Question 1

Perhaps the best way to reduce macro risk in a stock portfolio is to invest in stocks that:
A)Have only unique risks
B)Have diversified away the macro risk
C)Have low exposure to business cycles
D)Pay guaranteed dividends

Accepted Answer

Investing in stocks with low exposure to business cycles can help reduce macro risk, as these stocks are less affected by economic fluctuations.

Question 2

Which of the following statements is incorrect concerning stock indexes?
A)They have been developed for foreign stocks
B)They have been developed for smaller companies
C)Indexes include all common stocks
D)Some indexes are equal-weighted

Accepted Answer

Not all stock indexes include all common stocks; they typically include a selection of stocks that represent a particular market or sector.

Question 3

The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that:
A)The variance of Treasury bill returns is zero
B)The standard deviation of Treasury bill returns is negative
C)The real return on Treasury bills has been zero
D)Common stocks should offer a higher return than Treasury bills

Accepted Answer

Treasury bills are considered low-risk investments with lower volatility, while common stocks are riskier and thus should offer higher returns to compensate for the increased risk.

Question 4

Investment risk can best be described as the:
A)Dispersion of possible returns
B)Elimination of macro risk through diversification
C)Possibility of changes in the cost of capital
D)Level of systematic risk for an undiversified investor

Accepted Answer

Investment risk refers to the uncertainty about the actual returns that an investor may earn from an investment. This uncertainty arises from a variety of factors like economic conditions, market forces, company-specific risks, etc. The dispersion of possible returns describes the range of potential outcomes an investor could face, which is a fundamental characteristic of investment risk. The other options, elimination of macro risk through diversification, possibility of changes in the cost of capital, and level of systematic risk, are relevant concepts to investment risk, but do not describe it as accurately as the dispersion of possible returns.

Question 5

When viewing the long-term trend of volatility in U.S.stocks, it is readily apparent that:
A)Volatility has continually increased
B)Volatility has continually decreased
C)Volatility has offered little discernable trend
D)Volatility has remained constant for years

Accepted Answer

Although there have been periods of high volatility, such as during the financial crisis of 2008, and periods of relative calm, such as in the mid-2010s, there is no clear long-term trend of increasing or decreasing volatility in U.S. stocks. Therefore, option C, "Volatility has offered little discernable trend", is the best answer.

Question 6

Averaging the deviations from the mean for a portfolio of securities will:
A)Compute the standard deviation
B)Compute the variance
C)Equal zero
D)Equal the number of securities in the portfolio

Accepted Answer

The sum of deviations from the mean for any data set, including a portfolio of securities, is always zero.

Question 7

Which of the following companies might you expect to be exposed to less macro risk?
A)A large producer of flour
B)A regional airline
C)A major commercial bank
D)An electric utility

Accepted Answer

A large producer of flour is less exposed to macro risk as it is less dependent on the economic and political environment. The demand for flour remains relatively stable regardless of economic conditions, making it a low-risk investment option.

Question 8

Which of the following would you expect to represent the broadest-based index of Canadian stocks?
A)TSX 300
B)CDNX
C)Standard and Poor's Composite
D)Financial Times Index

Accepted Answer

The TSX 300 Index represents the performance of the largest 300 Canadian companies listed on the Toronto Stock Exchange, making it a broad-based index of Canadian stocks. The CDNX (Canadian Venture Exchange) represents smaller, emerging companies, while the Standard and Poor's Composite and Financial Times Index are not specific to Canadian stocks.

Question 9

What percentage return is achieved by an investor who purchases a stock for $30, receives a $1.50 dividend, and sells the share one year later for $28.50?
A)-5 percent
B)0 percent
C)5 percent
D)10 percent

Accepted Answer

The answer of What percentage return is achieved by an...

Question 10

If a stock's returns are volatile, then the stock:
A)Cannot be considered a negative risk asset
B)Can still be considered a negative risk asset
C)Has macro risk, but no unique risk
D)Does not offer diversification potential

Accepted Answer

A stock's volatility does not necessarily make it a negative risk asset. In fact, high volatility can present opportunities for investors who are willing to assume risk. Therefore, option B is correct as a stock can still be considered a negative risk asset even if its returns are volatile.

Question 11

Which of the following firms is likely to exhibit the least macro risk exposure?
A)Furniture manufacturer
B)Oil driller
C)Dog food processor
D)Auto manufacturer

Accepted Answer

The dog food processor is less likely to have macro risk exposure as it is not a commodity-based industry, unlike oil drilling or auto manufacturing, and also does not depend on discretionary spending by consumers like furniture manufacturing.

Question 12

If a project's expected return is 15 percent, which represents a 35 percent return in a booming economy and a 5 percent return in a stagnant economy, what is the probability of a booming economy?
A)18.33 percent
B)25.00 percent
C)33.33 percent
D)50.00 percent 15% = 35 %(X) + 5%(1 - X)
10% = 30%X

Accepted Answer

Using the formula given, we can solve for X:
0.15 = 0.35X + 0.05(1 - X)
0.15 = 0.3X + 0.05
0.1 = 0.3X
X = 1/3 or 33.33%
Therefore, the probability of a booming economy is 33.33%, which is option C.

