Question 1

If standard deviation is used to measure the risk of stocks, one problem that arises is the inability to tell which stock is riskier by looking at the standard deviation alone.

Accepted Answer

Standard deviation may not provide a clear picture of which stock is riskier as it does not account for other factors such as the nature of the business, management, and market conditions.

Question 2

Beta measures the variability of an asset's returns relative to the market portfolio.

Accepted Answer

Beta is a measure of systematic risk that compares the volatility of an individual stock's returns to the overall market's returns. A beta of 1 indicates that the stock's price will move with the market, while a beta greater than 1 means the stock is more volatile than the market, and a beta less than 1 means the stock is less volatile than the market.

Question 3

Standard deviation is stated in the same units of measurement (e.g., dollars, percent) as those of the data from which they were generated.

Accepted Answer

Standard deviation is calculated using the same units of measurement as the original data. It measures the amount of variation or spread around the mean of the data in the same units, whether it is dollars, percent, or any other unit of measurement.

Question 4

Unsystematic risk is the risk that cannot be eliminated through diversification.

Accepted Answer

The answer of Unsystematic risk is the risk that cannot...

Question 5

Standard deviation is the square root of the variance.

Accepted Answer

This is a true statement. The standard deviation is the square root of the variance, which measures the spread or variability of a set of data.

Question 6

A higher coefficient of variation indicates more risk per unit of return.

Accepted Answer

Coefficient of variation is a measure of risk-adjusted return. A higher coefficient of variation means that the returns of an investment are more spread out and therefore more risky compared to investments with a lower coefficient of variation.

Question 7

A weak-form efficient market is a market in which prices reflect all past information.

Accepted Answer

In a weak-form efficient market, prices reflect all past information, but not necessarily all publicly available information or future events.

Question 8

The Capital Asset Pricing Model states that the expected return on an asset depends on its level of unsystematic risk.

Accepted Answer

The Capital Asset Pricing Model states that the expected return on an asset depends on its level of systematic risk or market risk, not unsystematic risk.

Question 9

In an efficient market, investors cannot consistently earn above average profits after taking risk differences into account.

Accepted Answer

In an efficient market, all available information is already reflected in the current market prices, and thus any attempt to consistently earn above average profits after accounting for risk differences would be unlikely to succeed.

Question 10

The variance of a portfolio would can be calculated by finding the variances of the individual components of the portfolio and finding the weighted average of those variances.

Accepted Answer

The variance of a portfolio is not simply the weighted average of the variances of its components; it also depends on the covariances between the components.

Question 11

The coefficient of variation is a measure of total return on a stock.

Accepted Answer

The coefficient of variation is a measure of the standard deviation of returns compared to the mean return, which is a measure of risk, not total return.

Question 12

The market portfolio is a portfolio that contains all risky assets.

Accepted Answer

The market portfolio includes all risky assets in the market in proportions based on their market values.

Question 13

In an efficient market, both expected and unexpected news should cause stock prices to move up or down.

Accepted Answer

In an efficient market, only unexpected news causes stock prices to move because expected news is already priced into the stocks.

Question 14

Although gold is a risky investment by itself, including gold in a stock portfolio can make the portfolio less risky.

Accepted Answer

Gold has a low correlation with other assets such as stocks and bonds, making it a good diversifier. Including gold in a stock portfolio can help reduce overall portfolio risk.

Question 15

Any consistent predictable trend in the same direction as the price change would be evidence of an efficient market.

Accepted Answer

If there is a consistent predictable trend in the same direction as the price change, it would be evidence of an inefficient market. This is because in an efficient market, all relevant information is already reflected in the price and there should not be any consistent predictable trends.

Question 16

The variance or standard deviation measures the risk per unit of return.

Accepted Answer

Variance or standard deviation measures the dispersion or spread of a set of data points around their mean value, not the risk per unit of return. Risk per unit of return is often assessed using metrics like the Sharpe ratio.

Question 17

Diversification occurs when we invest in several different assets rather than just a single one.

Accepted Answer

Diversification is the strategy of investing in different types of assets in order to reduce the risk of loss in any one of them. By spreading the investment across several assets, we lower the risk and achieve a more balanced portfolio. So, diversification is always done by investing in several different assets.

Question 18

If Stock A has a higher standard deviation than Stock B, it will also have a greater coefficient of variation.

Accepted Answer

The coefficient of variation is calculated as the standard deviation divided by the mean. Therefore, a stock can have a higher standard deviation but a lower coefficient of variation if its mean is also significantly higher.

Question 19

The benefits of diversification are greatest when asset returns have positive correlations.

Accepted Answer

The benefits of diversification are actually greater when asset returns have negative or low correlations, as this helps to reduce overall portfolio risk. Positive correlations between asset returns mean that they tend to move up and down together, increasing overall risk.

Question 20

A market system that allows for quick execution of customers' trades is said to be informationally efficient.

Accepted Answer

Informational efficiency in a market refers to how quickly and accurately prices reflect all available information, not specifically to the speed of executing trades.

Quiz 12: Financial Return and Risk Concepts