Question 1

Two poker machines offer to double your money 3 times out of 5. Machine A takes $10 bets an? Machine B takes $100 bets on each occasion. A risk-averse investor prefers to bet on

Accepted Answer

To calculate the expected return of each machine, we can use the binomial distribution:
- For Machine A: the probability of winning is 0.6 (3 out of 5), and the probability of losing is 0.4. The payout is double the bet, so if we bet $10, we either win $20 or lose $10. The expected return is: (0.6 x $20) - (0.4 x $10) = $12 - $4 = $8.
- For Machine B: the probability of winning is also 0.6, but the bet is $100. So we either win $200 or lose $100. The expected return is: (0.6 x $200) - (0.4 x $100) = $120 - $40 = $80.

Therefore, Machine A has a higher expected return per bet, and it is a better choice for a risk-averse investor who wants to minimize the amount of money they bet.

Question 2

When investing for a long horizon, investors care about the volatility of returns and not the volatility of returns.

Accepted Answer

When investing for a long horizon, investors are more concerned with the cumulative returns over the entire period than the average or mean return. It is the final, cumulative return that matters to them. However, they are concerned about the volatility or fluctuations of these returns, which may impact their investment goals.

Question 3

Which of the following statements is TRUE?

Accepted Answer

Portfolios of smaller cap shares are typically less volatile than individual small cap shares due to the diversification effect. Diversification helps to reduce the impact of the underlying risks of individual stocks and can lead to a more stable overall portfolio. Option B is false as smaller cap shares are known to have higher volatility on average than Treasury notes. Option C is also false as smaller cap shares have historically provided higher returns than larger cap shares. Option D is false as Treasury notes are typically considered to have lower returns than world shares.

Question 4

Fortescue had realised returns of 10%, 25%, -20%, and -15% over four quarters. What is the quarterly standard deviation of returns for Fortescue?

Accepted Answer

To find the quarterly standard deviation, we need to first calculate the average (or mean) return and then calculate the deviations from the mean for each quarter.

The average return is:
(10% + 25% - 20% - 15%) / 4 = 0%

Now we calculate the deviations from the mean for each quarter:

Quarter 1: 10% - 0% = 10% 
Quarter 2: 25% - 0% = 25%
Quarter 3: -20% - 0% = -20%
Quarter 4: -15% - 0% = -15%

Next, we square these deviations:

Quarter 1: (10% - 0%)^2 = 100%
Quarter 2: (25% - 0%)^2 = 625%
Quarter 3: (-20% - 0%)^2 = 400%
Quarter 4: (-15% - 0%)^2 = 225%

We then find the average of these squared deviations:

(100% + 625% + 400% + 225%) / 4 = 337.5%

Finally, we take the square root of this average to get the standard deviation:

sqrt(337.5%) = 18.37%

Therefore, the quarterly standard deviation of returns for Fortescue is 18.37%, which is closest to option B (21.21%).

Question 5

Which of the following investments offered the highest average annual return over the twentyyears to June 2012?

Accepted Answer

According to the given information, Australian shares offered the highest average annual return over the twenty years to June 2012, therefore it is the best choice. The other options, Australian property, cash, and bonds, did not offer as high of a return.

Question 6

A security returns 5%, 4%, 3%, and 6% over four years. The standard deviation of returns of thesecurity is

Accepted Answer

We can use the formula for sample standard deviation, which is:
s = sqrt((1/(n-1)) * sum(xi - xbar)^2)
where n is the sample size, xi are the individual returns, xbar is the average return, and sqrt is the square root function.
Using this formula and plugging in the given returns, we get:
xbar = (5% + 4% + 3% + 6%)/4 = 4.5%
s = sqrt((1/(4-1)) * ((5% - 4.5%)^2 + (4% - 4.5%)^2 + (3% - 4.5%)^2 + (6% - 4.5%)^2))
s = sqrt((1/3) * ((-0.5)^2 + (-0.5)^2 + (-1.5)^2 + (1.5)^2))
s = sqrt((1/3) * (0.25 + 0.25 + 2.25 + 2.25))
s = sqrt(5/3) = 1.29%
Therefore, the answer is B.

