If standard deviation is used to measure the risk of stocks, one problem that arises is the inability to tell
which stock is riskier by looking at the standard deviation alone.
True
also consider coefficient of variation
The variance measures the risk per unit of return.
False
variance o^2 is units squared, CV gives risk per unit return
A higher coefficient of variation indicates more risk per unit of return.
True
Standard deviation is stated in the same units of measurement (e.g., dollars, percent) as those of the data
from which they were generated.
True
In an efficient market, both expected and unexpected news should cause stock prices to move up or down.
False
only unexpected news should cause stock prices to move
A market system that allows for quick execution of customers' trades is said to be informationally efficient.
False
Any predictable trend in the same direction as the price change would be evidence of an efficient market.
False
A predictable trend implies the market does not quickly and correctly process
new information to determine asset prices
In an efficient market, investors cannot consistently earn above average profits after taking risk differences
into account.
True
A weak-form efficient market is a market in which prices reflect all past information.
True
The variance of a portfolio can be calculated by finding the variances of the individual components of the
portfolio and finding the weighted average of those variances.
False
Diversification occurs when we invest in several different assets rather than just a single one.
True
The benefits of diversification are greatest when asset returns have positive correlations.
False
Standard deviation is the square root of the variance.
True
The coefficient of variation is a measure of total return on a stock.
False
CV is a measure of risk per unit return
Unsystematic risk is the risk that cannot be eliminated through diversification.
False
The market portfolio is a portfolio that contains all risky assets.
True
The Capital Asset Pricing Model states that the expected return on an asset depends on its level of
unsystematic risk.
False
Beta measures the variability of an asset's returns relative to the market portfolio.
True
Although gold is a risky investment by itself, including gold in a stock portfolio can make the portfolio less
risky.
True
Since gold is negatively correlated with stocks adding it to a portfolio of stocks
reduces the risk of the portfolio
If Stock A has a higher standard deviation than Stock B, it will also have a greater coefficient of variation.
False
If the expected return is 10%, the standard deviation is 3%, about 68% of the time returns will be expected
to fall between 10% and 13%.
False
In general, large company stocks are more risky than Treasury bonds.
True
. Future returns and risk cannot be predicted precisely from past measures.
True
A stock that went from $40 per share at the beginning of the year to $45 at the end of the year and paid a $2
dividend provided an investor with a 14% return.
False
When we speak of ex-ante returns, we are referring to historical information or data.
False
expected or forecasted
In general, securities with higher historical standard deviations have provided higher returns.
True
The existence of chartists or technicians suggests that some investors believe that markets are not weak form
efficient.
True
Research suggests that a portfolio of 20 or 30 different stocks can eliminate most of a portfolio's systematic
risk.
False
A portfolio is any combination of financial assets or investments.
True
The expected rate of return on a portfolio is the weighted average of the expected returns of the individual
assets in the portfolio.
True
The historical percentage return for a single financial asset is equal to any dividends received minus the
difference between the selling price and the purchase price, all divided by the purchase price.
False
The variance is the square root of the standard deviation.
False
If a financial asset has a historical variance of 16, then its standard deviation must be 4.
True
If a financial asset has a historical variance of 25, then its standard deviation must be 12.5%.
False
The coefficient of variation measures the risk per unit of return.
True
The term "ex-ante" refers to the past or historical information.
False
The term "ex-ante" refers to expected or forecasted information.
True
A weak-form efficient market is one in which prices reflect all public and private knowledge, including past
and current information.
False
A strong-form efficient market is one in which prices reflect all public knowledge, including past and
current information.
False
and private information
A weak-form efficient market is one in which prices reflect all public knowledge, including past and current
information.
False
If a market is semi-strong form efficient, it also is by definition weak-form efficient.
True
The return on a portfolio is simply equal to the weighted average return of the securities that comprise it.
True
The risk of a portfolio is simply equal to the weighted average variance of the securities that comprise it.
False
You cannot use an equation similar 12-7 for the variance of portfolio of stocks
The greatest level of risk reduction through diversification can be achieved when combining two securities
whose returns are perfectly negatively correlated.
True
Most nondiversifiable risk can be eliminated by creating a portfolio of around 30 stocks.
False
nondiversifiable (systematic) risk cannot be eliminated by
diversification
The only relevant risk for investors that hold well diversified portfolios of securities is nondiversifiable risk.
True
Most market risk can be eliminated through diversification.