Question 13

If when a coin is tossed the observance of a head rewards you with a dollar and the observance of a tail costs you fifty cents, how much would you expect to gain after twenty tosses?
A)$5.00
B)$7.50
C)$10.00
D)$15.00 Expected return = 20 x [($1.00 x .5) - (.50 x .5)]
= 20 x ($.25)

Accepted Answer

Expected return = 20 x [($1.00 x .5) - (.50 x .5)]= 20 x ($.25)= $5.00

Question 14

One common reason for reporting standard deviations rather than variances is that standard deviations:
A)Are lower
B)Are stated in understandable units
C)Account properly for negative returns
D)Take probability estimates into consideration

Accepted Answer

Standard deviations are stated in the same units as the original data, which makes them more easily understandable than variances. Options A, C, and D are incorrect as they do not accurately describe the advantages of reporting standard deviations over variances.

Question 15

Common stock is held for two years, during which time it receives an annual dividend of $10.The stock was sold for $100 and generated an average annual return of 16 percent.What price was paid for the stock?
A)$61.60
B)$64.80
C)$88.00
D)$90.90 .32 =

Accepted Answer

The answer of Common stock is held for two years,...

Question 16

A stock is held one year, during which time its dividend yield was greater than its capital gains yield.For this stock, the percentage return:
A)Is positive
B)Is negative
C)Equals the dividend yield
D)Cannot be determined

Accepted Answer

The percentage return cannot be determined because while the dividend yield is known to be greater than the capital gains yield, we do not have information on the actual values of these yields. The capital gains yield could be negative, zero, or positive, affecting the overall return.

Question 17

If a stock is purchased for $12.50 per share and held one year, during which time a $1.50 dividend is paid and the price drops to $10.75, the percentage return is:
A)-2%
B)-1%
C)1%
D)2%

Accepted Answer

The answer of If a stock is purchased for $12.50...

Question 18

The addition of a negative risk asset to a portfolio of assets will:
A)Increase the portfolio's expected return
B)Decrease the portfolio's expected return
C)Increase the portfolio's expected volatility
D)Decrease the portfolio's expected volatility

Accepted Answer

The answer of The addition of a negative risk asset...

Question 19

How is the calculation of a variance affected by an observation with a negative rate of return when other returns are positive?
A)It reduces the variance
B)It increases the variance
C)Variance is not affected by negatives or positives
D)The effect cannot be determined from this information

Accepted Answer

The answer of How is the calculation of a variance...

Question 20

Treasury bonds have provided a higher historical return than Treasury bills, which can be attributed to:
A)Greater default risk
B)A higher level of unique risk
C)Greater price risk due to longer maturities
D)The fact that they are less frequently traded than bills

Accepted Answer

Treasury bonds have longer maturities, which makes them more susceptible to price changes due to changes in interest rates. This higher price risk has historically resulted in a higher return for investors in comparison to Treasury bills, which have shorter maturities and thus less price risk. A and B are incorrect, as Treasury bonds are considered to have very low default risk and are less exposed to unique risk due to their size and government backing. D is also incorrect, as Treasury bonds are actually more frequently traded than bills due to their popularity among institutional investors.

Quiz 11: Introduction to Risk, Return, and the Opportunity Cost of Capital

Perhaps the best way to reduce macro risk in a stock portfolio is to invest in stocks that:

Which of the following statements is incorrect concerning stock indexes?

The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that:

Investment risk can best be described as the:

When viewing the long-term trend of volatility in U.S.stocks, it is readily apparent that:

Averaging the deviations from the mean for a portfolio of securities will:

Which of the following companies might you expect to be exposed to less macro risk?

Which of the following would you expect to represent the broadest-based index of Canadian stocks?

What percentage return is achieved by an investor who purchases a stock for $30, receives a $1.50 dividend, and sells the share one year later for $28.50?

If a stock's returns are volatile, then the stock:

Which of the following firms is likely to exhibit the least macro risk exposure?

If a project's expected return is 15 percent, which represents a 35 percent return in a booming economy and a 5 percent return in a stagnant economy, what is the probability of a booming economy?

If when a coin is tossed the observance of a head rewards you with a dollar and the observance of a tail costs you fifty cents, how much would you expect to gain after twenty tosses?

One common reason for reporting standard deviations rather than variances is that standard deviations:

Common stock is held for two years, during which time it receives an annual dividend of $10.The stock was sold for $100 and generated an average annual return of 16 percent.What price was paid for the stock?

A stock is held one year, during which time its dividend yield was greater than its capital gains yield.For this stock, the percentage return:

If a stock is purchased for $12.50 per share and held one year, during which time a $1.50 dividend is paid and the price drops to $10.75, the percentage return is:

The addition of a negative risk asset to a portfolio of assets will:

How is the calculation of a variance affected by an observation with a negative rate of return when other returns are positive?

Treasury bonds have provided a higher historical return than Treasury bills, which can be attributed to: