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Exam 8: Analysis of Risk and Return

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Question 41

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When comparing two equal-sized investments, the ____ is an appropriate measure of total risk.

A) standard deviation
B) coefficient of variation
C) correlation
D) covariance

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Question 42

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What is the beta of the following project?

A) 1.11
B) .95
C) 2.15
D) 1.43

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Question 43

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____ can be achieved by investing in a set of securities that have different risk-return characteristics.

On the capital market line (CML) , any risk-return combination beyond the Market Portfolio (m) is obtained by ____.

In general, when the correlation coefficient between the returns on two securities is ____, the risk of a portfolio is ____ the weighted average of the total risk of the two individual securities.

An investor, by investing in combinations of stocks, develops a ____ portfolio

The risk-free rate of return can be thought of as consisting of the following two components:

Christy is considering investing in the common stock of One Liberty and Heico. The following data are available for these two securities: If she invests 30% of her funds in Heico and 70% in One Liberty, and if the correlation of returns between these securities is +0.65, what is the portfolio's expected return and standard deviation?

Given the following information on securities E and F, calculate the expected return and standard deviation of returns on a portfolio consisting of 40% invested in E and 60% invested in F.

The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%. Determine the probability of earning more than 21% on FTC common stock.

Over the 10-year period from 1978 through 1987, the compound annual rate of return on U.S. Treasury bills was 9.17 percent. Over the same time period, the average annual inflation rate was 6.39 percent. Therefore,

An investor plans to invest 75 percent of her funds in the common stock of Gamma Industries and 25 percent in Epsilon Company. The expected return on Gamma is 12 percent and the expected return on Epsilon is 16 percent. The standard deviation of returns for Gamma is 8 percent and for Epsilon is 12 percent. The correlation between the returns for Gamma and Epsilon is +0.8. -An investor plans to invest 75 percent of her funds in the common stock of Gamma Industries and 25 percent in Epsilon Company. The expected return on Gamma is 12 percent and the expected return on Epsilon is 16 percent. The standard deviation of returns for Gamma is 8 percent and for Epsilon is 12 percent. The correlation between the returns for Gamma and Epsilon is +0.8.Determine the standard deviation of returns for this investor's portfolio.

Explain marketability risk and marketability premium.

The security market line

All of the following statements about risk are correct EXCEPT:

If the return on U.S. Treasury bills is 7.02%, the risk premium is 2.32%, and the inflation rate is 4.16%, then the real rate of return is:

The real rate of interest is expected to be 3 percent and the expected rate of inflation for next year is expected to be 5.5 percent. If the default risk premium is 1.1 percentage points, and the seniority risk premium is 0.4 percentage points, what is the required return on a 1 year U.S. Treasury security?

The slope of the characteristic line for a specific security is an estimate of ____ for that security.

Assume you want to construct a portfolio with a 14 percent return from the following two securities: What percentage of your portfolio should be invested in Security 1?

Jim Bowles is an investor who believes the economy is gaining strength and, therefore, wishes to increase the risk of his 14 security portfolio. Each security has a current market value of $5,000 and the current beta of the portfolio is 1.02. The beta of the least risky security is .76. If Jim replaces the least risky security with another security with the same market value but a beta of 1.45, what will the portfolio beta be then?