Question 1

The expected return on a stock given various states of the economy is equal to the:

Accepted Answer

The expected return on a stock given various states of the economy is the weighted average of the returns for each economic state, where the weights correspond to the probabilities of each state occurring. Therefore, the best choice is D, the weighted average of the returns for each economic state.

Question 2

Which one of the following events would be included in the expected return on Sussex stock?

Accepted Answer

The expected return on a stock includes all anticipated changes in the stock's value, such as changes in the company's leadership. Option A, B, D, and E describe unexpected events that could affect the stock price, but these events would not be included in the expected return. Only option C describes an anticipated change in the company's leadership, which would be included in the expected return calculation.

Question 3

Which one of the following is a risk that applies to most securities?

Accepted Answer

Systematic risk applies to most securities and cannot be diversified away. It is the risk associated with the entire market or economy, including factors such as changes in interest rates, inflation, and macroeconomic events. Unsystematic risk, on the other hand, is specific to an individual security or company and can be diversified away through portfolio diversification. Diversifiable risk and asset-specific risk are synonyms for unsystematic risk. Industry risk is a type of unsystematic risk that is specific to a particular industry or sector.

Question 4

The standard deviation of a portfolio:

Accepted Answer

The standard deviation of a portfolio can indeed be less than the standard deviation of the least risky security in the portfolio due to diversification effects. Diversification can reduce the overall risk of the portfolio when the securities within it are not perfectly correlated, allowing the portfolio's total standard deviation to be lower than that of any individual security it contains.

Question 5

The expected risk premium on a stock is equal to the expected return on the stock minus the:

Accepted Answer

The risk premium is the compensation an investor receives for taking on risk when investing. The risk-free rate represents the return an investor can earn with zero risk, so the expected return on a stock minus the risk-free rate represents the extra return an investor expects to earn for taking on the additional risk of investing in that stock. Therefore, option B is the correct answer.

Question 6

Which one of the following statements is correct?

Accepted Answer

The average unexpected return is the deviation from the expected return, and over time, these unexpected returns can balance out and average to zero.

Question 7

Which one of the following is an example of systematic risk?

Accepted Answer

Systematic risk, also known as market risk, is the risk inherent to the entire market or an entire market segment. The scenario described in option A is an example of systematic risk because it is a market-wide event that impacts security prices around the world. The other options are examples of unsystematic risk, which is risk associated with a specific company or industry.

Question 8

The expected return on a stock computed using economic probabilities is:

Accepted Answer

The expected return on a stock computed using economic probabilities is a mathematical expectation based on a weighted average of all possible outcomes, taking into account the probabilities of each outcome. It is not a guaranteed or actual outcome, but rather an estimate of what may happen based on economic forecasts and historical data.

Question 9

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

Accepted Answer

The 15 percent is a measure of the portfolio weight of Wise Man Foods, which indicates the proportion of the total portfolio value that is invested in that particular stock.

Question 10

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?

Accepted Answer

The 6.5 percent is the expected return, which is calculated as the weighted average return of each potential state of the economy. It is not the arithmetic return, historical return, geometric return, or required return, as these terms have different meanings and calculations.

Question 11

The standard deviation of a portfolio:

Accepted Answer

Standard deviation of a portfolio can indeed be less than the weighted average of the standard deviations of the individual securities due to the benefits of diversification, which can reduce the overall risk of the portfolio.

Question 12

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?

Accepted Answer

Given the unequal weights of securities and economic states, through diversification and careful selection, it's theoretically possible to construct a portfolio with an expected standard deviation of zero, especially if the securities have perfectly negatively correlated returns in different states of the economy.

Question 13

Which one of the following is an example of unsystematic risk?

Accepted Answer

The national decrease in consumer spending on entertainment is an example of unsystematic risk because it is a risk specific to the entertainment industry and not related to broader market forces such as changes in interest rates or geopolitical events.

Question 14

Suzie owns five different bonds and twelve different stocks. Which one of the following terms most applies to her investments?

Accepted Answer

A portfolio is a collection of assets, such as stocks, bonds, and other securities owned by an individual or institution. Given that Suzie has multiple investments in different securities, "portfolio" is the term that best describes her investments. "Index" refers to a benchmark used to track the performance of a specific group of securities. "Collection" and "grouping" are too broad and vague to accurately describe Suzie's investments, while "risk-free" refers to an investment with no possibility of losing money, which does not apply to Suzie's investments.

Question 15

If a stock portfolio is well diversified, then the portfolio variance:

Accepted Answer

Diversification can reduce the overall risk of a portfolio to a level that is lower than the risk of the individual securities within the portfolio, including the least risky stock, due to the benefits of combining uncorrelated or negatively correlated assets.

Question 16

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

Accepted Answer

The expected rate of return on a stock portfolio is best based on the market value of the investment in each stock as it takes into account both the number of shares owned and the market price per share of each stock. The original amount invested or the cost per share of each stock held may not accurately reflect the current value of the investment.

Question 17

Unsystematic risk:

Accepted Answer

Unsystematic risk is specific to a particular company or industry and can be diversified away by investing in a portfolio of different assets. Therefore, portfolio diversification is an effective way to eliminate unsystematic risk.

Question 18

The expected return on a portfolio considers which of the following factors?
I. Percentage of the portfolio invested in each individual security
II. Projected states of the economy
III. The performance of each security given various economic states
IV. Probability of occurrence for each state of the economy

Accepted Answer

The expected return on a portfolio takes into account all these factors: the percentage of the portfolio invested in each security (I), the different projected states of the economy and how they might affect the portfolio (II), the performance of each security within these various economic states (III), and the probability of each state occurring (IV). These elements together help in calculating the expected return by considering the weighted average of possible outcomes, where the weights are the probabilities of each state.

Question 19

The expected return on a portfolio:
I. can never exceed the expected return of the best performing security in the portfolio.
II. must be equal to or greater than the expected return of the worst performing security in the portfolio.
III. is independent of the unsystematic risks of the individual securities held in the portfolio.
IV. is independent of the allocation of the portfolio amongst individual securities.

Accepted Answer

The expected return on a portfolio can indeed exceed the expected return of the best performing security in the portfolio due to diversification benefits, making statement I incorrect. Statement II is true because diversification cannot result in a portfolio return lower than the worst performing security assuming no leverage. Statement III is true because diversification reduces unsystematic risk, which is specific to individual securities. Statement IV is incorrect because the portfolio's expected return is highly dependent on how the portfolio is allocated among individual securities.

Question 20

Which one of the following statements related to unexpected returns is correct?

Accepted Answer

Unexpected returns are random and can be positive or negative in the short term, but over the long term, they tend to average out to zero, as they are deviations from the expected return.

Quiz 13: Return, Risk, and the Security Market Line

The expected return on a stock given various states of the economy is equal to the:

Which one of the following events would be included in the expected return on Sussex stock?

Which one of the following is a risk that applies to most securities?

The standard deviation of a portfolio:

The expected risk premium on a stock is equal to the expected return on the stock minus the:

Which one of the following statements is correct?

Which one of the following is an example of systematic risk?

The expected return on a stock computed using economic probabilities is:

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

The standard deviation of a portfolio:

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?

Which one of the following is an example of unsystematic risk?

Suzie owns five different bonds and twelve different stocks. Which one of the following terms most applies to her investments?

If a stock portfolio is well diversified, then the portfolio variance:

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

Unsystematic risk:

Which one of the following statements related to unexpected returns is correct?