Question 1

Rogue Recreation,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 5%,while Lake Tours,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 15%.Which of the following is true?

Accepted Answer

Lake Tours, Inc. has a higher standard deviation (15%) compared to Rogue Recreation, Inc. (5%), indicating greater volatility in returns. A higher standard deviation means a wider distribution of returns, increasing the likelihood of negative returns. Therefore, Lake Tours is more likely to have negative returns than Rogue Rec.

Question 2

Assume that you have $100,000 invested in a stock that is returning 14%,$150,000 invested in a stock that is returning 18%,and $200,000 invested in a stock that is returning 15%.What is the expected return of your portfolio?

Accepted Answer

The expected return of a portfolio is the weighted average of the expected returns of the individual assets in the portfolio. In this case, the expected return of the portfolio is:(0.14 * 100,000) + (0.18 * 150,000) + (0.15 * 200,000) / (100,000 + 150,000 + 200,000) = 15.78%

Question 3

Negative historical returns are not possible during periods of high volatility (high standard deviations of returns)due to the risk-return trade-off.

Accepted Answer

Negative historical returns are possible during periods of high volatility as the risk-return trade-off does not guarantee positive returns in every scenario. High volatility can lead to both high returns as well as high losses.

Question 4

You are going to invest all of your funds in one of three projects with the following distribution of possible returns:
PROJECT 1 PROJECT 2

PROJECT 3

If you are a risk averse investor,which one should you choose?

Accepted Answer

As a risk averse investor, it is best to minimize risk even if it means sacrificing some potential return. Project 3 has the lowest standard deviation, indicating a more predictable return. Projects 1 and 2 have higher standard deviations and therefore, more risk. While Project 1 and 2 have higher expected returns, the potential losses are also greater. Therefore, Project 3 is the best choice for a risk averse investor.

Question 5

Assume that you have $330,000 invested in a stock that is returning 11.50%,$170,000 invested in a stock that is returning 22.75%,and $470,000 invested in a stock that is returning 10.25%.What is the expected return of your portfolio?

Accepted Answer

We can calculate the expected return of the portfolio by weighting the returns of each stock based on their respective investments:

Expected return = (0.5 x 11.50%) + (0.25 x 22.75%) + (0.25 x 10.25%)
Expected return = 5.75% + 5.6875% + 2.5625%
Expected return = 14.00%

Therefore, the expected return of the portfolio is 14%, which is closest to option B (12.9%).

Question 6

Assume that you expect to hold a $20,000 investment for one year.It is forecasted to have a year end value of $21,000 with a 30% probability; a year end value of $24,000 with a 45% probability; and a year end value of $30,000 with a 25% probability.What is the standard deviation of the holding period return for this investment?

Accepted Answer

The answer of Assume that you expect to hold a...

Question 7

How is risk defined?

Accepted Answer

The answer of How is risk defined?...

Question 8

Investment A and Investment B both have the same expected return,but Investment A is more risky than Investment B.In the technical jargon of modern portfolio theory,Investment A is said to "dominate" Investment B.

Accepted Answer

In modern portfolio theory, an investment that offers the same expected return but with higher risk does not "dominate" another investment. Instead, the term "dominate" is typically used to describe an investment that offers a higher expected return for the same or lower level of risk.

Question 9

You are given the following probability distribution for XYZ common stock's returns during the next year,which are assumed to be normally distributed.Show all work below,and complete the following:
  
a.Calculate the standard deviation of the returns,and round to the nearest one-half percent.
b.Draw a graphical representation of XYZ's normal distribution below (ye old bell-shaped curve).LABEL THE AXES OF THE GRAPH OR THE FOLLOWING RESULTS WILL BE MEANINGLESS.Using your result in part A for the standard deviation (rounded to the nearest one-half percent)explain and indicate on the graph,the probability that XYZ will return more than 13.5%,assuming a normal distribution.

Accepted Answer

The answer of You are given the following probability distribution...

Question 10

You must add one of two investments to an already well- diversified portfolio.

If you are a risk-averse investor,which one is the better choice?

Accepted Answer

The answer of You must add one of two investments...

Question 11

Small company stocks have historically had higher average annual returns than large company stocks,and also a higher risk premium.

Accepted Answer

This is a well-known phenomenon in finance known as the small firm effect. Small companies tend to have higher growth potential and are often overlooked by analysts, leading to undervaluation and higher returns for investors who are willing to take on the higher risk involved. However, it is important to note that this is a general trend and there are always exceptions to the rule.

