Question 1

Stock P and Stock Q have had annual returns of -10 percent, 12 percent, and 28 percent; and 8 percent, 13 percent, and 24 percent, respectively.Calculate the covariance of return between the securities.(Ignore the correction for the loss of a degree of freedom set out in the text.)
A)-149.00
B)+149.00
C)+99.33
D)-100.00

Accepted Answer

The answer of Stock P and Stock Q have had...

Question 2

What has been the approximate standard deviation of returns of U.S.common stocks during the period between 1900 and 2014?
A)19.9 percent
B)33.4 percent
C)8.9 percent
D)2.8 percent

Accepted Answer

The approximate standard deviation of returns of U.S. common stocks during the period between 1900 and 2014 has been around 19.9 percent.

Question 3

Market risk is also called I) systematic risk; II) undiversifiable risk; III) firm-specific risk.
A)systematic risk.
B)undiversifiable risk.
C)firm-specific risk.
D)systematic risk and undiversifiable risk.

Accepted Answer

Market risk is also called systematic risk and undiversifiable risk because it affects the entire market and cannot be diversified away.

Question 4

The standard deviation of U.S.returns from 2005 to the financial crisis four years later had increased (approximately) by a factor of
A)2.
B)3.
C)4.
D)6.

Accepted Answer

The answer of The standard deviation of U.S.returns from 2005...

Question 5

Which portfolio had the highest standard deviation during the period between 1900 and 2014?
A)Common stocks
B)Government bonds
C)Treasury bills
D)None of the answers is correct.

Accepted Answer

Common stocks had the highest standard deviation during the period between 1900 and 2014, according to historical data. This means that the returns for common stock investments were more volatile and less predictable compared to government bonds or treasury bills.

Question 6

If the correlation coefficient between the returns on stock C and stock D is +1.0, the standard deviation of return for stock C is 15 percent, and that for stock D is 30 percent, calculate the covariance between stock C and stock D.
A)+45
B)-450
C)+450
D)-45

Accepted Answer

Covariance of two securities A and B is given by the formula:
Covariance of A and B = ρ(A,B) * Std Dev of A * Std Dev of B
where ρ(A,B) is the correlation coefficient between A and B.
In this question, ρ(C,D) = +1.0, Std Dev of C = 15%, and Std Dev of D = 30%
Therefore, Covariance of C and D = ρ(C,D) * Std Dev of C * Std Dev of D
= +1.0 * 15% * 30%
= +4.5%
= +0.045 [in decimal]
Multiplying this with the average of the mean returns of stock C and stock D gives the expected return.
Therefore, the covariance between stock C and stock D is +450.

Question 7

If the covariance between stock A and stock B is 100, the standard deviation of stock A is 10 percent and that of stock B is 20 percent, calculate the correlation coefficient between the two securities.
A)-0.5
B)+1.0
C)+0.5
D)0.0

Accepted Answer

The formula for the correlation coefficient is: 
Correlation Coefficient = Covariance / (Standard Deviation of Stock A x Standard Deviation of Stock B)
Plugging in the values given, we get: 
Correlation Coefficient = 100 / (10% x 20%) = 100 / 2% = 50
Since the correlation coefficient ranges from -1 to +1, we can conclude that the correlation coefficient of +0.5 means that there is a positive correlation between the two securities. Therefore, the best choice is C.

Question 8

For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between the two stocks equals
A)+1.0.
B)-0.5.
C)-1.0.
D)0.0.

Accepted Answer

The correlation coefficient ranges from -1 to +1. A correlation coefficient of +1 indicates a perfect positive correlation, while a correlation coefficient of -1 indicates a perfect negative correlation. A correlation coefficient of 0 indicates no correlation between the two stocks. A portfolio containing stocks that are perfectly negatively correlated (-1.0) is the best choice because such a portfolio results in the lowest possible portfolio risk.

Question 9

As the number of stocks in a portfolio is increased,
A)unique risk decreases and approaches zero.
B)market risk decreases.
C)unique risk decreases and becomes equal to market risk.
D)total risk approaches zero.

Accepted Answer

As the number of stocks in a portfolio is increased, the diversification effect reduces unique risk, which is the risk associated with an individual company or industry. However, market risk, which is the risk associated with the overall market, cannot be diversified away and will continue to affect the portfolio. Therefore, unique risk decreases and approaches zero, but market risk remains.

