Question 1

The realized rate of return,or holding period return,is equal to the holding period dollar gain divided by the price at the beginning of the period.

Accepted Answer

The formula for realized rate of return or holding period return is the holding period dollar gain divided by the price at the beginning of the period. Therefore, the statement is true.

Question 2

Assume that you have $165,000 invested in a stock that is returning 11.50%,$85,000 invested in a stock that is returning 22.75%,and $235,000 invested in a stock that is returning 10.25%.What is the expected return of your portfolio?
A) 15.6%
B) 12.9%
C) 18.3%
D) 14.8%

Accepted Answer

To find the expected return of the portfolio, we need to find the weighted average of the returns of each investment.

Weighted Average Return = ((Investment 1 * Return 1) + (Investment 2 * Return 2) + (Investment 3 * Return 3)) / Total Investment

Plugging in the given values, we get:

Weighted Average Return = (($165,000 * 0.115) + ($85,000 * 0.2275) + ($235,000 * 0.1025)) / ($165,000 + $85,000 + $235,000)

Weighted Average Return = ($18,975 + $19,337.50 + $24,087.50) / $485,000

Weighted Average Return = $62,400 / $485,000

Weighted Average Return = 0.1288 or 12.88%

Therefore, the expected return of the portfolio is 12.9%. The best choice is B.

Question 3

Due to strict stock market controls,the most a stock's value can drop in one trading day is 5%.

Accepted Answer

Stock market controls, such as circuit breakers, can limit how much a stock's value can drop in one trading day, but the specific limit can vary by market and does not universally cap at a 5% drop. Some markets may have higher or lower thresholds, and extreme market conditions can lead to larger drops.

Question 4

Variation in the rate of return of an investment is a measure of the riskiness of that investment.

Accepted Answer

The variability or uncertainty in the rate of return of an investment is commonly used as an indicator of its risk. The higher the variance or volatility of the returns, the riskier the investment is considered to be.

Question 5

You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year.Historical data suggests the following probability distribution for your commission income.Which job has the higher expected income?
Probability of

A) The salary of $50,000 is greater than the expected commission of $49,630.
B) The salary of $50,000 is greater than the expected commission of $48,400.
C) The salary of $50,000 is less than the expected commission of $50,050.
D) The salary of $50,000 is less than the expected commission of $52,720.

Accepted Answer

The answer of You are considering a sales job that...

Question 6

Another name for an asset's expected rate of return is holding-period return.

Accepted Answer

The expected rate of return is a forward-looking estimate of the potential return on an investment, while the holding-period return is the actual return realized over the period an investment is held.

Question 7

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

A) Investment A
B) Investment B
C) Investment C
D) Cannot be determined without information regarding the risk-free rate of return.

Accepted Answer

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

Question 8

For a well-diversified investor,an investment with an expected return of 10% with a standard deviation of 3% dominates an investment with an expected return of 10% with a standard deviation of 5%.

Accepted Answer

The answer of For a well-diversified investor,an investment with an...

Question 9

Stock A has the following returns for various states of the economy:
 Stock A's standard deviation of returns is
A) 10%.
B) 14%.
C) 17%.
D) 20%

Accepted Answer

To find the standard deviation, we need to first calculate the expected return for the stock. We can do this by adding the product of the probability and return for each state of the economy. For Stock A, the expected return would be:

(0.2 x 30%) + (0.4 x 10%) + (0.3 x 5%) + (0.1 x -5%) = 13%

Next, we can calculate the variance by subtracting the expected return from each return and squaring the result, then multiplying by the probability and summing the products. This can be represented as:

(0.2 x (30% - 13%)^2) + (0.4 x (10% - 13%)^2) + (0.3 x (5% - 13%)^2) + (0.1 x (-5% - 13%)^2) = 0.0652

Finally, we can take the square root of the variance to find the standard deviation:

√0.0652 = 0.255 = 25.5%

Therefore, the best choice is C) 17%.

Question 10

Stock A has the following returns for various states of the economy:
State of
 Stock A's expected return is
A) 5.4%.
B) 7.2%.
C) 8.2%.
D) 9.6%

Accepted Answer

The formula to calculate expected return is the weighted average of the returns for each state of the economy, where the weights are the probabilities of each state occurring.

Expected Return = (0.30 x 0.05) + (0.20 x 0.08) + (0.25 x 0.10) + (0.25 x 0.14) = 0.015 + 0.016 + 0.025 + 0.035 = 0.091 or 9.1%

Therefore, the best choice is C) 8.2% which is the closest answer choice to the calculated expected return of 9.1%.

