Question 1

A stock has an expected return of 12% and a standard deviation of 20%. Long-term Treasury bonds have an expected return of 9% and a standard deviation of 15%. Given this data, which of the following statements is correct?

Accepted Answer

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Question 2

Which of the following is correct?

Accepted Answer

All of these statements are correct. 
A is true based on historical data. 
B is also true as stock returns can be highly volatile from year to year. 
C is also true as there have been years when bond returns outperformed stocks.

Question 3

Describe the diversification potential of two assets with a -0.7 correlation. What is the potential if the correlation is + 0.7?

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Question 4

Risk versus Return in Bonds Assess the risk-return relationship of the following bonds:

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Question 5

Which of the following is correct?

Accepted Answer

All of these statements are correct.

- A) Total risk is measured by the standard deviation: This is correct as standard deviation measures the dispersion of returns around the stock's average return, which gives an idea of the total risk of the stock.
- B) There is a positive relationship between risk and return: This is correct as higher risks are associated with higher returns, as per the risk-reward tradeoff principle.
- C) If you observe a high variability in a stock's returns you can infer that the stock is very risky: This is also correct as high variability or dispersion in returns is an indicator of higher risk.

Question 6

Risk, Return, and Their Relationship Consider the following stocks' annual average return, standard deviation, and coefficient of variation. Which stock appears better? Why?

Accepted Answer

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Question 7

What does diversification do to the risk and return characteristics of a portfolio?

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Question 8

From 1950 to 2007, the average return in the stock market, as measured by the S&P500, was 13.2% and a standard deviation of 17%. Given this information, which of the following statements is correct?

Accepted Answer

Option A is incorrect because even though the average return is high, there is no guarantee that an investor will not lose money in the stock market in the next year or two. The stock market is unpredictable, and past returns do not guarantee future results.

Option B is correct because the high standard deviation suggests that there is a wide range of potential returns, both positive and negative, over a 25-year investment period.

Option C is incorrect because the standard deviation being greater than the average return does not necessarily mean that this investment is not very good. The stock market is known to have high volatility, which is why it has the potential to offer high returns.

Option D is incorrect because only option B is correct.

Question 9

You are a risk averse investor with a low-risk portfolio of bonds. How is it possible that adding some stocks (which are riskier than bonds) to the portfolio can lower the total risk of the portfolio?

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Question 10

Diversifying Consider the characteristics of the following three stocks:

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Question 11

What is the source of firm-specific risk? What is the source of market risk?

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Question 12

A stock has an expected return of 15% and a standard deviation of 20%. Long-term Treasury bonds have an expected return of 9% and a standard deviation of 11%. Given this data, which of the following statements is correct?

Accepted Answer

The coefficient of variation (CV) is calculated as the standard deviation divided by the expected return. The CV for the stock is 20%/15% = 1.33, and for the bond, it is 11%/9% = 1.22. A lower CV indicates a better risk-return trade-off, so the bond investment has a better risk-return trade-off.

Question 13

Risk, Return, and Their Relationship Consider the following annual average return, standard deviation, and coefficient of variation for Companies E and L. Which stock appears better? Why?

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Quiz 9: Characterizing Risk and Return

A stock has an expected return of 12% and a standard deviation of 20%. Long-term Treasury bonds have an expected return of 9% and a standard deviation of 15%. Given this data, which of the following statements is correct?

Which of the following is correct?

Describe the diversification potential of two assets with a -0.7 correlation. What is the potential if the correlation is + 0.7?

Risk versus Return in Bonds Assess the risk-return relationship of the following bonds:

Which of the following is correct?

Risk, Return, and Their Relationship Consider the following stocks' annual average return, standard deviation, and coefficient of variation. Which stock appears better? Why?

What does diversification do to the risk and return characteristics of a portfolio?

From 1950 to 2007, the average return in the stock market, as measured by the S&P500, was 13.2% and a standard deviation of 17%. Given this information, which of the following statements is correct?

You are a risk averse investor with a low-risk portfolio of bonds. How is it possible that adding some stocks (which are riskier than bonds) to the portfolio can lower the total risk of the portfolio?

Diversifying Consider the characteristics of the following three stocks:

What is the source of firm-specific risk? What is the source of market risk?

A stock has an expected return of 15% and a standard deviation of 20%. Long-term Treasury bonds have an expected return of 9% and a standard deviation of 11%. Given this data, which of the following statements is correct?

Risk, Return, and Their Relationship Consider the following annual average return, standard deviation, and coefficient of variation for Companies E and L. Which stock appears better? Why?