Question 12

Bay Land,Inc.has the following distribution of returns:
  
Assuming that these returns are normally distributed,what is the probability that Bay Land,Inc.will return less than 7.25%? Show all work,and clearly explain and state your answer.

Accepted Answer

The answer of Bay Land,Inc.has the following distribution of returns:
...

Question 13

Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio?

Accepted Answer

The answer of Which of the following investments is clearly...

Question 14

You are considering investing in a project with the following possible outcomes:

Calculate the expected rate of return and standard deviation of returns for this investment,respectively.

Accepted Answer

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

Question 15

You are thinking of adding one of two investments to an already well- diversified portfolio.

If you are a risk-averse investor,which one is the better choice?

Accepted Answer

The answer of You are thinking of adding one of...

Question 16

You are considering the three securities listed below.
  
a.Calculate the expected return for each security.
b.Calculate the standard deviation of returns for each security.
c.Compare Stock A with Stocks B and C.Is Stock A preferred over the others?

Accepted Answer

The answer of You are considering the three securities listed...

Question 17

Historically,investments with the highest returns have the lowest standard deviations because investors do not like risk.

Accepted Answer

This statement is false. Investments with higher potential returns often come with higher levels of risk and volatility, meaning their standard deviations can be quite high. Investors who are comfortable with taking on more risk may choose to invest in these assets in the hopes of achieving greater returns, while others may prefer to stick with lower-risk investments with lower potential returns.

Question 18

Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return.What is the standard deviation of return for this investment?

Accepted Answer

To calculate standard deviation, we need to first calculate the expected return. 
- E(R) = (0.20 x 0.12) + (0.50 x 0.16) + (0.30 x 0.19) 
- E(R) = 0.156 or 15.6%
Next, we need to calculate the variance. 
- Var = (0.20 x (0.12 - 0.156)^2) + (0.50 x (0.16 - 0.156)^2) + (0.30 x (0.19 - 0.156)^2) 
- Var = 0.00058336 
Finally, we can calculate standard deviation. 
- SD = SQRT(Var) 
- SD = 0.0243 or 2.43%

Question 19

You are considering a security with the following possible rates of return:
  
a.Calculate the expected rate of return.
b.Calculate the standard deviation of the returns.

Accepted Answer

The answer of You are considering a security with the...

Question 20

You must add one of two investments to an already well- diversified portfolio.

If you are a risk-averse investor,which one is the better choice?

Accepted Answer

The answer of You must add one of two investments...

Quiz 6: The Meaning and Measurement of Risk and Return

Rogue Recreation,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 5%,while Lake Tours,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 15%.Which of the following is true?

Assume that you have $100,000 invested in a stock that is returning 14%,$150,000 invested in a stock that is returning 18%,and $200,000 invested in a stock that is returning 15%.What is the expected return of your portfolio?

Negative historical returns are not possible during periods of high volatility (high standard deviations of returns)due to the risk-return trade-off.

You are going to invest all of your funds in one of three projects with the following distribution of possible returns: PROJECT 1 PROJECT 2 PROJECT 3 If you are a risk averse investor,which one should you choose?

Assume that you have $330,000 invested in a stock that is returning 11.50%,$170,000 invested in a stock that is returning 22.75%,and $470,000 invested in a stock that is returning 10.25%.What is the expected return of your portfolio?

How is risk defined?

Investment A and Investment B both have the same expected return,but Investment A is more risky than Investment B.In the technical jargon of modern portfolio theory,Investment A is said to "dominate" Investment B.

You must add one of two investments to an already well- diversified portfolio. If you are a risk-averse investor,which one is the better choice?

Small company stocks have historically had higher average annual returns than large company stocks,and also a higher risk premium.

Bay Land,Inc.has the following distribution of returns: Assuming that these returns are normally distributed,what is the probability that Bay Land,Inc.will return less than 7.25%? Show all work,and clearly explain and state your answer.

Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio?

You are considering investing in a project with the following possible outcomes: Calculate the expected rate of return and standard deviation of returns for this investment,respectively.

You are thinking of adding one of two investments to an already well- diversified portfolio. If you are a risk-averse investor,which one is the better choice?

You are considering the three securities listed below. a.Calculate the expected return for each security. b.Calculate the standard deviation of returns for each security. c.Compare Stock A with Stocks B and C.Is Stock A preferred over the others?

Historically,investments with the highest returns have the lowest standard deviations because investors do not like risk.

Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return.What is the standard deviation of return for this investment?

You are considering a security with the following possible rates of return: a.Calculate the expected rate of return. b.Calculate the standard deviation of the returns.

You must add one of two investments to an already well- diversified portfolio. If you are a risk-averse investor,which one is the better choice?