Finance Keen Chapter 8

THE BETA OF A PORTFOLIO IS

a measure of the volatility of the portfolio compared to the market as a whole.

Under the capital asset pricing model, the relevant risk is:

systematic risk

Which of the following is the best description of systematic risk?

-Any risk that will impact the value of all assets simultaneously.

The __________ indicates the tendency of historical returns to be different from their average and how far away from the average they tend to be.

Variance

You purchased Hobo Hats stock last year for $60 a share. Today, you received $2 a share dividend and immediately sold the stock for $63. Your realized return, or holding period return, was 8.33%.
To compute a holding period return you use the following fo

HRP= (ending price+distribution-beginning price)/Beginning price

The expected return on a portfolio is:

-calculated as the weighted average of the expected returns of the securities in the portfolio.

Which of the following correlation coefficients (CorrAB) would generate the most benefit in terms of risk reduction for a 2-asset portfolio that consists of 40% in Asset A and 60% in Asset B?

.65

According to the security market line, a security with a beta of 1.5 should provide a risk premium that is _________ times the risk premium existing for the market as a whole.

1.5

If the required return for a security is 15% and the risk-free rate is 6%, the risk premium is:

9%

Market risk can also be called:

non-diversifiable risk

Over the past 20 years, the average annual return for ShortStop Baseball Gear has been 9% and the standard deviation has been 4%. Given this information you know that the:

-95% prediction interbal is from 1% to 17%

The CAPM is a model of:

- non-diversifiable risk of a security relative to all risky returns.
-The CAPM assumes market efficiency which means that investors will not be compensated for either diversifiable risks or total risk. Assets will be priced to reflect only their level of

The beta for a portfolio is determined by calculating:

a weighted average of individual stock betas where the weights equal the percentage invested in each stock.

$10,000 invested in your portfolio with $5,000 invested in Stock A with a beta of 1.2, $3,000 invested in Stock B with a beta of 2.2, and $2,000 invested in Stock C with a beta of 0.7. The portfolio beta would be;

Beta portfolio = ($5,000/$10,000)(1.2) + ($3,000/$10,000)(2.2) + ($2,000/$10,000)(0.7) = .6 + .66 +.14 = 1.4.

A stock's holding period return represents:

- the total return earned over a specific period through buying and selling an asset.

__________ risk is the only risk that matters to investors with broadly diversified portfolio

- Systematic

The expected rate of return is the:

return forecasted to occur in the future.

The normal distribution is a symmetrical distribution that is described by its:

mean and standard deviation.

An asset with a beta of 1.6 will have an expected return of __________ when the risk-free rate is 4% and the expected return on the market is 12%.

An asset with a beta of 1.6 will have an expected return of 16.8% when the risk-free rate is 4% and the expected return on the market is 12%. Use the following CAPM formula to compute the expected return.
E(Rj) = Rf + Bj(E(Rm) - Rf) where;
E(Rj) = require

The best measure to use when comparing alternative investments is the amount of the dollar gain or loss.

False

With holding periods of more than a? year, annualizing the HPR makes it smaller.

True

The lower the correlation coefficient between two? stocks, the greater will be the benefit from diversifying by combining the two stocks in a portfolio

True

Based on the period 1950? - 1999, you would have the less uncertainty about any expected return on small company stocks than you would about the expected return on large company stocks.

Falso

Our author discusses the average return and standard deviation for 4 different assets for the period 1950? - 1999.

True

Diversifiable" risk,? "Company-specific" risk,? "Unsystematic" risk and? "Market" risk all refer to the same type of risk.

False

y diversifying you can eliminate most or all of unsystematic risk.

T

The standard deviation is the square root of the variance.

T

A stock with? one-half the average market risk would have a value for beta of 2.0.

F

The only variable on the? right-hand side of the CAPM formula that varies from one company to another is expected return on the market.

F

in order to properly evaluate a? stock, investors need only consider its? risk.,

F

Investors should always choose stocks with the highest? reward-risk ratio.

