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Exam 6: The Meaning and Measurement of Risk and Return

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Question 1

Multiple Choice

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Which of the following statements is most correct concerning diversification and risk?

A) Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.
B) Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk.
C) Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification.
D) Proper diversification generally results in the elimination of risk.

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Question 2

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Redesign Corp is considering a new strategy that would increase its expected return from 12% to 13.9%,but would also increase its beta from 1.2 to 1.8.If the risk free rate is 5% and the return on the market is expected to be 10%,should Redesign change its strategy?

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No.Currently the company's required retu...

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Question 3

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The Beta of a T-bill is one.

A stock's beta is a measure of its

An all-stock portfolio is more risky than a portfolio consisting of all bonds.

For a well-diversified investor,an investment with an expected return of 10% with a standard deviation of 3% dominates an investment with an expected return of 10% with a standard deviation of 5%.

Asset allocation is not recommended by financial planners because mixing different types of assets,such as stocks with bonds,makes it more difficult to track performance and adjust portfolios to changing market conditions.

Beta is a statistical measure of

Stock A has the following returns for various states of the economy: State of Stock A's expected return is

You hold a portfolio with the following securities: What is the expected return for the portfolio?

The slope of the characteristic line of a security is that security's Beta.

You hold a portfolio made up of the following stocks: If the market's expected return is 14%,and the risk free rate of return is 5%,what is the expected return of the portfolio?

Investment A and Investment B both have the same expected return,but Investment A is more risky than Investment B.In the technical jargon of modern portfolio theory,Investment A is said to "dominate" Investment B.

Assume that you expect to hold a $20,000 investment for one year.It is forecasted to have a yearend value of $21,000 with a 30% probability; a yearend value of $24,000 with a 45% probability; and a yearend value of $30,000 with a 25% probability.What is the standard deviation of the holding period return for this investment?

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 $10,500 return.What is the expected amount of return this investment will produce?

Beta represents the average movement of a company's stock returns in response to a movement in the market's returns.

You are considering the three securities listed below. a.Calculate the expected return for each security. b.Calculate the standard deviation of returns for each security. c.Compare Stock A with Stocks B and C.Is Stock A preferred over the others?

Which of the following is the slope of the security market line?

The relevant risk to an investor is that portion of the variability of returns that cannot be diversified away.

Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________.