Question 1

Given the returns of two stocks J and K in the table below over the next 4 years. Find the expected return and standard deviation of holding a portfolio of 40% of stock J and 60% in stock K over the next 4 years: 
A) 10.7% and 1.34%
B) 10.6% and 1.79%
C) 10.6% and 1.16%
D) 14.3% and 2.02%

Accepted Answer

The answer of Given the returns of two stocks J...

Question 2

Two assets whose returns move in the opposite directions and have a correlation coefficient of -1 ar either risk-free assets or low-risk assets.

Accepted Answer

A correlation coefficient of -1 between two assets' returns indicates perfect negative correlation, meaning they move in opposite directions, but this does not inherently make them risk-free or low-risk assets. The risk of each asset depends on its own volatility and other factors, not just the correlation between them.

Question 3

An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K; $25,000 will be invested in asset R, with an expected annual return of 12 percent; $10,000 will be invested in asset J, with an expected annual return of 18 percent; and $15,000 will be invested in asset K, with an expected annual return of 8 percent. The expected annual return of this portfolio is ________.
A) 12.67%
B) 12.00%
C) 10.00%
D) 11.78%

Accepted Answer

The answer of An investment advisor has recommended a $50,000...

Question 4

The standard deviation of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.

Accepted Answer

The formula for standard deviation of a portfolio takes into account the standard deviations of the individual securities and the correlation between them. The proportion of the portfolio invested in each security also affects the overall standard deviation. Therefore, the statement is true.

Question 5

New investments must be considered in light of their impact on the risk and return of the portfolio of assets because the risk of any single proposed asset investment is not independent of other assets.

Accepted Answer

The statement is true. New investments can affect the risk and return of the overall portfolio because the risk of any single asset is not independent of other assets in the portfolio. The effect of the new investment must be considered in the context of the entire portfolio to determine the potential impact on risk and return.

Question 6

An efficient portfolio is a portfolio that maximizes return for a given level of risk or minimizes risk for a given level of return.

Accepted Answer

An efficient portfolio is created by selecting the optimal combination of assets that provides the highest expected return for a given level of risk, or the lowest risk for a given level of expected return. This is known as the efficient frontier.

Question 7

The expected value, standard deviation of returns, and coefficient of variation for asset A are ________. (See below.) Asset A 
A) 10 percent, 8 percent, and 1.25, respectively
B) 9.33 percent, 8 percent, and 2.15, respectively
C) 9.35 percent, 4.68 percent, and 2.00, respectively
D) 9.35 percent, 2.76 percent, and 0.295, respectively

Accepted Answer

The answer of The expected value, standard deviation of returns,...

Question 8

Perfectly ________ correlated series move exactly together and have a correlation coefficient of ________, while perfectly ________ correlated series move exactly in opposite directions and have a correlation coefficient of ________.
A) negatively; -1; positively; +1
B) negatively; +1; positively; -1
C) positively; -1; negatively; +1
D) positively; +1; negatively; -1

Accepted Answer

Perfectly positively correlated series move in the same direction and have a correlation coefficient of +1, while perfectly negatively correlated series move in opposite directions and have a correlation coefficient of -1. Therefore, choice D is the correct answer.

Question 9

________ is a statistical measure of the relationship between any two series of numbers.
A) Coefficient of variation
B) Standard deviation
C) Correlation
D) Probability

Accepted Answer

Correlation is a statistical measure of the relationship between two variables or series of numbers. It quantifies the strength and direction of the relationship between them. Option A (Coefficient of variation) measures the variability of a data set as a percentage of the mean, Option B (Standard deviation) measures the amount of variability or dispersion in a set of data, and Option D (Probability) refers to the likelihood of an event occurring.

Question 10

An efficient portfolio is one that ________.
A) guarantees a predetermined rate of return
B) maximizes return for a given level of risk
C) consists of a single asset, which gives maximum return
D) maximizes return at all risk levels

Accepted Answer

An efficient portfolio maximizes the return for a given level of risk. It does not guarantee a predetermined rate of return or consist of a single asset but rather achieves the maximum return at all risk levels. Therefore, option B is the best choice.

Question 11

Given the following information about the two assets A and B, determine which asset is preferred.

Accepted Answer

The answer of Given the following information about the two...

Question 12

An efficient portfolio is defined as ________.
A) grouping of assets with same level of risk
B) collection of assets with the aim of maximizing the return
C) an investment in a single asset
D) grouping of assets with the highest possible correlation

Accepted Answer

An efficient portfolio is a collection of assets that seeks to provide the highest possible return for a given level of risk. The portfolio is constructed using a combination of assets that have low or negative correlations with each other, which helps to reduce overall portfolio risk. The goal of an efficient portfolio is to provide the most effective use of investment capital, which can help to maximize returns over time.

