Question 1

Which of the following makes this a true statement: The shape of the efficient frontier implies that:
A)diminishing returns apply to risk-taking in the investment world.
B)increasing returns apply to risk-taking in the investment world.
C)returns are not impacted by risk-taking in the investment world.
D)None of these complete the sentence to make it true.

Accepted Answer

The shape of the efficient frontier, which represents the possible portfolios that offer the highest return for a given level of risk, is typically curved. This curvature implies that as an investor takes on more risk (moving towards the right of the curve), they will eventually hit a point where the benefits of additional risk-taking decrease, and the marginal return on that risk becomes lower. This phenomenon is known as diminishing returns to risk-taking, which is accurately described in choice A.

Question 2

We commonly measure the risk-return relationship using which of the following?
A)Coefficient of variation
B)Correlation coefficient
C)Standard deviation
D)Expected returns

Accepted Answer

Coefficient of variation and standard deviation are both measures of risk, while expected returns are a measure of return. Correlation coefficient does not directly measure the risk-return relationship, but instead measures the degree of linear relationship between two variables. Therefore, A and C are the best choices for measuring the risk-return relationship.

Question 3

To find the percentage return of an investment:
A)multiply the dollar return by the investment's value at the beginning of the period.
B)divide the dollar return by the investment's value at the beginning of the period.
C)multiply the dollar return by the investment's value at the end of the period.
D)divide the dollar return by the investment's value at the end of the period.

Accepted Answer

To find the percentage return of an investment, we need to divide the dollar return by the investment's value at the beginning of the period. This will give us the percentage increase in the investment's value. For example, if we invested $100 at the beginning of the year and the investment returned $10 by the end of the year, the percentage return would be ($10/$100) * 100 = 10%.

Question 4

MedTech Corp. stock was $50.95 per share at the end of last year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500 shares of MedTech, what was your percent return?
A)7.20 percent
B)8.83 percent
C)22.67 percent
D)23.55 percent

Accepted Answer

To calculate the percent return on the stock, we need to find the total return, which is the sum of the dividend and the increase in stock price.

Dividend = 500 shares x $0.45 per share = $225 
Initial investment = 500 shares x $50.95 per share = $25,475 
Current value of investment = 500 shares x $62.50 per share = $31,250

Total return = Dividend + Increase in stock price 
Total return = $225 + ($31,250 - $25,475) = $1,000

Percent return = (Total return / Initial investment) x 100% 
Percent return = ($1,000 / $25,475) x 100% = 3.92%

Therefore, the percent return on the stock for the investor who owned 500 shares of MedTech is 23.55%.

Question 5

Which of these is a measure summarizing the overall past performance of an investment?
A)Average return
B)Dollar return
C)Market return
D)Percentage return

Accepted Answer

Average return measures the overall performance of an investment over a specific period of time. It takes into account the total return generated by the investment and the number of periods of the investment. B) Dollar return measures the total profit or loss earned on an investment, but it does not provide a summary of overall past performance. C) Market return measures the overall performance of an entire market or an index, not just one specific investment. D) Percentage return measures the return generated by an investment as a percentage of the initial investment, but it does not provide a summary of overall past performance.

Question 6

Which of the following is an index that tracks 500 companies, which allows for a great deal of diversification?
A)Nasdaq
B)Fortune 500
C)S&P 500
D)Wall Street Journal

Accepted Answer

The S&P 500 is an index that tracks the performance of 500 large-cap companies listed on American stock exchanges. It is often used as a benchmark for the overall U.S. stock market and provides a great deal of diversification.

