FIN 3400 Chapter 09 Assignment Questions and Answers- Florida International University

FIN 3400 Chapter 09 Assignment Questions and Answers- Florida International University True or false: A high-risk investment can underperform a low-risk investment over the short term. True false question. True False How is the term "dollar return" defined? Multiple choice question. Amount of profit or loss expressed as an annual rate Amount of profit or loss from an investment expressed as a percentage of the ending price Amount of profit or loss from an investment expressed in dollars Amount of profit or loss from an investment expressed as a percentage of the investment's cost How can the percentage return on a stock be defined? Multiple choice question. Dollar return/Money invested Capital gain or loss/Money invested Dollar return/Ending stock value Capital gain or loss/Ending stock value Maria bought a stock one year ago for $16 a share. The stock pays quarterly dividends of $0.12 and is currently valued at $17 a share. How is the percentage return computed? Multiple choice question. [$17 - $16 + (4 × $0.12)]/$17 [$17 - $16 + (4 × $0.12)]/$16 ($17 - $16 + $0.12)/$17 ($17 - $16 + $0.12)/$16 For the past three years, a stock had annual returns of 14 percent, -32 percent, and 4 percent. What is the average arithmetic return? Multiple choice question. -7.33 percent 2.08 percent 1.15 percent -4.67 percent Reason: (14% - 32% + 4%)/3 = -4.67% An investor who purchases a high-risk investment should expect to earn a higher rate of return over which period of time? Multiple choice question. Any period of time No period of time Short term Long term Which of these is an accurate measure of returns that is used in performance analysis? Multiple choice question. Variance Arithmetic average return Geometric mean return Standard deviation The dollar return on a stock investment includes which of these? Multiple choice question. Dividends only Dividend income and capital gains or losses Capital gains only Capital gains and losses only The annual returns on a stock for the past four years are: 5.2 percent, -16.8 percent, 22.1 percent, and 11.4 percent. What is the geometric mean return? Multiple choice question. 4.46 percent 5.99 percent 5.48 percent 4.80 percent The percentage total return on a stock investment is expressed as a percentage of what? Multiple choice question. Par value Initial investment Final price Average price The S&P 500 had the highest decade average return for which period? Multiple choice question. 1970s 1950s 1980s 1990s Theo purchased a stock at $28 a share and sold it six months later for $23 a share. He received a $0.75 dividend. How is his percentage return calculated? Multiple choice question. ($23 - $28 + $0.75)/$23 ($28 - $23)/$23 ($23 - $28 + $0.75)/$28 ($28 - $23 + $0.75)/$23 Reason: Percentage return = ($23 - $28 + $0.75)/$28 How is standard deviation defined in relation to investments? Multiple choice question. Risk associated with a specific firm The change in the rate of return from one year to the following year Measure of average returns Measure of past return volatility, or risk A stock returned 13 percent, 8 percent, -16 percent, and 1 percent annually for the past four years, respectively. What is the arithmetic average return? Multiple choice question. 1.50 percent 4.00 percent -2.25 percent 9.50 percent What is a geometric mean return? Multiple choice question. The square root of the summation of the annual rates of return The discounted arithmetic average return The equivalent return that is compounded for N periods The sum of all returns divided by the number of returns Which of these statements regarding the standard deviation formula is correct? Select all that apply. Multiple select question. Standard deviation is a squared value. N is the total number of returns. (N - 1) is used when computing historical standard deviations. The average return is an arithmetic average. A stock provided annual returns of 11.2 percent, 16.8 percent, and 0.3 percent for the past three years. What is the geometric mean return? Multiple choice question. 9.43 percent 9.22 percent 9.36 percent 8.78 percent Reason: [(1.112)(1.168)(1.003)]1/3 - 1 = 0.0922 = 9.22% For the past three years, a stock returned 11 percent, 6 percent, and 22 percent. What is the standard deviation? Multiple choice question. 