Question 7

Which of the following statements is FALSE?

Accepted Answer

Firm-specific news leads to diversifiable risk, not common risk, which is systematic and affects the entire market.

Question 8

The geometric average annual return for a large capitalisation share portfolio is 12% for ten yearsand 5% per year for the next five years. The geometric average annual return for the entire 15-year period is

Accepted Answer

The geometric average annual return is calculated by taking the nth root of the product of (1 + each annual return), where n is the total number of years. For this problem, the formula is: [(1.12^10) * (1.05^5)]^(1/15) - 1. Calculating this gives approximately 9.62%.

Question 9

The risk premium of a share is not affected by it?

Accepted Answer

The risk premium of a share is directly affected by systematic risk, which is the risk stemming from factors affecting the overall market, and undiversifiable risk, which is the risk that cannot be diversified away. However, unsystematic risk, which is the risk that is unique to a particular company or industry, can be diversified away and therefore does not affect the risk premium of a share. "Typical risk" is not a commonly used term in finance, but if it refers to either systematic or unsystematic risk, the answer would still be A.

Question 10

Use the table for the question(s) below.
Consider the following price and dividend data for Cockatoo Limited:
$\begin{array} { l c c } 
\hline \text { Date } & \text { Price (\$) } & \text { Dividend (\$) } \
\hline \text { December 31, 2011 } & \$ 14.64 & \
\hline \text { January 26, 2012 } & \$ 13.35 & \$ 0.10 \
\hline \text { April 28, 2012 } & \$ 9.14 & \$ 0.10 \
\hline \text { July 29, 2012 } & \$ 10.74 & \$ 0.10 \
\hline \text { October 28, 2012 } & \$ 8.02 & \$ 0.10 \
\hline \text { December 30, 2012 } & \$ 7.72 & \
\hline
\end{array}$
-Assume that you purchased Cockatoo shares at the closing price on 31 December 2011 and sold it after the dividend had been paid at the closing price on 26 January 2012. Your dividend yield for this period is closest to:

Accepted Answer

The answer of Use the table for the question(s) below.
Consider...

Question 11

Independent risk is more closely related t?

Accepted Answer

Independent risk refers to risks that are unique to a particular company or industry and not related to broader market factors. This type of risk is also known as unsystematic risk, as it is specific to a particular company or sector and is not related to the overall market movements. Therefore, option A is the most closely related to independent risk.

Question 12

Suppose you bought a $75 share a month ago. It paid a dividend of $0.50 today and then you sold itfor $70. What was your return on the investment?

Accepted Answer

The answer of Suppose you bought a $75 share a...

Question 13

Use the table for the question(s) below.
Consider the following realised annual returns:
$\begin{array} { l c c } 
\hline \text { Year-end } & \begin{array} { c } 
\text { All Ords } \
\text { Realised } \
\text { Return }
\end{array} & \begin{array} { c } 
\text { Westpac } \
\text { Realised } \
\text { Return }
\end{array} \
\hline 2003& 23.6 \% & 46.3 \% \
\hline 2004 & 24.7 \% & 26.7 \% \
\hline 2005 & 30.5 \% & 86.9 \% \
\hline 2006 & 9.0 \% & 23.1 \% \
\hline 2007 & - 2.0 \% & 0.2 \% \
\hline 2008 & - 17.3 \% & - 3.2 \% \
\hline 2009 & - 24.3 \% & - 27.0 \% \
\hline 2010 & 32.2 \% & 27.9 \% \
\hline 2011 & 4.4 \% & - 5.1 \% \
\hline 2012 & 7.4 \% & - 11.3 \% \
\hline  &
\end{array}$
-The average annual return on Westpac from 2003 to 2012 is closest to?

Accepted Answer

The answer of Use the table for the question(s) below.
Consider...

Question 14

Suppose the quarterly arithmetic average return for a security is 5% per quarter and the securitygives a return of 10% each over the next two quarters. The arithmetic average return over the six quarters is

Accepted Answer

The arithmetic average return over six quarters is calculated by summing up the returns for each quarter and dividing by the number of quarters. Given that the return for the first four quarters is 5% each and 10% for the next two quarters, the total return is (5% * 4) + (10% * 2) = 40%. Dividing by 6 quarters gives an average return of 6.67%.