Question 7

Which of these is a measure of risk to reward earned by an investment over a specific period of time?
A)Coefficient of variation
B)Market deviation
C)Standard deviation
D)Total variation

Accepted Answer

Coefficient of variation is a measure of risk to reward earned by an investment over a specific period of time as it calculates the ratio of standard deviation to the mean return. The higher the coefficient of variation, the greater the risk involved in the investment, and the lower the coefficient of variation, the lower the risk. This measure takes into account both the risk and the return earned by the investment, making it a more comprehensive measure of performance. The other options listed (market deviation, standard deviation, and total variation) are all related to measuring the variability of returns but do not directly calculate the risk-to-reward ratio.

Question 8

Which of the following is another term for market risk?
A)Firm specific risk
B)Modern portfolio risk
C)Nondiversifiable risk
D)Total risk

Accepted Answer

Market risk is also known as nondiversifiable risk because it cannot be eliminated through diversification. It refers to the risk that an entire market or asset class will experience a decline or become volatile due to factors such as economic conditions, geopolitical events, or changes in investor sentiment.

Question 9

Which of the following is a measurement of the co-movement between two variables that ranges between -1 and +1?
A)Coefficient of variation
B)Correlation
C)Standard deviation
D)Total risk

Accepted Answer

The measurement that ranges between -1 and +1 and measures the co-movement between two variables is correlation. The coefficient of variation is a ratio that measures the dispersion of data relative to its mean, the standard deviation is a measure of the dispersion of data from its mean, and total risk is the sum of systematic and unsystematic risk.

Question 10

Which of the following is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification?
A)Firm specific risk
B)Market risk
C)Modern portfolio risk
D)Total risk

Accepted Answer

Firm specific risk, also known as unsystematic risk, is the portion of total risk that is specific to a particular company or industry and can be reduced through diversification. This risk is not related to overall market conditions and is unique to the individual business.

Question 11

Which of these is the investor's combination of securities that achieves the highest expected return for a given risk level?
A)Efficient portfolio
B)Modern portfolio
C)Optimal portfolio
D)Total portfolio

Accepted Answer

The optimal portfolio is the combination of securities that achieves the highest expected return for a given level of risk. It is found by identifying the point on the efficient frontier where the slope is steepest, which indicates the highest expected return for a given level of risk. The modern portfolio theory is based on the concept of efficient portfolios and the total portfolio includes all the assets in an investor's portfolio, not just the optimal ones.

Question 12

Which of these includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment?
A)Average return
B)Dollar return
C)Market return
D)Portfolio

Accepted Answer

Dollar return includes both capital gains/losses and income received from a specific investment, making it the best choice among the given options. The other options either don't include capital gains/losses (average return) or refer to broader market trends rather than specific investments (market return). Portfolio may include multiple investments and their returns but does not provide a comprehensive view of capital gains/losses and income from each individual investment.

Question 13

Which of the following is the concept and procedure for combining securities into a portfolio to minimize risk?
A)Firm specific theory
B)Modern portfolio theory
C)Optimal portfolio theory
D)Total portfolio theory

Accepted Answer

The concept and procedure for combining securities into a portfolio to minimize risk is known as Modern portfolio theory. This theory suggests that by diversifying investments across different asset classes, an investor can reduce the overall risk of their portfolio. Therefore, option B is the correct choice. The other options, including Firm-specific theory, Optimal portfolio theory, and Total portfolio theory, are not relevant to the concept of combining securities into a portfolio for risk minimization.

Question 14

Which of these is defined as a combination of investment assets held by an investor?
A)Bundle
B)Market basket
C)Portfolio
D)All of these

Accepted Answer

A portfolio is a combination of investment assets held by an investor. A bundle is a group of goods or services sold together, while a market basket is a group of goods used to track the performance of a specific market or industry.

Question 15

Which statement is true?
A)The larger the standard deviation, the lower the total risk.
B)The larger the standard deviation, the higher the total risk.
C)The larger the standard deviation, the more portfolio risk.
D)The standard deviation is not an indication of total risk.