8.03 percent 6.68 percent 8.19 percent 6.87 percent Reason: Average = (0.11 + 0.06 + 0.22)/3 = 0.13; σ = {[(0.11 - 0.13)2 + (0.06 - 0.13)2 + (0.22 - 0.13)2]/(3 - 1)}1/2 = 0.0819 = 8.19% How can you best describe the relationship between the performance of long-term Treasury bonds and the S&P 500 during the period ? Multiple choice question. The S&P 500 returns varied significantly but the Treasury bond returns did not. The Treasury bonds always produced a positive annual return but the S&P 500 did not. Their rates of return were directly related. When one asset class incurred a loss, the other class had a positive rate of return. Based on actual performance for the period , which one of the following displayed the least amount of risk and why? Select the best answer. Multiple choice question. T-bills as their decade average returns were all positive. Long-term Treasury bonds because their returns were higher than the Treasury bills. S&P 500 as its average return for the period exceeded T-bonds and T-bills. T-bills as their returns were less volatile. What does standard deviation measure? Multiple choice question. Average risk Market risk Total risk Firm-specific risk Select all that apply Which of these correctly describe the returns on long-term Treasury bonds for the period ? Select all that apply. Multiple select question. Higher returns than T-bill returns over the period Higher returns than S&P 500 returns over the period More volatile than S&P 500 returns over the period More volatile than T-bill returns on an annual basis For the past three years, a stock had annual returns of 14 percent, -32 percent, and 4 percent. What is the average arithmetic return? Multiple choice question. 1.15 percent -7.33 percent -4.67 percent 2.08 percent Reason: (14% - 32% + 4%)/3 = -4.67% Which of the following is considered the risk-free asset? Multiple choice question. Treasury Bonds Municipal Bonds Treasury Bills Treasury Notes Which one of these is correct regarding the standard deviation formula? Multiple choice question. The sum of the return deviations must equal one. The deviations must be squared to eliminate all negative values. You must have at least three returns to compute a standard deviation. The returns used to compute a standard deviation must be annual returns. Which statement is true? Multiple choice question. Longer-term Treasuries tend to have the lowest level of standard deviation of any asset class. A risk-free asset class will have a high rate of return. The higher the long-term rate of return on an asset class, the higher its risk level. The higher the risk of a security, the lower the long-run expected rate of return. The variance of the returns on an individual stock is 0.. What is the standard deviation? Multiple choice question. 6.06 percent 12.12 percent 24.61 percent 36.72 percent Reason: σ = (0.)1/2 = 0.2461 = 24.61% What is the definition of the coefficient of variation? Multiple choice question. A risk-return measure that investors prefer be higher rather than lower Amount of return per unit of risk Measure of volatility Measure of total risk to reward Based on annual returns for the years , which one of the following exhibited the greatest risk and why? Multiple choice question. S&P 500 because the highest annual return was 28.7 percent and the lowest annual return was -35.5 percent. S&P 500 because the highest annual return was 36.4 percent and the lowest annual return was -52.3 percent. Long-term Treasury bonds because the highest annual return was 22.7 percent and the lowest annual return was -12.2 percent. Long-term Treasury bonds because the highest annual return was 31.4 percent and the lowest annual return was -16.8 percent. Based on returns and their volatility for the period , what can be implied about the risk level of long-term Treasury bonds? Multiple choice question. Long-term Treasury bonds are riskier than Treasury bills. Long-term Treasury bonds are risk-free. Long-term Treasury bonds are riskier than the S&P 500 index. Long-term Treasury bonds are the least risky type of debt security. A stock has a variance of 0.02468, a current price of $28 a share, and an average rate of return of 14.4 percent. How is the coefficient of variation (CoV) computed? Multiple choice question. CoV = (0.02468 × $28)/0.144 CoV = (0./2)/0.144 CoV = 0.02468/0.144 CoV = 0.144/$28 True or false: T-bills are considered to be risk-free because their standard deviation of returns is always zero. True false question. True False A bond has a standard deviation of 10.7 percent and an average rate of return of 6.4 percent. What is the coefficient of variation (CoV)? Multiple choice question. 