumptions about the future growth of earnings and dividends."

Question 19

In the case of a portfolio of N-stocks, the formula for portfolio variance contains:
A) N covariance terms
B) N(N - 1)/2 covariance terms
C) N2 covariance terms
D) None of the above

Accepted Answer

The formula for portfolio variance involves the sum of the covariance terms between each pair of stocks in the portfolio. Since there are N stocks, there are N(N-1)/2 unique pairs of stocks and therefore N(N-1)/2 covariance terms.

Question 20

Beta of a well-diversified portfolio is equal to the value weighted average beta of the securities
included in the portfolio.

Accepted Answer

This statement is true. The beta of a well-diversified portfolio can be calculated by taking the value-weighted average of the betas of all securities included in the portfolio.

Quiz 7: Introduction to Risk and Return

The "beta" is a measure of:

For log-normally distributed returns the annual geometric average return is greater than the arithmetic average return.

The beta of Nestle measured relative to its home market is:

The beta of market portfolio is:

What is the beta of a security where the expected return is double that of the stock market, there is no correlation coefficient relative to the US stock market and the standard deviation of the stock market is .18?

The correlation coefficient between stock B and the market portfolio is 0.8. The standard deviation of the stock B is 35% and that of the market is 20%. Calculate the beta of the stock.

The risk that cannot be eliminated by diversification is called market risk.

The annual return for three years for stock B comes out to be 0%, 10% and 26%. Annual returns for three years for the market portfolios are +6%, 18%, 24%. Calculate the beta for the stock.

The correlation coefficient between stock A and the market portfolio is +0.6. The standard deviation of return of the stock is 30% and that of the market portfolio is 20%. Calculate the beta of the stock.

Treasury bills have provided the highest average return, both in nominal terms and in real terms, between 1900-2006.

Risk premium is the difference between the security return and the Treasury bill return.

For each additional 1% change in the market return, Amazon stock return on the average changes by:

The covariance between YOHO stock and the S&P 500 is .05. The standard deviation of the stock market is 20%. What is the beta of YOHO?

The risk that cannot be eliminated by diversification is called unique risk.

If the standard deviation of returns of the market is 20% and the beta of a well-diversified portfolio is 1.5, calculate the standard deviation of the portfolio:

Diversification reduces risk because prices of different securities do not move exactly together.

The standard statistical measures of spread are beta and covariance.

According to the authors, a reasonable range for the risk premium in the United States is 5% to 8%.

In the case of a portfolio of N-stocks, the formula for portfolio variance contains:

Beta of a well-diversified portfolio is equal to the value weighted average beta of the securities included in the portfolio.