Chapter 8 Risk and Return (with Questions Answers)

Principles of Managerial Finance, Brief Ed., 8e (Zutter/Smart)
Chapter 8 Risk and Return

8.1 Risk and return fundamentals

1) Investment A guarantees its holder $100 return. Investment B earns $0 or $200 with equal
chances (i.e., an average of $100) over the same period. Both investments have equal risk.
Answer: FALSE
Diff: 1
Topic: Risk Defined
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Reflective Thinking

2) The return on an asset is the change in its value plus any cash distribution over a given period
of time, expressed as a percentage of its ending value.
Answer: FALSE
Diff: 1
Topic: Return Defined
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking

3) For a risk-seeking investor, no increase in return would be required for an increase in risk.
Answer: TRUE
Diff: 1
Topic: Risk Preferences
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking

4) For a risk-averse investor, required return would decrease for an increase in risk.
Answer: FALSE
Diff: 1
Topic: Risk Preferences
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking

5) For a risk-indifferent investor, no change in return would be required for an increase in risk.
Answer: TRUE
Diff: 1
Topic: Risk Preferences
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking


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,6) Most investors are risk-averse, since for a given increase in risk they require an increase in
return.
Answer: TRUE
Diff: 1
Topic: Risk Preferences
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking

7) For a risk-averse investor, the required return increases for an increase in risk.
Answer: TRUE
Diff: 1
Topic: Risk Preferences
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking

8) Interest rate risk is the chance that changes in interest rates will adversely affect the value of
an investment.
Answer: TRUE
Diff: 1
Topic: Risk and Return Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking

9) The term "risk" is used interchangeably with "uncertainty" to refer to the unpredictability of
returns associated with a given asset.
Answer: TRUE
Diff: 1
Topic: Risk and Return Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking

10) In the most basic sense, risk is a measure of the uncertainty surrounding the return that an
investment will earn.
Answer: TRUE
Diff: 1
Topic: Risk and Return Fundamentals
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking




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,11) An investment's total return is the sum of any cash distributions minus the change in the
investment's value, divided by the beginning-of-period value.
Answer: FALSE
Diff: 1
Topic: Return Defined
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking

12) Stocks are less risky than either bonds or bills.
Answer: FALSE
Diff: 1
Topic: Return Defined
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking

13) The interest rate risk associated with Treasury bonds is much higher than with bills.
Answer: TRUE
Diff: 1
Topic: Return Defined
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking

14) Which of the following is TRUE of risk?
A) Risk and return are inversely proportionate to each other.
B) Higher the risk associated with a security the lower is its return.
C) Risk is a measure of the uncertainty surrounding the return that an investment will earn.
D) Riskier investments tend to have lower returns as compared to T-bills which are risk free.
Answer: C
Diff: 1
Topic: Risk Defined
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking




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, 15) Nico bought 100 shares of Cisco Systems stock for $30.00 per share on January 1, 2018. He
received a dividend of $2.00 per share at the end of 2018 and $3.00 per share at the end of 2019.
At the end of 2020, Nico collected a dividend of $4.00 per share and sold his stock for $33.00
per share. What was Nico's realized holding period return?
A) -40%
B) +40%
C) -36.36%
D) +36.36%
Answer: B
Diff: 1
Topic: Return Defined
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking

16) The total rate of return on an investment over a given period of time is calculated by
________.
A) dividing the asset's cash distributions during the period, plus change in value, by its
beginning-of period investment value
B) dividing the asset's cash distributions during the period, plus change in value, by its ending-of
period investment value
C) dividing the asset's cash distributions during the period, minus change in value, by its ending-
of period investment value
D) dividing the asset's cash distributions during the period, minus change in value, by its
beginning-of period investment value
Answer: A
Diff: 1
Topic: Return Defined
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking

17) Last year, Mike bought 100 shares of Dallas Corporation common stock for $53 per share.
During the year he received dividends of $1.45 per share. The stock is currently selling for $60
per share. What rate of return did Mike earn over the year?
A) 11.7 percent
B) 13.2 percent
C) 14.1 percent
D) 15.9 percent
Answer: D
Diff: 1
Topic: Return Defined
Learning Obj.: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking



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