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Exam 7: Risk and Return

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Question 31

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In a game of chance, the probability of winning a $50 is 40 percent and the probability of losing a $50 prize is 60 percent. What is the expected value of a prize in the game?

A) -$10
B) $0
C) $10
D) $25

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Question 32

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Given the returns for two stocks with the following information, calculate the covariance of the returns for the two stocks. Assume the expected return is 10.8 percent for Stock 1 and 9.7 percent for Stock 2. Prob Stock 1 Stock 2 0) 4 0) 09 0) 11 0) 5 0) 11 0) 08 0) 1 0) 17 0) 13

A) 0.000094
B) 0.00051600
C) 0.00032100
D) 0.71750786

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Question 33

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Whenever the outcome of an event has a number of different possibilities that have equal probability of occurrence, then the expected value of the outcome is equal to the simple average of the individual events.

Given the returns for two stocks with the following information, calculate the correlation coefficient of the returns for the two stocks. Assume the expected return for Stock 1 is 10.8 percent and 9.7 percent for Stock 2. Prob Stock 1 Stock 2 0) 4 0) 09 0) 11 0) 5 0) 11 0) 08 0) 1 0) 17 0) 13

Sayers purchased a stock with a coefficient of variation equal to 0.125. The expected return on the stock is 20 percent. What is the variance of the stock?

Holding Period Return: George Wilson purchased Bright Light Industries common stock for $47.50 on January 31, 2010. The firm paid dividends of $1.10 during the last 12 months. George sold the stock today (January 30, 2011) for $54.00. What is George's holding period return? Round off the nearest 0.01%.

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

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

If you were to compare the returns of an individual stock to a market index, select the answer below that is most true.

If you are building a portfolio, then you desire assets that have a correlation coefficient of one.

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

The variance of a distribution can be a negative value.

Most of the risk-reduction benefits from diversification can be achieved in a portfolio consisting of

Standard Deviation: View Point Industries has forecast a rate of return of 20.00% if the economy booms (25.00% probability) ; a rate of return of 15.00% if the economy in in a growth phase (45.00% probability) ; a rate of return of 2.50% if the economy in in decline (20.00% probability) ; and a rate of return of -15.00% if the economy in a depression (10.00% probability) . What is View Point's standard deviation of returns?

If the capital appreciation return from owning a stock is positive, then the total return from owning the same stock can be negative.

In order for the total return of a stock to be equal to -100 percent, the income return component for that stock must be zero.

Utilizing 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.

The appropriate measure of risk for a diversified portfolio is beta.

Niles is making an investment with an expected return of 12 percent. If the standard deviation of the return is 4.5 percent, and if Niles is investing $100,000, then what dollar amount is Niles 95 percent sure that he will have at the end of the year?

Books Brothers stock was priced at $15 per share two years ago. The stock sold for $13 last year and now it sells for $18. What was the total return for owning Books Brothers stock during the most recent year? Assume that no dividends were paid and round to the nearest percent.