Question 10

Stock A has an expected return of 10 percent per year and stock B has an expected return of 20 percent.If 40 percent of a portfolio's funds are invested in stock A and the rest in stock B, what is the expected return on the portfolio of stock A and stock B?
A)10 percent
B)20 percent
C)16 percent
D)14 percent

Accepted Answer

To calculate the expected return on the portfolio, we need to take a weighted average of the expected returns of the individual stocks, using the proportion of the portfolio invested in each stock as the weight.

Expected return on portfolio = (0.4 x 10%) + (0.6 x 20%) 
= 4% + 12% 
= 16%

Therefore, the expected return on the portfolio of stock A and stock B is 16%. Hence, the correct answer is C.

Question 11

For a portfolio of N-stocks, the formula for portfolio variance contains A)N variance terms. B)N(N - 1)/2 variance terms. C)N² variance terms. D)N - 1 variance terms.

Accepted Answer

The formula for portfolio variance for a portfolio of N-stocks contains N variance terms, one for each stock in the portfolio. These terms account for the individual risk associated with each stock.

Question 12

Stock M and Stock N have had the following returns for the past three years: 12 percent, -10 percent, and 32 percent; and 15 percent, 6 percent, and 24 percent, respectively.Calculate the covariance between the two securities.(Ignore the correction for the loss of a degree of freedom set out in the text.)
A)-99
B)126
C)+250
D)-250

Accepted Answer

The covariance is calculated by finding the average of the products of the deviations of each stock's returns from their respective means. The calculation yields a covariance of 126.

Question 13

Which of the following countries has had the highest risk premium?
A)Germany
B)Denmark
C)United States
D)Switzerland

Accepted Answer

The answer of Which of the following countries has had...

Question 14

Unique risk is also called
A)systematic risk.
B)nondiversifiable risk.
C)firm-specific risk.
D)market risk.

Accepted Answer

Unique risk, also known as unsystematic risk, is specific to a particular company or industry. It can be mitigated through diversification, unlike systematic or market risk.

Question 15

What range of values can correlation coefficients take?
A)Zero to + 1
B)-1 to + 1
C)-Infinity to + infinity
D)Zero to + infinity

Accepted Answer

Correlation coefficients are measures of the strength and direction of the linear relationship between two variables. The range of correlation coefficients is from -1 to +1. A coefficient of -1 indicates a perfect negative linear relationship, while a coefficient of +1 indicates a perfect positive linear relationship. A coefficient of 0 indicates no linear relationship between the two variables. Therefore, option B (-1 to +1) is the best choice.

Question 16

The type of the risk that can be eliminated by diversification is called
A)market risk.
B)unique risk.
C)interest rate risk.
D)default risk.

Accepted Answer

Diversification can help reduce the impact of unique risk, also known as specific risk or unsystematic risk, which is risk that is specific to an individual company or sector and cannot be diversified away through investing in a range of securities. Market risk, interest rate risk, and default risk are all systematic risks, which affect the broader market or economy and cannot be eliminated through diversification.

Question 17

Stock X has a standard deviation of return of 10 percent.Stock Y has a standard deviation of return of 20 percent.The correlation coefficient between the two stocks is 0.5.If you invest 60 percent of your funds in stock X and 40 percent in stock Y, what is the standard deviation of your portfolio?
A)10.3 percent
B)21.0 percent
C)12.2 percent
D)14.8 percent

Accepted Answer

The formula for calculating portfolio standard deviation is:
Portfolio SD = ((wX^2 * SDX^2) + (wY^2 * SDY^2) + (2 * wX * wY * SDX * SDY * p))^0.5
Where:
wX = weight of stock X in the portfolio
wY = weight of stock Y in the portfolio
SDX = standard deviation of stock X
SDY = standard deviation of stock Y
p = correlation coefficient between the two stocks

Substituting the given values in the formula, we get:
Portfolio SD = ((0.6^2 * 0.1^2) + (0.4^2 * 0.2^2) + (2 * 0.6 * 0.4 * 0.1 * 0.2 * 0.5))^0.5
Portfolio SD = 0.122 or 12.2 percent

Therefore, the best choice is C.

