Question 1

Which of the following best measures an asset's risk?

Accepted Answer

The best measure of an asset's risk is the standard deviation, which indicates how much the asset's returns fluctuate around the expected return. A higher standard deviation means the asset has a higher level of risk. The other choices do not specifically measure an asset's risk.

Question 2

Using the following information for an M2 Group Limited share,calculate their expected return and standard deviation.
State Probability Return
Boom 20% 40%
Normal 60% 15%
Recession 20% (20%)

Accepted Answer

Ki =  = (.20)(40%)+ (.60)(15%)+ (.20)(-20%)
= 8% + 9% - 4% = 13%
σi = (  ).
σi = ((40% - 13%)2(.2)+ (15% - 13%)2 (.6)+ (-20% - 13%)2 (.2)).= 19.13%

Question 3

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

Accepted Answer

The expected rate of return is calculated by taking the weighted average of the possible returns, where the weights are the probabilities of each possible return occurring.

Question 4

You are considering investing in a firm that has the following possible outcomes: Economic boom: probability of 25%;return of 25%
Economic growth: probability of 60%;return of 15%
Economic decline: probability of 15%;return of -5%
What is the expected rate of return on the investment?

Accepted Answer

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

Question 5

You purchased a share of ASX Limited at a price of $75.75 one year ago today.If you sell the share today for $89.00 and did not collect a dividend what is your rate of return?

Accepted Answer

Rate of return = (Final value - Initial value) / Initial value x 100
= (89.00 - 75.75) / 75.75 x 100
= 17.50%

Question 6

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

Accepted Answer

The higher the standard deviation, the more volatile the investment is and therefore, the riskier it is. A higher standard deviation indicates a wider range of possible outcomes and greater uncertainty, which increases the risk.

Question 7

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?

Accepted Answer

To find the expected rate of return, we multiply the probability of each return by its corresponding percentage and add them up.

Expected return = (20% x 16%) + (30% x 14%) + (40% x 12%) + (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 8

You have invested in a project that has the following cash return schedule: Probability of
Cash Return Occurrence
$40 .15
$50 .20
$60 .30
$70 .30
$80 .05
What is the expected value of the investment's cash return (Round to the nearest $1. )

Accepted Answer

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

Question 9

The cash return on an investment is calculated as purchase price-selling price.

Accepted Answer

The correct formula for calculating cash return on an investment is (selling price - purchase price) / purchase price.

Question 10

Which of the following sequences is arranged in the correct order,from highest expected long-term returns to lowest?

Accepted Answer

Historically, small shares have provided higher long-term returns than large shares. Large shares have provided higher long-term returns than treasury notes. Therefore, the correct order from highest expected long-term returns to lowest is small shares, large shares, and treasury notes. Government bonds were not included in this order.

Question 11

An emerging market is

Accepted Answer

An emerging market is defined as a market located in an economy with low to middle per capita income, but with high economic growth potential. These markets are in the process of industrialization and modernization, making them attractive to investors seeking high returns.

Question 12

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

Accepted Answer

This statement is true. The expected rate of return is calculated by multiplying each possible return by its likelihood of occurrence and then summing them up.

Question 13

Investments that have earned the highest rates of return over time also have

Accepted Answer

Investments that have earned the highest rates of return over time generally have a higher standard deviation of returns, indicating higher volatility and risk. This includes investments such as stocks, which have higher potential for returns but also higher risk. Investments with lower risk, such as bonds or cash, typically have lower rates of return over time. Therefore, the answer is B as it explains the relationship between high rates of return and higher risk.

Question 14

The difference between returns on shares and government bonds is known as

Accepted Answer

The difference between returns on shares and government bonds is known as the equity risk premium. This refers to the additional return that investors expect to receive from investing in equities (such as shares) compared to risk-free investments such as government bonds. The equity risk premium is influenced by factors such as economic growth, inflation, and political stability. Investors demand a higher risk premium to compensate for the greater uncertainty and volatility associated with investing in equities compared to bonds.

Question 15

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

Accepted Answer

This statement is true according to the risk-return tradeoff principle. Investors need to take more risk to achieve higher returns. Therefore, investments with greater risk should have a higher expected return.

Question 16

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.

Accepted Answer

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

Question 17

Burson Group Limited.is selling for $50.00 per share today.In one year,Burson will be selling for $48.00 per share,and the dividend for the year will be $3.00.What is the cash return on Burson share?

Accepted Answer

The cash return on a share is the dividend plus the change in the share price. In this case, the dividend is $3.00 and the change in the share price is -$2.00 ($50.00 - $48.00). Therefore, the cash return on a Burson share is $3.00 + (-$2.00) = $1.00.

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 to compensate investors for taking on additional risk. The required return on less risky investments is typically lower because they offer a greater certainty of returns.

Question 19

You are considering investing in a project with the following possible outcomes: Probability of Investment
States Occurrence Returns
State 1: Economic boom 15% 16%
State 2: Economic growth 45% 12%
State 3: Economic decline 25% 5%
State 4: Depression 15% -5%
Calculate the expected rate of return for this investment.

Accepted Answer

To calculate the expected rate of return:

Expected Return = (State 1 return x probability of occurrence of state 1) + (State 2 return x probability of occurrence of state 2) + (State 3 return x probability of occurrence of state 3) + (State 4 return x probability of occurrence of state 4)

Expected Return = (0.16 x 0.15) + (0.12 x 0.45) + (0.05 x 0.25) + (-0.05 x 0.15) = 0.024 + 0.054 + 0.0125 - 0.0075 = 0.083 or 8.3%
Thus, the best choice is option C as it gives the expected rate of returns from the investment.

Question 20

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

Accepted Answer

Investing always carries a certain amount of risk, and there is no guarantee that the expected return will be achieved. Market fluctuations, unforeseen events, and other factors can all contribute to a negative return on investment.

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