Question 1

Stock market indexes are found in several countries outside the United States.

Accepted Answer

Stock market indexes exist in many countries around the world, not just in the United States. Some examples include Japan's Nikkei 225, Germany's DAX, and China's Shanghai Composite Index.

Question 2

Specific risks are generally associated with a single firm or industry.

Accepted Answer

Specific risks are also known as company-specific risks or unsystematic risks. These risks are unique to a particular firm or industry and are not influenced by macroeconomic factors or market conditions. Examples of specific risks include the failure of a new product launch or a sudden change in management.

Question 3

Market risk can be eliminated in a stock portfolio through diversification.

Accepted Answer

Diversification can reduce market risk, but it cannot eliminate it completely as all stocks are still subject to market conditions and external factors.

Question 4

Long-term corporate bonds are the only portfolio of securities found to be riskier than common stocks.

Accepted Answer

Long-term corporate bonds are generally considered less risky than common stocks as they offer a fixed income stream and are less influenced by market volatility. Common stocks are subject to fluctuations in the market and company-specific risks.

Question 5

Investors who bought shares of stock in March 2000 would most likely have seen the value of their investment decline over the next two-and-a-half years.

Accepted Answer

March 2000 was near the height of the dot-com bubble, and the stock market experienced a significant decline in the following years, including the dot-com crash in 2001. Therefore, investors who bought shares of stock in March 2000 would most likely have seen the value of their investment decline over the next two-and-a-half years.

Question 6

Macro risks are faced by all common stock investors.

Accepted Answer

Macro risks are external factors that affect the overall economy and financial markets, such as geopolitical events, interest rate changes, inflation, and natural disasters. These can impact all common stock investors, regardless of the specific companies they invest in.

Question 7

Every additional stock added to a portfolio reduces the portfolio's level of risk by an equal amount.

Accepted Answer

This statement is false. The level of risk in a portfolio is not solely determined by the number of stocks, but also by their correlations and individual volatilities. Adding more stocks may not necessarily reduce risk if they are all highly correlated or volatile. Proper diversification involves selecting stocks with low correlations and balancing their weights in the portfolio to achieve the desired level of risk.

Question 8

The historical record fails to show that investors have received a risk premium for holding risky assets.

Accepted Answer

The historical record does show that investors have received a risk premium for holding risky assets. This is evidenced by the fact that over the long-term, investments in stocks have outperformed investments in bonds or cash. However, it is important to note that this risk premium is not guaranteed and there are periods of time where risky assets may underperform, causing investors to lose money.

Question 9

For investment horizons greater than 20 years, long-term corporate bonds traditionally have outperformed common stocks.

Accepted Answer

Historically, over long periods, common stocks have generally provided higher returns than long-term corporate bonds, reflecting the higher risk associated with equity investments.

Question 10

The expected return on an investment includes compensation for both the time value of money and the risks assumed.

Accepted Answer

The expected return on an investment must compensate for both the time value of money (i.e. the opportunity cost of investing the funds instead of using them for other purposes) and the risks assumed. Investors require a higher return for taking on greater risk.

Question 11

The S&P 500 accounts for nearly 75% of the total market value of stocks traded in the United States.

Accepted Answer

The S&P 500 is a market-capitalization weighted index that tracks the performance of the 500 largest publicly traded companies in the US. As of September 2021, the S&P 500 had a total market value of approximately $36.5 trillion, which accounts for nearly 75% of the total market value of all stocks traded in the US. Therefore, the statement is true.

Question 12

Historically speaking, the market risk premium in Italy has been higher than that of the United States.

Accepted Answer

Historically, Italy has experienced higher market volatility, political instability, and economic phases characterized by high inflation and high interest rates. These factors have contributed to a higher market risk premium in Italy compared to the United States.

Question 13

All financial managers and economists believe that long-run historical returns are the best available measure of future returns.

Accepted Answer

Not all financial managers and economists believe that long-run historical returns are the best measure of future returns, as they are aware that past performance is not always indicative of future results due to changing market conditions, economic factors, and unforeseen events.

Question 14

The risk that remains in a stock portfolio after efforts to diversify is known as unique risk.

Accepted Answer

The risk that remains in a stock portfolio after efforts to diversify is known as systematic risk or market risk, not unique risk. Unique risk, also known as unsystematic risk, is specific to a single company or industry and can be reduced through diversification.

Question 15

If one portfolio's variance exceeds that of another portfolio, its standard deviation will also be greater than that of the other portfolio.

Accepted Answer

This is because standard deviation is the square root of variance. Therefore, if the variance of one portfolio is higher than that of another, the standard deviation of that portfolio will also be higher.

Question 16

The expected return on an investment provides compensation to investors both for waiting and for worrying.

Accepted Answer

The expected return on an investment compensates investors for waiting because they are not immediately receiving the money they invested. It also compensates them for worrying because there is always a risk associated with investing, and investors want to be rewarded for taking on that risk.

Question 17

A share of stock currently sells for $60, pays an annual dividend of $4.00, and earned a rate of return of 20% over the past year. What did this stock sell for one year ago?

Accepted Answer

0.20 = ($60 + 4 - P)/P; P = $53.33

Question 18

Cyclical stocks tend to perform well when other stocks are performing well also.

Accepted Answer

Cyclical stocks are closely tied to the overall economy and tend to do well when the economy is doing well. When the economy is performing well, other stocks are also likely to perform well, making this statement true.

Question 19

A market index is used to measure performance of a broad-based portfolio of stocks.

Accepted Answer

A market index typically tracks the performance of a specific set of stocks, and is used as a benchmark for portfolio performance.

Question 20

Average returns on high-risk assets are higher than those on low-risk assets.

Accepted Answer

This is generally true as high-risk assets such as stocks or commodities carry more risk and volatility, but also offer the potential for higher returns. Low-risk assets such as bonds or savings accounts typically offer lower returns but are generally considered safer investments.

Quiz 11: Introduction to Risk, Return, and the Opportunity Cost of Capital