T

When working with the entire population of? observations, the denominator of the variance calculation is? (n -? 1).

F

Ceteris paribus?, lower standard deviations represent greater risk.

False

You purchased a share of stock for? $87.45 twelve years ago and just sold it today for? $115.83. No dividends were paid out over the twelve years but you did receive an accumulated dividend of? $35.70 when you sold the stock. What is your? (a) Dollar gain

$64.08; 73.3%

You purchased a share of stock for? $87.45 twelve years ago and just sold it today for? $115.83. No dividends were paid out over the twelve years but you did receive an accumulated dividend of? $35.70 when you sold the stock. What is your? (a) Simple Annu

?6.1%; 4.7%

You bought a stock for? $37.80 and sold it 7 months later for? $40.18 with no dividends paid. What is your? (a) Dollar gain or? loss; and? (b) HPR?

$2.38; 6.3%

You bought a stock for? $37.80 and sold it 7 months later for? $40.18 with no dividends paid. What is your? (a) Simple annual? return; and Compounded annual? return?

10.8%; 11.0%

If the? risk-free rate is? 3% and the expected return on the market is? 8%, according to? CAPM, a stock that is? one-and-a-quarter times as risky as the market would have an expected return of? _____?

9.25%

Based on the prior? question, what is the? MRP?

5%

You are considering investing in one of two? well-diversified portfolios. Portfolio A has an expected return of? 8% and a beta of 1.35 while Portfolio B has an expected return of? 6% and a beta of 0.80. Assuming that you are a rational? risk-averse invest

Portfolio B because it has a higher? reward-to-risk ratio.

Stocks? A, B,? C, and D have standard? deviations, respectively, of? 20%, 5%,? 10%, and? 15%. Which one is the? riskiest?

A

Stock A B C D
Expected Return? 5% 5%? 7% 6%
Standard Deviation? 10% 12%? 12% 11%
Which of the following statements is? true?

A is a better investment than B.

You wish to diversify your singleminussecurity portfolio in a way that will maximize your reduction in risk. Which of the following securities should you add to your? portfolio?

Alpha Company stock that has a correlation coefficient of minus0.25 with your current security

The profit ?(or loss) on an investment is the dollars that you gained? (or lost) measured as the difference between the original cost of an investment and its ending? value, plus any distributions that you received over the life of the? investment:

Profit=ending value+Distribution-orignal cost

Return is the measure of the percentage of change or the ratio of the gain? (or loss) to the cost of the? investment:

Return = (Profit or loss)/original cost

Bohenick Classic Automobiles restores and rebuilds old classic cars. The company purchased and restored a classic 1957 Thunderbird convertible 6 years ago for ?$8,200.00. Today at? auction, the car sold for ?$82,000.00. What are the holding period return

900%
-HPR=(ending price+distribution-beggining price)/Beginning price
150%
-Simple Annual Return = HPR/n
46.78%
-EAR=(1+HPR)^(1/n)-1

WG Investors is looking at three different investment opportunities. Investment one is a? five-year investment with a cost of ?$450 and a promised payout of ?$900 at maturity. Investment two is a? seven-year investment with a cost of ?$450 and a promised

1) 14.87?%
- EAR=(1+HPR)^(1/n)-1
2) 15.85
-HPR=(ending price+distribution-beggining price)/Beginning price
3) 16.23
-

Metz Industries stock is twice as risky as the market on average. Given an expected return on the market of ?9.5%, and a? risk-free rate of? 2.50%, according to? CAPM, what is the expected return for Metz? Industries?

16.5

The textbook provides a history of returns from 1950 through 1999 for four classifications of securities in the United States. Rank the average returns from the highest to lowest over this time period.

Small company ?stocks, large company ?stocks, long term government? bonds, 3 month U.S. Treasury bills

The textbook provides a history of returns from 1950 through 1999 for four classifications of securities in the United States. Rank the average standard deviation? ( measure of? risk) from the highest to lowest over this time period.

Small company ?stocks, large company ?stocks, long term government? bonds, 3 month U.S. Treasury bills