False
market (systematic) risk cannot be eliminated by diversification
In general, securities with lower returns have lower historical standard deviations.
True
1. A stock that went from $40 per share at the beginning of the year to $45 at the end of the year and paid a $2
dividend provided an investor with a ____ return. (Pick the closest answer.)
a. 8.75%
b. 14%
c. 17.5%
d. 7%
C
2. The slope of the linear relation between the returns on a stock and the returns on the market portfolio is
called the:
a. alpha
b. beta
c. covariance
d. coefficient of variation
B
3. The Security Market Line describes the relationship between the:
a. expected return on securities and their systematic risk
b. expected return on securities and their unsystematic risk
c. expected return on a security and the expected return on the mar
A
4. Unsystematic risk is also known as:
a. market risk
b. nondiversifiable risk
c. firm-specific risk
d. macroeconomic risk
C
5. The market portfolio would have a beta of:
a. 0
b. +1
c. -1
d. +1.8
e. -0.6
B
6. Assets that are more volatile than the market have a beta of:
a. 1
b. 0
c. less than 1 but greater than 0
d. more than 1
D
7. As defined in accordance with efficient markets notions, a weak-form efficient market would be a market in
which asset prices reflect all:
a. current public information
b. current inside information
c. current private information
d. all three (a, b, c)
E
8. As defined in accordance with efficient markets notions, a strong-form efficient market would be a market
in which asset prices reflect all of the following EXCEPT:
a. past public information
b. current public information
c. past private information
d.
E
9. After controlling for risk, if someone were able to earn greater than the average returns for the market on a
consistent basis using publicly available information, which form of market efficiency is violated?
a. none of the forms would be violated
b.
B
10. If prices in a particular market fully reflect all public and private knowledge, the market is efficient in the:
a. weak form
b. semi-strong form
c. strong form
d. both a and b
C
11. The correlation between the return on the risk-free asset with a constant return over time and the return on a
risky asset is always:
a. -1
b. 0
c. 1
d. 0.5
B
12. If IBM has a beta of 1.2 when the risk-free rate is 6% and the expected return on the market portfolio is
18%, the expected return on IBM is: (Pick the closet answer.)
a. 17.2%
b. 20.4%
c. 22.1%
d. 23.6%
B
13. If the expected return on Stock 1 is 6%, and the expected return on Stock 2 is 20%, the expected return on a
two-asset portfolio that holds 10% of its funds in Stock 1 and 90% in Stock 2 is: (Pick the closet answer.)
a. 11.52%
b. 13%
c. 18.6%
d. 19.14
C
14. In an efficient market:
a. it is fairly easy to find stocks whose prices do not fairly reflect the present value of future expected cash
flows
b. expected news will cause a rapid change in prices
c. information flows are random, both in timing and in
C
15. The strong-form efficient market implies that:
a. no investor can consistently beat the market after adjusting for risk differences
b. stock prices reflect all public and private knowledge
c. even corporate officers and insiders cannot earn above-aver
D
16. Systematic risk is rewarded with higher returns in the market because:
a. it is associated with market movements which cannot be eliminated through diversification
b. it is a microeconomic risk
c. that risk is unique to a firm or an industry
d. none o
A
17. If the expected return on the market portfolio is 12%, and the beta on Consolidated Edison is 0.8, then using
the Security Market Line, the expected return on Con Ed is:
a. greater than 12%
b. less than 12%
c. greater or less than 12%, depending on th
B
18. The security market line can be used to determine the expected return on a security if we know the:
a. risk-free rate
b. systematic risk of that security
c. expected return on the market portfolio
d. all three (a, b, c)
D
19. The Capital Asset Pricing Model (CAPM) states that the expected return on an asset depends upon its level
of:
a. systematic risk
b. unsystematic risk
c. foreign exchange risk
d. interest rate risk
A
20. If the risk-free rate, the expected return on the market portfolio, and the _____________ of a stock is
known, an investor can use the security market line to determine the expected return on that stock.
a. standard deviation
b. beta
c. coefficient of
B
21. The portfolio that contains all risky assets is known as the:
a. market portfolio
b. efficient portfolio
c. efficient frontier
d. value-weighted portfolio
A
22. If you invest 40% of your investment in GE with an expected rate of return of 10% and the remainder in
IBM with an expected rate of return of 16%, the expected return on your portfolio is: (Pick the closet answer.)