Question 13

Champion Breweries must choose between two asset purchases. The annual rate of return and related probabilities given below summarize the firm's analysis.  For each asset, compute
(a) the expected rate of return.
(b) the standard deviation of the expected return.
(c) the coefficient of variation of the return.
(d) Which asset should Champion select?

Accepted Answer

The answer of Champion Breweries must choose between two asset...

Question 14

The goal of an efficient portfolio is to ________.
A) achieve a predetermined rate of return for a given level of risk
B) maximize risk in order to maximize profit
C) minimize profit in order to minimize risk
D) minimize risk for a given level of return

Accepted Answer

The goal of an efficient portfolio is to minimize risk for a given level of return, meaning the investor wants to get the highest return possible given their desired level of risk. Therefore, option D is the best choice. Option A is incorrect because the rate of return is not predetermined, but rather the investor's desired rate of return is taken into consideration when selecting investments. Option B is incorrect because maximizing risk does not necessarily lead to maximizing profit, as the investor could be exposed to too much risk and suffer losses. Option C is also incorrect because minimizing profit is not the goal of any investment strategy.

Question 15

Assuming the following returns and corresponding probabilities for asset A, compute its standard deviation and coefficient of variation.

Accepted Answer

The answer of Assuming the following returns and corresponding probabilities...

Question 16

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are very risky assets.

Accepted Answer

A correlation coefficient of +1 indicates that the two assets move in the same direction perfectly, but it does not inherently determine their risk level. Risk is assessed by other measures such as volatility, not correlation.

Question 17

A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.
A) efficient
B) risk-free
C) risk-neutral
D) risk-indifferent

Accepted Answer

An efficient portfolio is one that is optimized to provide maximum return for a given level of risk or to minimize risk for a given level of return. Such a portfolio is considered to be on the "efficient frontier," which represents the optimal combination of risk and return achievable given the available investment options. A risk-free portfolio (B) would not provide any return, while a risk-neutral (C) or risk-indifferent (D) portfolio would not be optimized for either risk or return.

Question 18

Given the following probability distribution for assets X and Y, compute the expected rate of return, variance, standard deviation, and coefficient of variation for the two assets. Which asset is a better investment?

Accepted Answer

The answer of Given the following probability distribution for assets...

Question 19

A financial manager's goal for the firm is to create a portfolio that maximizes return for a given level of risk.

Accepted Answer

The primary goal of a financial manager is to maximize shareholder wealth, typically represented by maximizing the stock price, rather than specifically creating a portfolio that maximizes return for a given level of risk, which is more directly related to the role of an investment manager or portfolio manager.

Question 20

The College Copy Shop is in process of purchasing a high-tech copier. In its search, it has gathered the following information about two possible copiers A and B.   (a) Compute expected rate of return for each copier.
(b) Compute variance and standard deviation of rate of return for each copier.
(c) Which copier should they purchase?

Accepted Answer

The answer of The College Copy Shop is in process...

Quiz 8: Risk and Return

Given the returns of two stocks J and K in the table below over the next 4 years. Find the expected return and standard deviation of holding a portfolio of 40% of stock J and 60% in stock K over the next 4 years:

Two assets whose returns move in the opposite directions and have a correlation coefficient of -1 ar either risk-free assets or low-risk assets.

The standard deviation of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.

New investments must be considered in light of their impact on the risk and return of the portfolio of assets because the risk of any single proposed asset investment is not independent of other assets.

An efficient portfolio is a portfolio that maximizes return for a given level of risk or minimizes risk for a given level of return.

The expected value, standard deviation of returns, and coefficient of variation for asset A are ________. (See below.) Asset A

Perfectly correlated series move exactly together and have a correlation coefficient of , while perfectly correlated series move exactly in opposite directions and have a correlation coefficient of .

________ is a statistical measure of the relationship between any two series of numbers.

An efficient portfolio is one that ________.

Given the following information about the two assets A and B, determine which asset is preferred.

An efficient portfolio is defined as ________.

The goal of an efficient portfolio is to ________.

Assuming the following returns and corresponding probabilities for asset A, compute its standard deviation and coefficient of variation.

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are very risky assets.

A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.

Given the following probability distribution for assets X and Y, compute the expected rate of return, variance, standard deviation, and coefficient of variation for the two assets. Which asset is a better investment?

A financial manager's goal for the firm is to create a portfolio that maximizes return for a given level of risk.