Question 15

There is an overall relationship between and -larger stocks have a lower volatility overall.

Accepted Answer

Larger stocks tend to have lower volatility, indicating a relationship between the size of a stock and its risk level.

Question 16

Fortescue Mining had realised returns of 5%, 15%, -10%, and -5% over four quarters. What is the quarterly standard deviation of returns for Fortescue?

Accepted Answer

To calculate the standard deviation, first find the mean of the returns: (5% + 15% - 10% - 5%) / 4 = 1.25%. Then, calculate the variance: [(5% - 1.25%)^2 + (15% - 1.25%)^2 + (-10% - 1.25%)^2 + (-5% - 1.25%)^2] / 4 = 123.125 / 4 = 30.78125. The standard deviation is the square root of the variance: √30.78125 ≈ 5.55%. However, since the choices are in percentages, the correct calculation should be √(variance * 100) ≈ 11.09%.

Question 17

In general, it is possible to eliminate ?

Accepted Answer

Unsystematic risk can be eliminated through diversification, while systematic risk cannot be eliminated as it affects the entire market.

Question 18

Which of the following statements is FALSE?

Accepted Answer

Volatility is a reasonable measure of risk for large portfolios but not necessarily for individual securities, as individual securities can have unique risks not captured by volatility alone.

Question 19

A portfolio of shares can achieve diversification benefits if the shares that comprise the portfolio ar?

Accepted Answer

Diversification benefits are achieved when the shares in a portfolio are not perfectly correlated, as this reduces the overall risk.

Question 20

McCoy paid a one-time special dividend of $3.20 on 18 October 2012. Suppose you bought McCoy stock for $47.00 on 18 July 2012, and sold it immediately after the dividend was paid for $63.32. What was your realised return from holding McCoy?

Accepted Answer

The realised return is calculated by adding the dividend received to the capital gain and then dividing by the initial investment. The capital gain is $63.32 - $47.00 = $16.32. Adding the dividend of $3.20 gives a total gain of $19.52. Dividing this by the initial investment of $47.00 gives a realised return of 41.5%.

Quiz 11: Risk and Return in Capital Markets

Two poker machines offer to double your money 3 times out of 5. Machine A takes $10 bets an? Machine B takes $100 bets on each occasion. A risk-averse investor prefers to bet on

When investing for a long horizon, investors care about the volatility of returns and not the volatility of returns.

Which of the following statements is TRUE?

Fortescue had realised returns of 10%, 25%, -20%, and -15% over four quarters. What is the quarterly standard deviation of returns for Fortescue?

Which of the following investments offered the highest average annual return over the twentyyears to June 2012?

A security returns 5%, 4%, 3%, and 6% over four years. The standard deviation of returns of thesecurity is

Which of the following statements is FALSE?

The geometric average annual return for a large capitalisation share portfolio is 12% for ten yearsand 5% per year for the next five years. The geometric average annual return for the entire 15-year period is

The risk premium of a share is not affected by it?

Independent risk is more closely related t?

Suppose you bought a $75 share a month ago. It paid a dividend of $0.50 today and then you sold itfor $70. What was your return on the investment?

Suppose the quarterly arithmetic average return for a security is 5% per quarter and the securitygives a return of 10% each over the next two quarters. The arithmetic average return over the six quarters is

There is an overall relationship between and -larger stocks have a lower volatility overall.

Fortescue Mining had realised returns of 5%, 15%, -10%, and -5% over four quarters. What is the quarterly standard deviation of returns for Fortescue?

In general, it is possible to eliminate ?

Which of the following statements is FALSE?

A portfolio of shares can achieve diversification benefits if the shares that comprise the portfolio ar?

McCoy paid a one-time special dividend of $3.20 on 18 October 2012. Suppose you bought McCoy stock for $47.00 on 18 July 2012, and sold it immediately after the dividend was paid for $63.32. What was your realised return from holding McCoy?