0.42 0.67 1.67 1.42 Reason: CoV = 0.107/0.064 = 1.67 Risk and expected return are ________ correlated. Multiple choice question. not positively negatively What type of risk exists in a fully-diversified portfolio? Multiple choice question. Firm-specific risk only Diversifiable risk only Both market risk and firm-specific risk Market risk only Risk, as it is used in the coefficient of variation (CoV), is best defined as a measure of which one of these? Multiple choice question. Volatility of returns Changes in price resulting from interest rate changes Possibility of default Changes in price due to changes in expected rates of growth Which of the following indicates a portfolio is becoming more diversified? Multiple choice question. Decreasing portfolio size Increasing portfolio standard deviation Decreasing portfolio standard deviation Increasing portfolio size How can firm-specific risk be defined? Multiple choice question. Risk that affects all securities Risk that cannot be reduced by diversification Risk that can be reduced by diversification Risk arising from one firm that affects all firms Which of these will calculate the coefficient of variation (CoV) for a security? Multiple choice question. Variance/Average return Standard deviation/Current price Standard deviation/Average return Variance/Current price Select all that apply Which of the following are examples of diversifiable risk? Select all that apply. Multiple select question. Decreased demand for electric cars Fraud committed by company management Increase in economic regulation Increase in interest rates For the past three years a stock has provided an average return of 11.6 percent with a variance of 0.02789. What is the coefficient of variation (CoV)? Multiple choice question. 1.36 0.67 1.44 0.01 Reason: CoV = (0./2)/0.116 = 1.44 What is the primary focus of modern portfolio theory (MPT)? Multiple choice question. Minimizing portfolio risk for a given level of return Minimizing portfolio risk Achieving the maximum possible rate of return for a portfolio Eliminating all portfolio risk Stock investors cannot avoid which type of risk? Multiple choice question. Market risk Diversifiable risk Market risk and firm-specific risk Firm-specific risk Marta is risk-adverse, which is her primary investment concern. Which one of these represents an optimal portfolio for her? Multiple choice question. 9 percent return; 8 percent standard deviation 8 percent return; 7 percent standard deviation 10 percent return; 8 percent standard deviation 7 percent return; 7 percent standard deviation Which one of these best describes diversification? Multiple choice question. Investing in five retail stocks Purchasing stocks in eight different industries Purchasing ten utility company stocks Purchasing stock issued by your employer Which of these sets represents an optimal portfolio? Select all that apply. Multiple select question. 10.5 percent return; 17 percent standard deviation 10 percent return; 15 percent standard deviation 11.5 percent return; 17 percent standard deviation 11 percent return; 15 percent standard deviation What is firm-specific risk? Multiple choice question. Risk associated only with newly-formed firms Risk found only in a diversified portfolio Risk arising only from default Risk that affects only one firm or one industry Which one of these is correct? Multiple choice question. Market risk is diversifiable. Market risk is another name for total risk. Firm-specific risk is diversifiable. Market risk = Total risk + Firm-specific risk. Modern portfolio theory (MPT) is designed to achieve which one of these? Multiple choice question. Average return with lowest level of risk Lowest return with no risk Highest return with no regard to risk Highest return for a given level of risk What are the characteristics of an efficient portfolio? Multiple choice question. Rate of return equal to the market rate Constant returns over time Comprised of ten stocks or more Maximum expected return for a given level of risk Nicholas is less risk-adverse than your average investor; returns are his primary investment concern. Which one of these represents an optimal portfolio for him? Multiple choice question. 8% return; 7% standard deviation 11% return; 9% standard deviation 11% return; 8% standard deviation 7% return; 7% standard deviation Assume a portfolio with a return of 12 percent with a standard deviation of 18 percent is an efficient portfolio. Which one of these is most apt to also be an efficient portfolio? Multiple choice question. 12 percent return; 19 percent standard deviation 11 percent return; 19 percent standard deviation 13 percent return; 19 percent standard deviation 13 percent return; 17 percent standard deviation Select all that apply Which of these represents an optimal portfolio comprised of two stocks? Select all that apply. Multiple select question. 