Question 1

If the distribution of returns for an asset has a variance of zero, then covariance of returns between that asset and the returns any other asset must equal zero.

Accepted Answer

If the variance of an asset's returns is zero, it means that the asset's returns are constant and do not vary. In such a case, the covariance of returns between that asset and any other asset must also be zero because there is no variability in the returns of the first asset for there to be a relationship with the returns of the second asset. Therefore, the statement is true.

Question 2

Ahmet purchased a share for $45 one year ago. The share is now worth $65. During the year, the share paid a dividend of $2.50. What is the total return to Ahmet from owning the share? (Round your answer to the nearest whole per cent.)
A) 5%
B) 44%
C) 35%
D) 50%

Accepted Answer

The total return is calculated by adding the capital gain and the dividend, then dividing by the initial price: ((65 - 45) + 2.5) / 45 = 50%.

Question 3

Gunther earned a 62.5 per cent return on a share that he purchased one year ago. The share is now worth $12, and he received a dividend of $1 during the year. How much did Gunther originally pay for the share?
A) $7.00
B) $7.50
C) $8.00
D) $8.50

Accepted Answer

Let's call the original price that Gunther paid for the share "x".

Given that he earned a 62.5% return, we can set up the equation: 
1.625x = 12 + 1

Simplifying: 
1.625x = 13 
x = 8

Therefore, Gunther originally paid $8.00 for the share.

Question 4

Francis purchased a share one year ago for $20, and it is now worth $24. The share paid a dividend of $3 during the year. What was the share's rate of return from capital appreciation during the year? (Round your answer to the nearest per cent.)
A) 17%
B) 20%
C) 29%
D) 35%

Accepted Answer

To calculate the rate of return from capital appreciation, we need to subtract the initial price from the current price, and then divide by the initial price.

Capital appreciation = (Current price - Initial price) / Initial price
Capital appreciation = ($24 - $20) / $20
Capital appreciation = $4 / $20
Capital appreciation = 0.20 or 20%

Therefore, the rate of return from capital appreciation during the year was 20%.

Question 5

If the covariance between the returns of two assets is equal to zero, then the correlation coefficient must also be zero.

Accepted Answer

This statement is true. The correlation coefficient measures the strength and direction of the linear relationship between two variables. If the covariance between the returns of two assets is zero, it means there is no linear relationship between them, so the correlation coefficient must also be zero. However, it is important to note that two variables can have a nonlinear relationship even if their covariance is zero, in which case the correlation coefficient may not be equal to zero.

Question 6

The coefficient of variation is useful when deciding which individual shares to add to your diversified portfolio.

Accepted Answer

The coefficient of variation is not useful when deciding which individual shares to add to your diversified portfolio. It is a measure of the dispersion of a data set, and it is not a measure of the risk or return of an investment.

Question 7

Utilising the fact that two or more asset values do not always move in the same direction at the same time in order to reduce the risk of a portfolio is called diversification.

Accepted Answer

Diversification is the process of spreading investments across different types of assets to reduce the risk of the portfolio. By investing in assets that move in different directions, the portfolio's overall risk is reduced because losses in one asset may be offset by gains in another.

Question 8

Given the historical information in the chapter, the beta of a small share should be greater than the beta of a corporate bond.

Accepted Answer

Historical data shows that small shares (equities) generally have higher risk and higher volatility compared to corporate bonds. Beta measures an asset's sensitivity to market risk, and therefore, a small share is likely to have a higher beta compared to a corporate bond.

Question 9

Julio purchased a share one year ago for $27. The share is now worth $32, and the total return to Julio for owning the share was 37 per cent. What is the dollar amount of dividends that he received for owning the share during the year?
A) $4
B) $5
C) $6
D) $7

Accepted Answer

The total return is 37%, which includes both capital gains and dividends. The capital gain is $32 - $27 = $5. The total return in dollars is 0.37 * $27 = $9.99 (approximately $10). Therefore, the dividends received are $10 - $5 = $5.

Question 10

If you are trying to determine whether to purchase Security A or Security B as the only holding in your portfolio, then you can consider the coefficient of variation in order to understand the risk-return relationship of the individual securities.

Accepted Answer

The coefficient of variation is a measure of risk-adjusted return and can be used to compare the risk and return of different securities. By calculating the coefficient of variation for Security A and Security B, you can determine which security provides a better risk-return tradeoff for your portfolio.

Question 11

Gwen purchased a share one year ago for $25, and it is now worth $31. The share paid a dividend of $1.50 during the year. What was the share's rate of return income during the year? (Round your answer to the nearest per cent.)
A) 6%
B) 15%
C) 24%
D) 26%

Accepted Answer

The rate of return income is calculated by dividing the dividend by the original purchase price: ($1.50 / $25) * 100 = 6%.

Question 12

If you know the risk-free rate, the market risk-premium, and the beta of a share, then using the CAPM you will be able to calculate the expected rate of return for the share.

Accepted Answer

According to the Capital Asset Pricing Model (CAPM), the expected rate of return on a share is calculated using the risk-free rate, the market risk-premium, and the beta of the share. Therefore, if you know these three inputs, you can calculate the expected rate of return for the share using the CAPM formula.

