Question 1

You purchased 500 shares of A.M.J.Inc.common stock one year ago for $50 per share.You received a dividend of $2 per share today and decide to take your profits by selling at $54.50 per share.What is your holding period return?
A) 13.0%
B) 9.0%
C) 6.5%
D) 4.0%

Accepted Answer

The holding period return (HPR) is calculated by taking the income and capital gains during the holding period and dividing it by the initial investment. Here, the income is the dividend of $2 per share, and the capital gain is the difference between the selling price ($54.50) and the purchase price ($50), which is $4.50 per share. So, for each share, the total return is $6.50 ($2 + $4.50). The return per share divided by the initial price per share ($50) gives us the holding period return: $6.50 / $50 = 0.13, or 13%.

Question 2

Assume that you have $165,000 invested in a stock whose beta is 1.25,$85,000 invested in a stock whose beta is 2.35,and $235,000 invested in a stock whose beta is 1.11.What is the beta of your portfolio?
A) 1.37
B) 2.01
C) 1.85
D) 1.57

Accepted Answer

The portfolio beta is calculated as the weighted average of the individual stock betas. The weights are the proportion of the total investment in each stock. The calculation is: (165,000/485,000)*1.25 + (85,000/485,000)*2.35 + (235,000/485,000)*1.11 = 1.37.

Question 3

Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?
A) 0.97
B) 1.02
C) 1.12
D) 1.21

Accepted Answer

To calculate the beta of the portfolio, we need to take a weighted average of the betas of each stock, where the weights are the percentage of the portfolio invested in each stock.

Weighted average beta = (0.85*100,000/600,000) + (1.05*200,000/600,000) + (1.25*300,000/600,000)
Weighted average beta = 0.1417 + 0.35 + 0.625
Weighted average beta = 1.1167

Therefore, the beta of the portfolio is 1.12.

Question 4

Investment A has an expected return of 14% with a standard deviation of 4%,while investment B has an expected return of 20% with a standard deviation of 9%.Therefore,
A) a risk averse investor will definitely select investment A because the standard deviation is lower.
B) a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A ($14% - 4%).
C) it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A's, but the return is not twice as big.
D) rational investors could pick either A or B, depending on their level of risk aversion.

Accepted Answer

The decision whether to choose investment A or B depends on the investor's level of risk aversion. A risk-averse investor may prefer investment A because of its lower standard deviation, even though the expected return is lower. However, a less risk-averse investor may prefer investment B because of its higher expected return, even though the standard deviation is higher. It ultimately comes down to the individual's risk tolerance and investment objectives. Therefore, rational investors could pick either A or B, depending on their level of risk aversion.

Question 5

Which of the following types of risk is diversifiable?
A) unsystematic, or company-unique risk
B) betagenic, or ecocentric risk
C) systematic risk
D) market risk

Accepted Answer

Diversifiable risk, also known as unsystematic risk or company-specific risk, is the risk that affects a particular company or industry and not the overall market. This type of risk can be reduced through diversification, by investing in a variety of companies and industries.

Question 6

Beginning with an investment in one company's securities,as we add securities of other companies to our portfolio,which type of risk declines?
A) systematic risk
B) market risk
C) non-diversifiable risk
D) unsystematic risk

Accepted Answer

As we add securities of other companies to our portfolio, the unsystematic risk of the portfolio declines. Unsystematic risk is the risk associated with individual securities or companies and can be diversified away by combining different securities in a portfolio.

Question 7

Which of the following statements is MOST correct regarding beta?
A) Beta must be calculated using at least 5 years of monthly returns data to be accurate.
B) Beta can only be measured properly using daily returns.
C) Beta for a particular company remains constant over time.
D) Even professionals may not agree on the measurement of beta.

Accepted Answer

Even professionals may not agree on the measurement of beta because there are different methods and assumptions that can be used to calculate it. Additionally, beta can change over time due to various factors, such as changes in the company's business or market conditions. Therefore, there may be some level of subjectivity and debate around what the "correct" or most accurate beta measurement is. Option A is incorrect because a shorter time period can also be used to calculate beta, although a longer period may provide more reliable results. Option B is incorrect because beta can be calculated using different time intervals, including daily, weekly, or monthly returns. Option C is incorrect because beta is not constant and can change over time.

Question 8

Which of the following investments is clearly preferred to the others for a risk-averse investor?

A) Investment A
B) Investment B
C) Investment C
D) Cannot be determined without additional information

Accepted Answer

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

Question 9

You hold a portfolio with the following securities:

What is the expected return for the portfolio?
A) 17.60%
B) 20.67%
C) 23.54%
D) 28.59%

Accepted Answer

The answer of You hold a portfolio with the following...

Question 10

An investor currently holds the following portfolio:

The beta for the portfolio is
A) 1.99.
B) 1.77.
C) 1.45.
D) 1.27.

Accepted Answer

The answer of An investor currently holds the following portfolio:

The...

Question 11

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?
A) Wait until the stock market rises.
B) Increase the amount of money invested in the portfolio.
C) Purchase a variety of securities; i.e., diversify.
D) Purchase stocks that have exceptionally high standard deviations.

Accepted Answer

Diversification is the practice of investing in a variety of securities, such as stocks, bonds, and mutual funds, to reduce the risk associated with any single security. By diversifying, investors can reduce the risk associated with their portfolio without sacrificing expected returns. This is because a diversified portfolio is less likely to be affected by the poor performance of any one security or market sector.

