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Exam 7: Risk and Return

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Question 21

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If you were to regress the historical returns of a stock on the historical return of a general market index, you would plot the line of best fit through those data points. The slope of that line represents the beta of the stock in question. However, in most instances the date points do not lie exactly on that line. Describe why.

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The slope of the line of best fit descri...

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Question 22

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

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Question 23

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Which of the following statements is most correct?

If you are calculating the variance and standard deviation of returns for a stock, the variance will always be larger than the standard deviation.

You have observed that the average size of a particular goldfish is 1.5 inches long. The standard deviation of the size of the goldfish is 0.25 inches. What is the size of a goldfish such that 95 percent of the goldfish are smaller? Assume a normal distribution for the size of goldfish.

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

The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz?

The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what is the expected return on Elsenore?

Explain the difference between systematic and nonsystematic risk.

Aquaman Stock has exhibited a standard deviation in stock returns of 0.7, whereas Green Lantern Stock has exhibited a standard deviation of 0.8. The correlation coefficient between the stock returns is 0.1. What is the standard deviation of a portfolio composed of 70 percent Aquaman and 30 percent Green Lantern?

If the returns for two assets have a correlation coefficient of one, then there are no benefits of diversification by combining these assets in a two-asset portfolio.

A portfolio with a level of systematic risk the same as that of the market has a beta that is

You have invested 20 percent of your portfolio in Homer, Inc., 40 percent in Marge Co., and 20 percent in Bart Resources. What is the expected return of your portfolio if Homer, Marge, and Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectfully?

The expected return on Mike's Seafood stock is 17.9 percent. If the expected return on the market is 13 percent and the beta for Kiwi is 1.7, then what is the risk-free rate?

If a random variable is drawn from a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations larger than the mean?

Genaro needs to capture a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property?

Robert paid $100 for a stock one year ago. The total return on the stock was 10 percent. Therefore, the stock must be selling for $110 today.

The standard deviation of a distribution can be a negative value.

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

Which of the following represents a plot of the relation between expected return and systemic risk?