Question 13

Complete diversification means that the portfolio is no longer subject to market risk.
b False

Accepted Answer

While diversification can reduce some specific risks in a portfolio, it does not completely eliminate overall market risk. Factors such as macroeconomic conditions, political events, and other broad market influences can still impact a diversified portfolio.

Question 14

The market risk-premium is equal to expected return on the market portfolio.

Accepted Answer

The market risk-premium is the additional return an investor requires to hold a risky asset instead of a risk-free asset. It is equal to the expected return on the market portfolio minus the risk-free rate. So the statement that the market risk-premium is equal to expected return on the market portfolio is false.

Question 15

Which of the following is the best measure of the systematic risk in a portfolio?
A) variance
B) standard deviation
C) covariance
D) beta

Accepted Answer

Beta is the best measure of systematic risk in a portfolio as it measures the sensitivity of the portfolio's returns to the overall market returns, thus capturing the systematic risk. Variance, standard deviation, and covariance do not specifically capture systematic risk and are better suited for measuring total risk or specific risk.

Question 16

Moshe purchased a share for $30 last year. He found out today that he had a -100 per cent return on his investment. Which of the following must be true?
A) The share is worth $30 today.
B) The share is worth $0 today
C) The share paid no dividends during the year.
D) Both b and c must be true.

Accepted Answer

The share is worth $0 today, and it paid no dividends during the year.

Question 17

If you were to completely diversify your portfolio by purchasing a portion of every asset in the investment universe, then the expected return of your portfolio is equal to the risk-free rate.

Accepted Answer

Diversification can help to reduce overall risk in a portfolio, but the expected return of a truly diversified portfolio would still be influenced by the varying returns of the different assets included. The risk-free rate is only relevant when considering the return on a completely risk-free investment, such as a government bond.

Question 18

The expected return of the market portfolio is equal to the market risk premium.

Accepted Answer

The expected return of the market portfolio includes the risk-free rate, while the market risk premium is the additional return that investors expect to receive for taking on the risk of investing in the market. Therefore, the two are not equal.

Question 19

If two assets with return correlation coefficients less than one make up a portfolio, then the portfolio does not take advantage of any diversification benefits.

Accepted Answer

If two assets with return correlation coefficients less than one make up a portfolio, there is still some diversification benefit. The greater the difference between the correlation coefficients of the assets, the greater the diversification benefit. Even if the correlation coefficient is not zero, a portfolio with assets that have correlation coefficients less than one can result in reduced risk and increased returns.

Question 20

The market risk-premium is equal to the expected return on the market less the risk-free rate of return.

Accepted Answer

The market risk-premium is defined as the additional return an investor expects to receive from investing in a market portfolio over the risk-free rate of return. Therefore, it is equal to the expected return on the market minus the risk-free rate of return.

Quiz 7: Risk and Return

If the distribution of returns for an asset has a variance of zero, then covariance of returns between that asset and the returns any other asset must equal zero.

Ahmet purchased a share for $45 one year ago. The share is now worth $65. During the year, the share paid a dividend of $2.50. What is the total return to Ahmet from owning the share? (Round your answer to the nearest whole per cent.)

Gunther earned a 62.5 per cent return on a share that he purchased one year ago. The share is now worth $12, and he received a dividend of $1 during the year. How much did Gunther originally pay for the share?

Francis purchased a share one year ago for $20, and it is now worth $24. The share paid a dividend of $3 during the year. What was the share's rate of return from capital appreciation during the year? (Round your answer to the nearest per cent.)

If the covariance between the returns of two assets is equal to zero, then the correlation coefficient must also be zero.

The coefficient of variation is useful when deciding which individual shares to add to your diversified portfolio.

Utilising the fact that two or more asset values do not always move in the same direction at the same time in order to reduce the risk of a portfolio is called diversification.

Given the historical information in the chapter, the beta of a small share should be greater than the beta of a corporate bond.

Julio purchased a share one year ago for $27. The share is now worth $32, and the total return to Julio for owning the share was 37 per cent. What is the dollar amount of dividends that he received for owning the share during the year?

If you are trying to determine whether to purchase Security A or Security B as the only holding in your portfolio, then you can consider the coefficient of variation in order to understand the risk-return relationship of the individual securities.

Gwen purchased a share one year ago for $25, and it is now worth $31. The share paid a dividend of $1.50 during the year. What was the share's rate of return income during the year? (Round your answer to the nearest per cent.)

If you know the risk-free rate, the market risk-premium, and the beta of a share, then using the CAPM you will be able to calculate the expected rate of return for the share.

Complete diversification means that the portfolio is no longer subject to market risk. b False

The market risk-premium is equal to expected return on the market portfolio.

Which of the following is the best measure of the systematic risk in a portfolio?

Moshe purchased a share for $30 last year. He found out today that he had a -100 per cent return on his investment. Which of the following must be true?

If you were to completely diversify your portfolio by purchasing a portion of every asset in the investment universe, then the expected return of your portfolio is equal to the risk-free rate.

The expected return of the market portfolio is equal to the market risk premium.

If two assets with return correlation coefficients less than one make up a portfolio, then the portfolio does not take advantage of any diversification benefits.

The market risk-premium is equal to the expected return on the market less the risk-free rate of return.