Question 18

Macro Corporation has had the following returns for the past three years: -10 percent, 10 percent, and 30 percent.Use the following formulas to calculate the standard deviation of the returns: Variance = expected value of $\left( r _ { m } \right)$ $\left( \tilde { r } _ { m } - r _ { m } \right) ^ { 2 }$ Standard deviation of . $\tilde { r } _ { m } = \sqrt { \text { variance } \left( r _ { m } \right) }$
A)10.00 percent
B)16.33 percent
C)18.21 percent
D)30.00 percent

Accepted Answer

First, we need to calculate the expected value of the returns ($r_m$):
\begin{align*}
r_m &= \frac{-10\% + 10\% + 30\%}{3} \
&= 10\%
\end{align*}

Next, we can calculate the variance of the returns using the formula:
\begin{align*}
\text{variance}(r_m) &= \frac{(-10\% - 10\%)^2 + (10\% - 10\%)^2 + (30\% - 10\%)^2}{3} \
&= 0.24
\end{align*}

Finally, we can calculate the standard deviation of the returns using the formula:
\begin{align*}
\text{standard deviation}(r_m) &= \sqrt{\text{variance}(r_m)} \
&= \sqrt{0.24} \
&\approx 0.1633 \
&\approx 16.33\%
\end{align*}

Therefore, the best choice is B because it is the closest option to the calculated standard deviation of 16.33%.

Question 19

Sun Corporation has had returns of -6 percent, 16 percent, 18 percent, and 28 percent for the past four years.Calculate the standard deviation of the returns using the correction for the loss of a degree of freedom shown below.When variance is estimated from a sample of observed returns, we add the squared deviations and divide by N -1, where N is the number of observations.We divide by N -1 rather than N to correct for a loss of a degree of freedom.The formula is. $\operatorname { Variance } \left( \tilde { r } _ { m } \right) = \frac { 1 } { N - 1 } \sum _ { t = 1 } ^ { N } \left( \tilde { r } _ { m t } - r _ { m } \right) ^ { 2 }$ Where is the market return in period t and r_m is the mean of the values of r_mt. A)11.6 percent B)14.3 percent C)13.4 percent D)14.0 percent

Accepted Answer

The answer of Sun Corporation has had returns of -6...

Question 20

A statistical measure of the degree to which securities' returns move together is called a
A)variance.
B)correlation coefficient.
C)standard deviation.
D)geometric average.

Accepted Answer

The correlation coefficient is the correct choice as it is a statistical measure that describes the degree of association between two random variables. In this case, it measures the extent to which the returns of different securities move together. Variance, standard deviation, and geometric average are measures of central tendency and dispersion of individual securities' returns, but do not explicitly capture the relationship between multiple securities' returns.

Quiz 7: Introduction to Risk and Return

Stock P and Stock Q have had annual returns of -10 percent, 12 percent, and 28 percent; and 8 percent, 13 percent, and 24 percent, respectively.Calculate the covariance of return between the securities.(Ignore the correction for the loss of a degree of freedom set out in the text.)

What has been the approximate standard deviation of returns of U.S.common stocks during the period between 1900 and 2014?

Market risk is also called I) systematic risk; II) undiversifiable risk; III) firm-specific risk.

The standard deviation of U.S.returns from 2005 to the financial crisis four years later had increased (approximately) by a factor of

Which portfolio had the highest standard deviation during the period between 1900 and 2014?

If the correlation coefficient between the returns on stock C and stock D is +1.0, the standard deviation of return for stock C is 15 percent, and that for stock D is 30 percent, calculate the covariance between stock C and stock D.

If the covariance between stock A and stock B is 100, the standard deviation of stock A is 10 percent and that of stock B is 20 percent, calculate the correlation coefficient between the two securities.

For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between the two stocks equals

As the number of stocks in a portfolio is increased,

Stock A has an expected return of 10 percent per year and stock B has an expected return of 20 percent.If 40 percent of a portfolio's funds are invested in stock A and the rest in stock B, what is the expected return on the portfolio of stock A and stock B?

For a portfolio of N-stocks, the formula for portfolio variance contains

Which of the following countries has had the highest risk premium?

Unique risk is also called

What range of values can correlation coefficients take?

The type of the risk that can be eliminated by diversification is called

Stock X has a standard deviation of return of 10 percent.Stock Y has a standard deviation of return of 20 percent.The correlation coefficient between the two stocks is 0.5.If you invest 60 percent of your funds in stock X and 40 percent in stock Y, what is the standard deviation of your portfolio?

A statistical measure of the degree to which securities' returns move together is called a