FINA 3770 EXAM 3 QUESTIONS AND ANSWERS LATEST UPDATE 2025-2026
Which of the following is true of risk and expected returns?
If two investments have the same expected return, investors prefer the riskier alternative.
The expected return on an investment is independent of the associated risk.
Higher the risk, higher the expected returns on an investment.
The expected return on an investment is inversely proportional to the associated risk. - Answers
Higher the risk, higher the expected returns on an investment.
The total holding period return on an investment ____
stays constant every year.
is the difference between the selling price and the purchase price.
is the difference between its selling price and its income component.
consists of a capital appreciation component and an income component. - Answers consists of
a capital appreciation component and an income component.
You purchased a share of Blyton Industries common stock 1 year ago for $37.50. During the
year you received dividends totaling $0.60 and today the stock can be sold for $39.28. What
total return did you earn on this stock over the past year? (Round your percentage answer to one
decimal place.)
1.6%
6.1%
4.7%
6.3% - Answers 6.3%
(Capital appreciation + cash flow) / Initial price = [($39.28 - $37.50) + $0.60] / $37.50 = ($1.78 +
$0.60) / $37.50 = 6.3%.
If the return distribution for the asset is described as below, what is the standard deviation for
the asset's returns? (Do not round your intermediate calculations. Round your percentage
answers to two decimal places.)
Return
12%
,10%
7%
Probability
15%
50%
35%
0.05%
2.91%
1.79%
3.19% - Answers 1.79%
Expected return for the asset = (0.12 × 15%) + (0.10 × 50%) + (0.07 × 35%) = 9.25%
Variance = (0.12 − 0.0925)^2 × 0.15 + (0.10 − 0.0925)^2 × 0.50 + (0.07 − 0.0925)^2 × 0.35 =
0.0001134 + 0.0000281 + 0.0001772 = 0.0003188.
Standard deviation =√Variance = √0.0003188 = 0.01785 = 1.79% (rounded).
The CEO of Coral Gables Corp. was reviewing the returns of the company's sizeable investment
portfolio in the last five years during a period of extreme volatility. He noted the 5 year sequence
of investment returns as follows: +30%, -20%, +30%, -20%, +30%. He then calculated the
arithmetic average return, but his CFO noted that since he had ignored the compounding effect
he was wrong. By how much was he wrong? (Hint: Calculate the annual arithmetic average
return over the five years less the average geometric (compounded) return.)
1.59%
9.39%
3.25%
2.95% - Answers 2.95%
Arithmetic average return = (30% - 20% + 30% - 20% + 30%)/5 = 10%;Geometric (compounded)
,average return = [(1.3) x (0.8) x (1.3) x (0.8) x (1.3)]^ 1/5-1 = 7.05%;The CFO overstated the
average rate of return over the last 5 years by 10% - 7.05% or 2.95%.
Jim Keys holds a $200,000 portfolio consisting of the following stocks:
Stock Investment Beta
Alpha $50,000 0.50
Beta $50,000 0.80
Gamma $50,000 1.00
Delta $50,000 1.30
What is the portfolio's beta?
0.90
0.75
1.05
0.80 - Answers 0.90
βPortfolio = [{($50,000/$200,000) x 0.50} + {($50,000/$200,000) x 0.80} + {($50,000/$200,000)
x 1.00} + {($50,000/$200,000) x 1.30}] = 0.90
Barbra purchased a piece of real estate last year for $85,000. The real estate is now worth
$102,000. If Barbra needs to have a total return of 25 percent during the year, then what is the
dollar amount of income that she needs to have to reach her objective?
$4,750
$5,250
$4,250
$3,750 - Answers $4,250
$102,000−$85,000+$X / $85,000=
0.25,$ X = $4,250
Books Brothers stock was priced at $15 per share two years ago. The stock sold for $13 last
, year and now it sells for $18. What was the total return for owning Books Brothers stock during
the most recent year? Assume that no dividends were paid. Round your answer to the nearest
percent.
38%
20%
23%
17% - Answers 38%
$18−$13 / $13= 0.3846
Total rate of return = 38.46% OR 38% (rounded).
Use the following table to calculate the expected return from the asset
Return Probability
0.05 0.1
0.1 0.15
0.15 0.5
0.25 0.25
13.75%
16.75%
15.75%
12.50% - Answers 15.75%
Francis purchased a stock one year ago for $20, and it is now worth $24. The stock paid a
dividend of $3 during the year. What was the stock's rate of return from capital appreciation
during the year?