Accepted Answer

The standard deviation measures the variability or spread of an investment's returns around its average return. The larger the standard deviation, the wider range of possible outcomes and the higher the total risk of the investment. Therefore, statement B is true. Statements A and D are incorrect as they suggest a decrease in total risk with a larger standard deviation, which is not true. Statement C is partially correct as a larger standard deviation does indicate more portfolio risk, but it is not the only factor to consider in assessing portfolio risk.

Question 16

Which of these is the term for portfolios with the highest return possible for each risk level?
A)Efficient portfolios
B)Modern portfolios
C)Optimal portfolios
D)Total portfolios

Accepted Answer

Efficient portfolios are those that offer the highest expected return for a given level of risk or the lowest risk for a given level of expected return, according to the Modern Portfolio Theory.

Question 17

Which of these is the dollar return characterized as a percentage of money invested?
A)Average return
B)Dollar return
C)Market return
D)Percentage return

Accepted Answer

The dollar return is simply the amount of money gained or lost on an investment, while the percentage return is the dollar return characterized as a percentage of the money invested. Therefore, the best choice is D, percentage return.

Question 18

Which of the following is defined as the volatility of an investment, which includes firm specific risk as well as market risk?
A)Diversifiable risk
B)Market risk
C)Standard deviation
D)Total risk

Accepted Answer

Total risk includes both diversifiable risk (also known as firm-specific risk) and market risk. Standard deviation measures the overall volatility of an investment, but does not explicitly include both types of risk. Market risk refers specifically to the risk associated with broad market movements and does not include firm-specific risk.

Question 19

Which of these statements is true?
A)When people purchase a stock, they know exactly what their dollar and percent return are going to be.
B)Many people purchase stocks as they find comfort in the certainty for this safe form of investing.
C)When people purchase a stock, they know the short-term return, but not the long term return.
D)When people purchase a stock, they do not know what their return is going to be-either short term or in the long run.

Accepted Answer

When people purchase a stock, they do not know what their return is going to be-either short term or in the long run. The stock market is volatile and unpredictable, and stock prices fluctuate constantly based on a variety of factors such as company performance, economic conditions, and investor sentiment. Therefore, it is impossible to know with certainty what the return on a stock investment will be.

Question 20

Which of these is the portion of total risk that is attributable to overall economic factors?
A)Firm specific risk
B)Market risk
C)Modern portfolio risk
D)Total risk

Accepted Answer

Market risk is the portion of total risk that is attributable to overall economic factors such as changes in interest rates, inflation, geopolitical events, and overall market trends. Firm specific risk, on the other hand, is the portion of risk that is unique to a specific company and is not affected by overall market conditions. Modern portfolio risk refers to the risk of a diversified portfolio, and total risk is the overall risk of an investment or portfolio, including both market risk and firm specific risk.

Quiz 9: Characterizing Risk and Return

Which of the following makes this a true statement: The shape of the efficient frontier implies that:

We commonly measure the risk-return relationship using which of the following?

To find the percentage return of an investment:

MedTech Corp. stock was $50.95 per share at the end of last year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500 shares of MedTech, what was your percent return?

Which of these is a measure summarizing the overall past performance of an investment?

Which of the following is an index that tracks 500 companies, which allows for a great deal of diversification?

Which of these is a measure of risk to reward earned by an investment over a specific period of time?

Which of the following is another term for market risk?

Which of the following is a measurement of the co-movement between two variables that ranges between -1 and +1?

Which of the following is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification?

Which of these is the investor's combination of securities that achieves the highest expected return for a given risk level?

Which of these includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment?

Which of the following is the concept and procedure for combining securities into a portfolio to minimize risk?

Which of these is defined as a combination of investment assets held by an investor?

Which statement is true?

Which of these is the term for portfolios with the highest return possible for each risk level?

Which of these is the dollar return characterized as a percentage of money invested?

Which of the following is defined as the volatility of an investment, which includes firm specific risk as well as market risk?

Which of these statements is true?

Which of these is the portion of total risk that is attributable to overall economic factors?