Question 1

The expected rate of return is the weighted average of the possible returns for an investment.

Accepted Answer

The expected rate of return takes into account all possible returns and their associated probabilities, and calculates a weighted average to provide a forecast of the most likely return.

Question 2

Using the following information for McDonovan,Inc.'s stock,calculate their expected return and standard deviation.

Accepted Answer

The answer of Using the following information for McDonovan,Inc.'s stock,calculate...

Question 3

You purchased the stock of Sargent Motors at a price of $75.75 one year ago today.If you sell the stock today for $89.00,what is your holding period return?
A)35.00%
B)12.50%
C)17.50%
D)25.00%

Accepted Answer

The holding period return can be calculated using the formula:
HPR = (Ending Price - Beginning Price + Dividends) / Beginning Price
In this case, there are no dividends mentioned, so we can ignore that. Plugging in the values, we get:
HPR = ($89.00 - $75.75) / $75.75 = 0.1750 or 17.50%
Therefore, the answer is C) 17.50%.

Question 4

What is the standard deviation of an investment that has the following expected scenario? 18% probability of a recession,2.0% return;65% probability of a moderate economy,9.5% return;17% probability of a strong economy,14.2% return.
A)3.68%
B)1.23%
C)8.47%
D)6.66%

Accepted Answer

The answer of What is the standard deviation of an...

Question 5

Riskier investments have traditionally had lower returns than less risky investments have had.

Accepted Answer

Riskier investments typically have higher returns than less risky investments, as investors require compensation for taking on more risk.

Question 6

Which of the following best measures the risk of holding an asset in isolation (i.e. ,stand-alone risk)?
A)The mean co-variance
B)The standard deviation
C)The coefficient of optimization
D)The standard asset pricing model
E)The correlation

Accepted Answer

The standard deviation is a measure of the volatility, or the degree of fluctuation of returns, of an individual asset. It is the most commonly used measure of stand-alone risk because it takes into account all possible outcomes and the likelihood of each of those outcomes occurring. The higher the standard deviation, the greater the risk associated with holding the asset in isolation.

Question 7

You are considering investing in a firm that has the following possible outcomes: 
What is the expected rate of return on the investment?
A)15.0%
B)11.7%
C)14.5%
D)25.0%

Accepted Answer

The answer of You are considering investing in a firm...

Question 8

Investments in emerging markets have higher volatility than do U.S.Stocks.

Accepted Answer

Emerging markets are generally considered to be riskier investments due to political instability, currency fluctuations, and less developed economies. This increased risk and uncertainty leads to higher volatility compared to more established markets like the United States.

Question 9

Spartan Sofas,Inc.is selling for $50.00 per share today.In one year,Spartan will be selling for $48.00 per share,and the dividend for the year will be $3.00.What is the cash return on Spartan stock?
A)0%
B)2%
C)6%
D)10%

Accepted Answer

The answer of Spartan Sofas,Inc.is selling for $50.00 per share...

Question 10

You have invested in a project that has the following payoff schedule: 
What is the expected value of the investment's payoff? (Round to the nearest $1. )
A)$60
B)$65
C)$58
D)$70

Accepted Answer

The answer of You have invested in a project that...

Question 11

The expected rate of return is the sum of each possible return times it likelihood of occurrence.

Accepted Answer

This statement accurately describes the calculation of expected rate of return.

Question 12

Less risky investments have lower standard deviations than do more risky investments.

Accepted Answer

Standard deviation is a measure of the volatility or risk of an investment. Generally, less risky investments have lower standard deviations because their returns are more stable and consistent. More risky investments, on the other hand, have higher standard deviations because their returns are more unpredictable and fluctuate more.

Question 13

The holding period return is always positive.

Accepted Answer

The holding period return can be negative if the investment loses value over the holding period.

Question 14

Even though an investor expects a positive rate of return,it is possible that the actual return will be negative.

Accepted Answer

This is because there are various types of risks involved in investing, such as market risk, inflation risk, credit risk, etc. These risks can cause the value of investments to fluctuate, resulting in a negative return. Additionally, unforeseen events, such as natural disasters or geopolitical turmoil, can also negatively impact investments.

Question 15

Expected return and realized return are the same thing.

Accepted Answer

Expected return is an estimation of what the return on an investment may be, whereas realized return is the actual return that was earned. They are not the same thing.

Question 16

You are considering investing in a project with the following possible outcomes: 
Calculate the expected rate of return for this investment.
A)9.8%
B)7.0%
C)8.3%
D)6.3%

Accepted Answer

To calculate the expected rate of return for this investment, we need to find the weighted average of the possible outcomes, where each outcome is multiplied by its respective probability.

Expected rate of return = (0.3 x 14%) + (0.4 x 8%) + (0.3 x 5%) = 4.2% + 3.2% + 1.5% = 8.9%

Therefore, the closest option to the expected rate of return is 8.3%, which is option C.

Question 17

If there is a 20% chance we will get a 16% return,a 30% chance of getting a 14% return,a 40% chance of getting a 12% return,and a 10% chance of getting an 8% return,what is the expected rate of return?
A)12%
B)13%
C)14%
D)15%

Accepted Answer

To find the expected rate of return, we need to weigh the possible returns by their corresponding probabilities and sum them up.

Expected return = (0.20 x 16%) + (0.30 x 14%) + (0.40 x 12%) + (0.10 x 8%)

Expected return = 3.2% + 4.2% + 4.8% + 0.8%

Expected return = 13%

Therefore, the best choice is B) 13% as it represents the expected rate of return.

Question 18

Because returns are more certain for the least risky investments,the required return on these investments should be higher than the required returns on more risky investments.

Accepted Answer

This statement is incorrect. The required return on more risky investments should be higher than the required return on the least risky investments to compensate investors for taking on more risk. This is known as the risk-return tradeoff.

Question 19

The higher the standard deviation,the less risk the investment has.

Accepted Answer

The higher the standard deviation, the more variation there is in returns, indicating higher risk. Therefore, the statement is false.

Question 20

The risk-return tradeoff tells us that expected returns should be higher on investments that have higher risk.

Accepted Answer

This is a fundamental principle of finance. Investors require a higher expected return to compensate for taking on more risk in their investments.

Quiz 7: An Introduction to Risk and Return-History of Financial Market Returns

The expected rate of return is the weighted average of the possible returns for an investment.

Using the following information for McDonovan,Inc.'s stock,calculate their expected return and standard deviation.

You purchased the stock of Sargent Motors at a price of $75.75 one year ago today.If you sell the stock today for $89.00,what is your holding period return?

What is the standard deviation of an investment that has the following expected scenario? 18% probability of a recession,2.0% return;65% probability of a moderate economy,9.5% return;17% probability of a strong economy,14.2% return.

Riskier investments have traditionally had lower returns than less risky investments have had.

Which of the following best measures the risk of holding an asset in isolation (i.e. ,stand-alone risk) ?

You are considering investing in a firm that has the following possible outcomes: What is the expected rate of return on the investment?

Investments in emerging markets have higher volatility than do U.S.Stocks.

Spartan Sofas,Inc.is selling for $50.00 per share today.In one year,Spartan will be selling for $48.00 per share,and the dividend for the year will be $3.00.What is the cash return on Spartan stock?

You have invested in a project that has the following payoff schedule: What is the expected value of the investment's payoff? (Round to the nearest $1. )