20%
17%
35%
29% - Answers 20%
Which of the following is true of risk and expected returns?
If two investments have the same expected return, investors prefer the riskier alternative.
The expected return on an investment is independent of the associated risk.
Higher the risk, higher the expected returns on an investment.
The expected return on an investment is inversely proportional to the associated risk. - Answers
Higher the risk, higher the expected returns on an investment.
The total holding period return on an investment ____
stays constant every year.
is the difference between the selling price and the purchase price.
is the difference between its selling price and its income component.
consists of a capital appreciation component and an income component. - Answers consists of
a capital appreciation component and an income component.
You purchased a share of Blyton Industries common stock 1 year ago for $37.50. During the
year you received dividends totaling $0.60 and today the stock can be sold for $39.28. What
total return did you earn on this stock over the past year? (Round your percentage answer to one
decimal place.)
1.6%
6.1%
4.7%
6.3% - Answers 6.3%
(Capital appreciation + cash flow) / Initial price = [($39.28 - $37.50) + $0.60] / $37.50 = ($1.78 +
$0.60) / $37.50 = 6.3%.
If the return distribution for the asset is described as below, what is the standard deviation for
the asset's returns? (Do not round your intermediate calculations. Round your percentage
answers to two decimal places.)
Return
12%
,10%
7%
Probability
15%
50%
35%
0.05%
2.91%
1.79%
3.19% - Answers 1.79%
Expected return for the asset = (0.12 × 15%) + (0.10 × 50%) + (0.07 × 35%) = 9.25%
Variance = (0.12 − 0.0925)^2 × 0.15 + (0.10 − 0.0925)^2 × 0.50 + (0.07 − 0.0925)^2 × 0.35 =
0.0001134 + 0.0000281 + 0.0001772 = 0.0003188.
Standard deviation =√Variance = √0.0003188 = 0.01785 = 1.79% (rounded).
The CEO of Coral Gables Corp. was reviewing the returns of the company's sizeable investment
portfolio in the last five years during a period of extreme volatility. He noted the 5 year sequence
of investment returns as follows: +30%, -20%, +30%, -20%, +30%. He then calculated the
arithmetic average return, but his CFO noted that since he had ignored the compounding effect
he was wrong. By how much was he wrong? (Hint: Calculate the annual arithmetic average
return over the five years less the average geometric (compounded) return.)
1.59%
9.39%
3.25%
2.95% - Answers 2.95%
Arithmetic average return = (30% - 20% + 30% - 20% + 30%)/5 = 10%;Geometric (compounded)
,average return = [(1.3) x (0.8) x (1.3) x (0.8) x (1.3)]^ 1/5-1 = 7.05%;The CFO overstated the
average rate of return over the last 5 years by 10% - 7.05% or 2.95%.
Jim Keys holds a $200,000 portfolio consisting of the following stocks:
Stock Investment Beta
Alpha $50,000 0.50
Beta $50,000 0.80
Gamma $50,000 1.00
Delta $50,000 1.30
What is the portfolio's beta?
0.90
0.75
1.05
0.80 - Answers 0.90
βPortfolio = [{($50,000/$200,000) x 0.50} + {($50,000/$200,000) x 0.80} + {($50,000/$200,000)
x 1.00} + {($50,000/$200,000) x 1.30}] = 0.90
Barbra purchased a piece of real estate last year for $85,000. The real estate is now worth
$102,000. If Barbra needs to have a total return of 25 percent during the year, then what is the
dollar amount of income that she needs to have to reach her objective?
$4,750
$5,250
$4,250
$3,750 - Answers $4,250
$102,000−$85,000+$X / $85,000=
0.25,$ X = $4,250
Books Brothers stock was priced at $15 per share two years ago. The stock sold for $13 last
, year and now it sells for $18. What was the total return for owning Books Brothers stock during
the most recent year? Assume that no dividends were paid. Round your answer to the nearest
percent.
38%
20%
23%
17% - Answers 38%
$18−$13 / $13= 0.3846
Total rate of return = 38.46% OR 38% (rounded).
Use the following table to calculate the expected return from the asset
Return Probability
0.05 0.1
0.1 0.15
0.15 0.5
0.25 0.25
13.75%
16.75%
15.75%
12.50% - Answers 15.75%
Francis purchased a stock one year ago for $20, and it is now worth $24. The stock paid a
dividend of $3 during the year. What was the stock's rate of return from capital appreciation
during the year?
20%
17%
35%
29% - Answers 20%
