Deck 12: Financial Return and Risk Concepts

Question 1

If a financial asset has a historical variance of 16, then its standard deviation must be 4.

Answer 1

True

Question 2

Standard deviation is stated in the same units of measurement (e.g., dollars, percent) as those of the data from which they were generated.

Answer 2

True

Question 3

Standard deviation is the square root of the variance.

Answer 3

True

Question 4

If Stock A has a higher standard deviation than Stock B, it will also have a greater coefficient of variation.

Question 5

The sum of the deviations always equals the sample size n.

Question 6

The variance or standard deviation measures the risk per unit of return.

Question 7

If standard deviation is used to measure the risk of stocks, one problem that arises is the inability to tell which stock is riskier by looking at the standard deviation alone.

Question 8

If the expected return is 10%, the standard deviation is 3%, about 68% of the time returns will be expected to fall between 10% and 13%.

Question 9

If the expected return is 10%, the standard deviation is 3%, about 95% of the time returns will be expected to fall between 1% and 19%.

Question 10

If the expected return is 10%, the standard deviation is 3%, about 68% of the time returns will be expected to fall between 7% and 13%.

Question 11

The coefficient of variation is calculated as the variance divided by average returns R.

Question 12

If stock A has a standard deviation of 5 and stock B has a standard deviation of 10, the higher standard deviation for B tells us it has higher risk.

Question 13

A higher coefficient of variation indicates more risk per unit of return.

Question 14

The coefficient of variation is a measure of total return on a stock.

Question 15

In computing the variance, you divide by the sample size n.

Question 16

Standard deviation is the square root of the coefficient of variation.

Question 17

If a financial asset has a historical variance of 25, then its standard deviation must be 12.5%.

Question 18

The standard deviation is computed first and then squared to find the variance.

Question 19

The variance is the square root of the standard deviation.

Question 20

A stock that went from $40 per share at the beginning of the year to $45 at the end of the year and paid a $2 dividend provided an investor with a 14% return.

Question 21

Exchange rate risk is the effect on revenues and expenses from variations in the value of the U.S. dollar in terms of other currencies.

Question 22

A strong-form efficient market is one in which prices reflect all public knowledge, including past and current information.

Question 23

Just because large company stocks have an arithmetic average return of about 11 percent does not mean we should expect the stock market to rise by that amount each year.

Question 24

In an efficient market, both expected and unexpected news should cause stock prices to move up or down.

Question 25

When we speak of ex-ante returns, we are referring to historical information or data.

Question 26

A weak-form efficient market is one in which prices reflect all public and private knowledge, including past and current information.

Question 27

The coefficient of variation measures the risk per unit of return.

Question 28

Future returns and risk cannot be predicted precisely from past measures.

Question 29

A weak-form efficient market is a market in which prices reflect all past information.

Question 30

The term "ex-ante" refers to the past or historical information.

Question 31

Any predictable trend in the same direction as the price change would be evidence of an efficient market.

Question 32

The existence of chartists or technicians suggests that some investors believe that markets are not weak form efficient.

Question 33

Business risk is variations in sales over time.

Question 34

A market system that allows for quick execution of customers' trades is said to be informationally efficient.

Question 35

If a market is semi-strong form efficient, it also is by definition weak-form efficient.

Question 36

In an efficient market, investors cannot consistently earn above average profits after taking risk differences into account.

Question 37

The term "ex-ante" refers to expected or forecasted information.

Question 38

Any consistent trend in the same direction as the price change would be evidence of an efficient market.

Question 39

In an informationally efficient market, there is no unexpected news.

Question 40

A weak-form efficient market is one in which prices reflect all public knowledge, including past and current information.

Question 41

There are relatively few mutual funds.

Question 42

Both closed-end and open-ended funds sell shares to investors on an on-going basis.

Question 43

Diversification occurs when we invest in several different assets rather than just a single one.

Question 44

The only relevant risk for investors that hold diversified portfolios of securities is undiversifiable risk.

Question 45

When prices appear to fluctuate with no consistent or discernible pattern over time, it is called a drunken walk.

Question 46

Negative correlation is when asset returns are falling.

Question 47

In an efficient market, it is difficult to consistently find stocks whose prices do not fairly reflect the present values of future expected cash flows.

Question 48

A portfolio is any combination of financial assets or investments.

Question 49

The risk of a portfolio is simply equal to the weighted average variance of the securities that comprise it.

Question 50

Purchasing power risk can be eliminated through diversification.

Question 51

The variance of a portfolio is a weighted average of its asset variances.

Question 52

Exchange rate risk can be eliminated through diversification.

Question 53

The expected rate of return on a portfolio is the weighted average of the expected returns of the individual assets in the portfolio.

Question 54

Correlation is a statistical concept that relates movements in three or more set of returns.

Question 55

The return on a portfolio is simply equal to the weighted average return of the securities that comprise it.

Question 56

Shareholders may sell their shares back to the mutual fund at any time.

Question 57

Positive correlation is when asset returns are rising.

Question 58

Most market risk can be eliminated through diversification.

Question 59

The variance of a portfolio can be calculated by finding the variances of the individual components of the portfolio and finding the weighted average of those variances.

Question 60

The standard deviation of a portfolio is a weighted average of its asset standard deviations.

Question 61

Up to half of portfolio risk can be eliminated in a well-diversified international portfolio.

Question 62

Unsystematic risk is the risk that cannot be eliminated through diversification.

Question 63

Research suggests that a portfolio of 20 or 30 different stocks can eliminate most of a portfolio's systematic risk.

Question 64

Event risk can be eliminated through diversification.

Question 65

The greatest level of risk reduction through diversification can be achieved when combining two securities whose returns are perfectly negatively correlated.

Question 66

The coefficient of variation cannot be negative.

Question 67

A stock that went from $32 per share at the beginning of the year to $35 at the end of the year and paid a $2 dividend provided an investor with a ____ return.

A) 9.4%
B) 12.7%
C) 14.7%
D) 15.6%

Question 68

If the variance in returns for Stock A is 400% and the expected return is 5%, then the coefficient of variation is:

A) 4
B) 80
C) .25
D) cannot be determined by this information

Question 69

If the expected returns for Stock A are 3% and this year's returns are 3%, next year's returns would be

A) 3%
B) 6%
C) between 3% and 6%
D) cannot determine from the information given

Question 70

Beta measures the variability of an asset's returns relative to the market portfolio.

Question 71

Tax risk can be eliminated through diversification.

Question 72

Most undiversifiable risk can be eliminated by creating a portfolio of around 30 stocks.

Question 73

Gold can have negative systematic risk.

Question 74

The Capital Asset Pricing Model states that the expected return on an asset depends on its level of unsystematic risk.

Question 75

A stock that went from $120 per share at the beginning of the year to $122 at the end of the year and paid a $1 dividend provided an investor with a ____ return.

A) 1.25%
B) 1.67%
C) 1.99%
D) 2.50%

Question 76

An asset's beta can be estimated by regressing its returns against the returns for the market portfolio.

Question 77

A stock that went from $40 per share at the beginning of the year to $45 at the end of the year and paid a $2 dividend provided an investor with a ____ return.

A) 8.75%
B) 14%
C) 17.5%
D) 7%

Question 78

The market portfolio is a portfolio that contains all risky assets.

Question 79

The benefits of diversification are greatest when asset returns have positive correlations.

Question 80

Although gold is a risky investment by itself, including gold in a stock portfolio can make the portfolio less risky.