14.3 percent return; 24.8 percent standard deviation 14.9 percent return; 25.4 percent standard deviation 14.8 percent return; 25.4 percent standard deviation 14.2 percent return; 24.8 percent standard deviation Which set of securities will provide the least amount of diversification given their correlation values? Multiple choice question. Stocks C and D; 0.18 Stocks A and B; 0.49 Stocks G and H; -0.01 Stocks E and F; -0.98 How is correlation defined? Multiple choice question. Measure of total risk as it applies to a portfolio Measure of the movement of a securities' return over time Measure of the co-movement between the returns on two variables Measure of market risk relative to firm-specific risk Select all that apply Which of the following exemplifies market risk? Select all that apply. Multiple select question. A decrease in GDP output An increase in inflation An increase in taxes A decrease in a firm's sales What does a correlation value of +0.9 indicate? Multiple choice question. There is little relationship between the movements of the stock returns. The stock returns tend to move closely, although not perfectly, together. The stock returns have a slight tendency to move together. The stock returns have a strong tendency to move in opposite directions, although not perfectly so. On a graph with expected return on the vertical axis and standard deviation on the horizontal axis, where is an efficient portfolio located? Multiple choice question. At the center point of the graph At any point along a straight line between the origin and the top right corner of the graph At the top left corner of the graph At the highest return achievable for any selected standard deviation Which one of these is the correct formula for computing the return on a portfolio comprised of unequal amounts of stocks A, B, and C? Multiple choice question. Rp = (RA + RB + RC)/3 Rp = (wA × RA) + (wB × RB) + (wC × RC) Rp = (wA + wB + wC) × [(RA + RB + RC)/3] Rp = [(wA × RA) + (wB × RB) + (wC × RC)]/3 What is the shape of the efficient frontier and what does this imply? Multiple choice question. Upward-sloping; indirect relationship between risk and reward Flat; constant relationship between risk and return Downward-sloping; indirect relationship between risk and reward Upward-sloping; direct relationship between risk and return How does correlation relate to total risk? Multiple choice question. Total risk is best lowered by selecting securities that have highly positive correlation coefficients. Total risk can be lowered by eliminating firm-specific risk, which is achieved by combining securities with low, or negative correlations. Correlation and total risk are not related. Total risk can be fully eliminated by constructing a portfolio of two stocks that have a -1 correlation value,. You want to invest in two stocks that will provide you with the most diversified portfolio. You should select the two stocks with which one of these correlation values? Multiple choice question. 0.03 -0.34 -0.01 0.68 Reason: The lowest correlation value will provide the greatest diversification benefits. How is the capital gain or loss on a stock investment computed? Multiple choice question. Beginning stock value - Ending stock value Ending stock value - Beginning stock value (Ending stock value - Beginning stock value) + Dividend income (Beginning stock value - Ending stock value) + Dividend income Which of these defines correlation? Multiple choice question. Average value ranging from 0 to 1 Average value ranging from -1 to +1 Statistical value ranging from -1 to +1 Statistical value ranging from 0 to 1 What does a correlation value of zero indicate? Multiple choice question. No relationship between the co-movements of the security returns Stocks returns that move in opposite directions over time Stock returns that move in the same direction over time Stock returns that move in sync with one another What determines the weights to be used in computing a portfolio rate of return? Select an answer that applies to both equal and unequal portfolio allocations. Multiple choice question. Market value of each security expressed as a percentage of the total portfolio value Market value of each security expressed as a percentage of the initial investment in that security Market capitalization of each security divided by the total market capitalization of all securities 100 percent divided by the number of securities held in the portfolio true or false: Total risk can be reduced by combining two perfectly correlated stocks. True false question. True False How is the total dollar return on a stock investment calculated? Multiple choice question. (Ending stock value - Beginning stock value) + Dividend income (Beginning stock value - Ending stock value) + Dividend income Ending stock value - Beginning stock value Beginning stock value - Ending stock value