a. 12.4%
b. 13.0%
c. 13.6%
d. 14.5%
C
23. Which of the following is not required to compute the expected return of a three-asset portfolio?
a. the amount invested in each stock
b. the correlation between the returns on each stock
c. the expected return on each stock
d. all three (a, b, c) are
B
24. The benefits of diversification are greatest when asset returns have:
a. negative correlations
b. positive correlations
c. zero correlations
d. low positive covariances
A
25. In an efficient market which of the following would not be expected to cause a quick price change in the
stock of a company?
a. an unexpected announcement by a major competitor
b. higher than predicted earnings announcement
c. unexpected death of CEO
D
26. Which of the following statements is correct?
a. The variance of a portfolio is a weighted average of asset variances.
b. The benefits of diversification are greatest when asset returns have zero correlations.
c. The market portfolio truly eliminates
C
27. Which of the following statements is correct?
a. The U.S. stock market appears to be a fairly good example of a semi-strong form efficient market.
b. A market in which prices reflect only all past and current publicly known information is a strong for
A
28. Which of the following statements is correct?
a. The security market line graphically shows the expected return and systematic risk relationship.
b. Unsystematic risk is the major determinant of returns for a well-diversified portfolio of stocks.
c. A
A
29. Which of the following statements is false?
a. Diversification cannot eliminate risk that is inherent in the macroeconomy or market risk.
b. The expected rate of return on a portfolio does not depend on the correlation between the return on each
stock
D
30. If Stock A had a price of $120 at the beginning of the year, $150 at the end of the year and paid a $6
dividend during the year, what would be the annualized holding period return? Pick the closest answer.
a. 36%
b. 30%
c. 25%
d. 28%
B
31. If the variance for Stock A is greater than the variance for Stock B, then the standard deviation for Stock A:
a. is greater than the standard deviation for Stock B
b. is less than the standard deviation for Stock B
c. is the same as the standard devi
A
32. If the variance for Stock A is greater than the variance for Stock B, then the coefficient of variation for
Stock A:
a. is greater than the coefficient of variation for Stock B
b. is less than the coefficient of variation for Stock B
c. is the same as
D
33. If the variance in returns for Stock A is 400% and the expected return is 5%, then the coefficient of variation
is: (Pick the closet answer.)
a. 4
b. 80
c. .25
d. cannot be determined by this information
A
34. According to the definitions given in the text, if Stock A has a standard deviation of 4% and Stock B has a
standard deviation of 3% which stock is riskier?
a. Stock A
b. Stock B
c. they are equally risky
d. cannot determine from the information given
D
35. According to the definitions given in the text, if Stock A has a standard deviation of 4% and expected returns of
9%, and Stock B has a standard deviation of 3% and expected returns of 1%, which stock is riskier?
a. Stock A
b. Stock B
c. they are equa
B
36. A fruit company has 20% returns in periods of normal rainfall and negative 3% returns in droughts. The
probability of normal rainfall is 60% and droughts 40%. What would the fruit company's expected returns be?
(Pick the closet answer.)
a. 24%
b. 10.8
B
37. If Stock A is considered to be of lower risk than Stock B, then Stock A should have returns that are
a. lower than Stock B
b. higher than Stock B
c. they would have equal returns
d. cannot determine from the information given
A
38. If the return for Stock A this year was 3% and the expected return for next year is 3%, then next year's
return will actually be (Pick the closet answer.)
a. 3%
b. 6%
c. cannot say for certain
d. 4.5%
C
39. Which one of the following is not considered to be a generally recognized type of market efficiency?
a. strong-form
b. semi-strong form
c. weak-form
d. insider-information form
D
40. A statistical concept that relates movements in one set of returns to movements in another set over time is
called:
a. variance
b. standard deviation
c. coefficient of variation
d. correlation
D
41. The total risk of a well-diversified portfolio of U.S. stocks appears to be about what proportion of the risk of
an average one-stock portfolio?
a. one-third
b. one-half
c. two-thirds
d. three-fourths
B
42. The total risk of a well-diversified international portfolio of stocks appears to be about what proportion of
the risk of an average one-stock portfolio?
a. one-quarter
b. one-third
c. one-half
d. two-thirds
e. three-fourths
B
43. Portfolio risk is comprised of:
a. systematic and market risk
b. unsystematic and microeconomic risk
c. systematic and unsystematic risk
d. systematic and macroeconomic risk
C
44. Which of the following is not a component of the security market line equation?
a. risk-free rate
b. expected return on the market
c. an asset's systematic risk
d. an asset's unsystematic risk
D
45. The square root of the standard deviation is called the:
a. variance
b. coefficient of variation
c. beta
d. none of three (a, b, c)
D
46. If we assume that asset X has an expected return of 10 and a variance of 10, then its coefficient of variation
is: (Pick the closest answer.)