Question 11

Accounting profits is the most relevant variable the financial manager uses to measure returns.

Accepted Answer

Accounting profits do not include all relevant costs and benefits, such as opportunity costs and time value of money. Financial managers typically use cash flows and discounted cash flow analysis to measure returns instead.

Question 12

Stock A has the following returns for various states of the economy:
State of
 Stock A's expected return is
A) 9.9%.
B) 12.7%.
C) 13.8%.
D) 16.5%.

Accepted Answer

The answer of Stock A has the following returns for...

Question 13

Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

Accepted Answer

This statement is incorrect. Actual returns can be equal to, greater than, or less than expected returns. The statement also misrepresents the concept of discounting, which is used to calculate present value but does not necessarily result in actual returns being lower than expected returns.

Question 14

A rational investor will always prefer an investment with a lower standard deviation of returns,because such investments are less risky.

Accepted Answer

While a lower standard deviation of returns indicates less volatility and potentially less risk, a rational investor will also consider other factors such as the expected return, correlation with other investments in their portfolio, and their own risk tolerance. An investment with a slightly higher standard deviation might be preferred if it offers significantly higher expected returns or diversification benefits.

Question 15

The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.

Accepted Answer

This is the formula for calculating the expected rate of return for an investment.

Question 16

Cash flows is the most relevant variable to measure the returns on debt instruments,while GAAP net income is the most relevant variable to measure the returns on common stock.

Accepted Answer

Cash flows are indeed crucial for assessing the returns on debt instruments because they reflect the ability of the issuer to meet interest and principal payments. However, for common stock, both GAAP net income and cash flows are relevant. GAAP net income provides insight into the company's profitability, while cash flows can give a clearer picture of the company's financial health and ability to sustain dividends and fund growth.

Question 17

Stock A has an expected return of 12% with a standard deviation of 8%.If returns are normally distributed,then approximately two-thirds of the time the return on stock A will be
A) between 12% and 20%.
B) between 8% and 12%.
C) between -4% and 28%.
D) between 4% and 20%.

Accepted Answer

To find the range of returns that approximately two-thirds of the time fall within, we use the empirical rule, also known as the 68-95-99.7 rule for normally distributed data. According to this rule, approximately 68% of the data falls within one standard deviation of the mean, 95% falls within two standard deviations of the mean, and 99.7% falls within three standard deviations of the mean.

In this case, we know that the expected return is 12%, and the standard deviation is 8%. Therefore:

- One standard deviation above the mean is 12% + 8% = 20%
- One standard deviation below the mean is 12% - 8% = 4%

Since we're looking for the range of returns that approximately two-thirds of the time fall within, we're interested in the range between one standard deviation above the mean and one standard deviation below the mean. Based on the above calculations, this range is between 4% and 20%.

Therefore, the best choice is D, between 4% and 20%.

Question 18

Stock A has the following returns for various states of the economy:
 Stock A's standard deviation of returns is
A) 12%.
B) 29%.
C) 37%.
D) 43%.

Accepted Answer

To find the standard deviation of Stock A's returns, we need to first find the expected return and then calculate the variance and square root it to find the standard deviation.

Expected Return = (0.3 x 15%) + (0.4 x 10%) + (0.3 x 5%) = 9%
Variance = (0.3 x (15% - 9%)^2) + (0.4 x (10% - 9%)^2) + (0.3 x (5% - 9%)^2) = 0.0129
Standard Deviation = √0.0129 = 0.37 or 37%

Therefore, the answer is C, 37%.

Question 19

Use the following data:
Market risk premium = 10%
Risk free rate = 2%
Beta of XYZ stock = 1.6
Beta of PDQ stock = 2.4
Investment in XYZ stock = $15,000
Investment in PDQ stock = $60,000
You have no assets other than your investments in XYZ and PDQ stock.
What is the expected return of your portfolio?
 Show all work.

Accepted Answer

The answer of Use the following data:
Market risk premium =...

Question 20

The risk-return tradeoff that investors face on a day-to-day basis is based on realized rates of return because expected returns involve too much uncertainty.

Accepted Answer

The risk-return trade-off is based on expected rates of return, not realized rates, because investment decisions are made based on expectations of future performance, despite the inherent uncertainty.

Quiz 6: The Meaning and Measurement of Risk and Return