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Exam 6: The Meaning and Measurement of Risk and Return

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Question 1

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If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the least risky investment?

A) common stock of large firms
B) U.S.Treasury bills
C) common stock of small firms
D) long-term government bonds

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Question 2

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Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?

A) 0.97
B) 1.02
C) 1.12
D) 1.21

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Question 3

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The risk-return tradeoff that investors face on a day-to-day basis is based on realized rates of return because expected returns involve too much uncertainty.

Which of the following is/are true?

The realized rate of return,or holding period return,is equal to the holding period dollar gain divided by the price at the beginning of the period.

A stock with a beta of 1 has systematic or market risk equal to the "typical" stock in the marketplace.

Changes in the general economy,like changes in interest rates or tax laws represent what type of risk?

Stock A has a beta of 1.2 and a standard deviation of returns of 18%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the market risk premium increases,then

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the highest risk investment?

Stock W has the following returns for various states of the economy: Stock W's standard deviation of returns is

An investor currently holds the following portfolio: The investor is worried that the beta of his portfolio is too high,so he wants to sell some stock C and add stock D,which has a beta of 1.0,to his portfolio.If the investor wants his portfolio to have a beta of 1.72,how much stock C must he replace with stock D?

Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return.What is the expected amount of return this investment will produce?

As the required rate of return of an investment decreases,the market price of the investment decreases.

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk free rate is 4%.What is the risk premium on the market?

Of the following,which differs in meaning from the other three?

Negative historical returns are not possible during periods of high volatility (high standard deviations of returns)due to the risk-return tradeoff.

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

Beta is a measurement of the relationship between a security's returns and the general market's returns.

According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's risk premium.

Assume that you have $100,000 invested in a stock that is returning 14%,$150,000 invested in a stock that is returning 18%,and $200,000 invested in a stock that is returning 15%.What is the expected return of your portfolio?