a. 3.162
b. 1.000
c. 0.316
d. 0.032
C
47. Maximum diversification benefit can be achieved if one were to form a portfolio of two stocks whose
returns had a correlation coefficient of:
a. -1.0
b. +1.0
c. 0.0
d. none of three (a, b, c)
A
48. Variations in operating income over time because of variations in unit sales, price, cost margins, and/or
fixed expenses are called:
a. business risk
b. exchange rate risk
c. purchasing power risk
d. financial risk
e. none of four (a, b, c, d)
A
49. Variations in operating income over time because of variations in unit sales, price, cost margins, and/or
fixed expenses are called:
a. interest rate risk
b. exchange rate risk
c. purchasing power risk
d. financial risk
e. none of four (a, b, c, d)
E
50. The effect on revenues and expenses from variations in the value of the U.S. dollar in terms of other
currencies is called:
a. interest rate risk
b. exchange rate risk
c. purchasing power risk
d. financial risk
e. none of four (a, b, c, d)
B
51. The effect on revenues and expenses from variations in the value of the U.S. dollar in terms of other
currencies is called:
a. interest rate risk
b. business risk
c. purchasing power risk
d. financial risk
e. none of four (a, b, c, d)
E
52. The risk caused by changes in inflation that affect revenues, expenses and profitability is called:
a. interest rate risk
b. business risk
c. purchasing power risk
d. financial risk
e. none of four (a, b, c, d)
C
53. The risk caused by changes in inflation that affect revenues, expenses and profitability is called:
a. interest rate risk
b. business risk
c. tax risk
d. financial risk
e. none of four (a, b, c, d)
E
54. The risk caused by variations in interest expense unrelated to sales or operating income arising from
changes in the level of interest rates in the economy is called:
a. interest rate risk
b. business risk
c. tax risk
d. financial risk
e. none of four
A
55. The risk caused by variations in interest expense unrelated to sales or operating income arising from
changes in the level of interest rates in the economy is called:
a. financial risk
b. business risk
c. tax risk
d. purchasing power risk
e. none of f
E
56. The risk caused by variations in income before taxes over time because fixed interest expenses do not
change when operating income rises or falls is called:
a. interest rate risk
b. business risk
c. financial risk
d. purchasing power risk
e. none of f
C
57. The risk caused by variations in income before taxes over time because fixed interest expenses do not
change when operating income rises or falls is called:
a. interest rate risk
b. business risk
c. tax risk
d. purchasing power risk
e. none of four (a
E
58. Variations in a firm's tax rate and tax-related charges over time due to changing tax laws and regulations is
called:
a. interest rate risk
b. business risk
c. exchange rate risk
d. purchasing power risk
e. tax risk
E
59. Assume the probability of a pessimistic, most likely and optimistic state of nature is .25, .45 and .30, and the
returns associated with those states of nature are 10%, 12%, and 16% for asset X. Based on this information,
the expected return and stand
B
60. A lower the coefficient of variation indicates ____________ risk per unit of return.
a. lower
b. higher
c. close to 100%
d. zero
A
61. Assume the probability of a pessimistic, most likely and optimistic state of nature is .25, .55 and .20, and the
returns associated with those states of nature are 5%, 10%, and 13% for asset Y. Based on this information, the
expected return, standard
D
62. Rico bought 100 shares of Banana Republic stock for $24.00 per share on January 1, 2010. He received a
dividend of $2.00 per share at the end of 2010 and $3.00 per share at the end of 2011. At the end of 2012, Rico
collected a dividend of $4.00 per sh
B
63. If a person requires greater return when risk increases, that person is said to be:
a. risk seeking
b. risk averse
c. risk aware
d. risk indifferent
B
64. Which of the following statements is correct?
a. Combining positively correlated assets having the same expected return results in a portfolio with the same
level of expected return and a lower level of risk.
b. Combining negatively correlated assets
B
65. Which of the following statements is correct?
a. Perfectly negatively correlated series move exactly together and have a correlation coefficient of -1.0 while
perfectly positively correlated series move exactly in opposite directions and have a correl
C
66. Investing in is a way for small investors to enjoy the benefits of professional management and
diversification.
a. stocks
b. bonds
c. mutual funds
d. put options
C