Question 12

Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________.
A) standard deviation; beta
B) security market line; standard deviation
C) beta; standard deviation
D) beta; slope of the characteristic line

Accepted Answer

Portfolio risk is typically measured by beta, which is the measure of the systematic risk of a portfolio relative to the market. On the other hand, the risk of a single investment is typically measured by standard deviation, which captures the volatility of returns around the mean. Therefore, option C is the correct choice.

Question 13

If you hold a portfolio made up of the following stocks:

What is the beta of the portfolio?
A) 1.33
B) 1.24
C) 1.15
D) 1.00

Accepted Answer

The answer of If you hold a portfolio made up...

Question 14

Which of the following is/are true?
A) Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.
B) Two points on the Characteristic Line are the T-bill and the market portfolio.
C) The greater the total risk of an asset, the greater the expected return.
D) All securities have a beta between 0 and 1.

Accepted Answer

Unsystematic risk, also known as diversifiable risk, can be significantly reduced by holding a diversified portfolio of about 30 stocks, as individual stock risks tend to offset each other.

Question 15

If we are able to fully diversify,what is the appropriate measure of risk to use?
A) expected return
B) standard deviation
C) beta
D) risk-free rate of return

Accepted Answer

Beta is the appropriate measure of risk when we are able to fully diversify because it measures the risk of an investment relative to the market, which is the undiversifiable or systematic risk remaining after diversification.

Question 16

What is diversifying among different kinds of assets known as?
A) portfolio funding
B) capital asset classification
C) asset allocation
D) multi-diversification

Accepted Answer

Diversifying among different kinds of assets is known as asset allocation. This strategy helps reduce overall investment risk by spreading investments across different asset classes such as stocks, bonds, and real estate.

Question 17

Which of the following measures the average relationship between a stock's returns and the market's returns?
A) coefficient of validation
B) standard deviation
C) geometric regression
D) beta coefficient

Accepted Answer

The beta coefficient measures the average relationship between a stock's returns and the market's returns. It is a measure of the stock's volatility in relation to the market as a whole, and is commonly used in the Capital Asset Pricing Model (CAPM) to calculate the expected return of a stock. Options A, B, and C are not relevant to measuring the relationship between a stock's returns and the market's returns.

Question 18

The prices for the National Gasworks Corporation for the second quarter of 2012 are given below.The price of the stock on April 1,2012 was $130.Find the holding period return for an investor who purchased the stock on April 1,2012 and sold it the last day of June 2012.

A) -4.2%
B) -3.7%
C) 2.1%
D) 3.7%

Accepted Answer

The answer of The prices for the National Gasworks Corporation...

Question 19

Changes in the general economy,like changes in interest rates or tax laws,represent what type of risk?
A) company-unique risk
B) market risk
C) unsystematic risk
D) diversifiable risk

Accepted Answer

Changes in the general economy, such as interest rates or tax laws, affect the entire market rather than just one specific company, making it a market risk. This type of risk cannot be diversified away and affects all investors in the market. Therefore, Option B is the correct answer. Option A refers to risks specific to a company, Option C refers to unsystematic risks that can be diversified away, and Option D refers to risks that can be reduced through diversification.

Question 20

Assume that you expect to hold a $40,000 investment for one year.It is forecasted to have a year end value of $42,000 with a 30% probability; a year end value of $48,000 with a 45% probability; and a year end value of $60,000 with a 25% probability.What is the expected holding period return for this investment?
A) 50%
B) 25%
C) 23%
D) 18%

Accepted Answer

To calculate the expected holding period return, we need to weigh the possible outcomes by their respective probabilities and then take the average.

Expected holding period return = (0.30 x 42000 + 0.45 x 48000 + 0.25 x 60000)/40000 - 1 = 1.15 - 1 = 0.15 or 15%

Therefore, the expected holding period return for this investment is 15%, so the closest answer choice is C) 23%.

Quiz 6: The Meaning and Measurement of Risk and Return

You purchased 500 shares of A.M.J.Inc.common stock one year ago for $50 per share.You received a dividend of $2 per share today and decide to take your profits by selling at $54.50 per share.What is your holding period return?

Assume that you have $165,000 invested in a stock whose beta is 1.25,$85,000 invested in a stock whose beta is 2.35,and $235,000 invested in a stock whose beta is 1.11.What is the beta of your portfolio?

Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?

Investment A has an expected return of 14% with a standard deviation of 4%,while investment B has an expected return of 20% with a standard deviation of 9%.Therefore,

Which of the following types of risk is diversifiable?

Beginning with an investment in one company's securities,as we add securities of other companies to our portfolio,which type of risk declines?

Which of the following statements is MOST correct regarding beta?

Which of the following investments is clearly preferred to the others for a risk-averse investor?

You hold a portfolio with the following securities: What is the expected return for the portfolio?

An investor currently holds the following portfolio: The beta for the portfolio is

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?

Portfolio risk is typically measured by while the risk of a single investment is measured by .

If you hold a portfolio made up of the following stocks: What is the beta of the portfolio?

Which of the following is/are true?

If we are able to fully diversify,what is the appropriate measure of risk to use?

What is diversifying among different kinds of assets known as?

Which of the following measures the average relationship between a stock's returns and the market's returns?

The prices for the National Gasworks Corporation for the second quarter of 2012 are given below.The price of the stock on April 1,2012 was $130.Find the holding period return for an investor who purchased the stock on April 1,2012 and sold it the last day of June 2012.

Changes in the general economy,like changes in interest rates or tax laws,represent what type of risk?