THE TRADEOFF BETWEEN RISK AND RETURN Questions and Answers Latest Updates 2024

THE TRADEOFF BETWEEN RISK AND
RETURN Questions and Answers Latest
Updates 2024
MULTIPLE CHOICE

1. Which of the following is an example of systematic risk?
a. IBM posts lower than expected earnings.
b. Intel announces record earnings.
c. The national trade deficit is higher than expected.
d. None of the above.
ANS: C DIF: E REF: 6.4 The Power of Diversification

2. Which of the following is an example of unsystematic risk?
a. IBM posts lower than expected earnings.
b. The Fed raises interest rates unexpectedly.
c. The rate of inflation is higher than expected.
d. None of the above.
ANS: A DIF: E REF: 6.4 The Power of Diversification

3. What do you call the portion of your total return on a stock investment that is caused by an increase in
the value of the stock.
a. Dividend yield.
b. Risk-free return.
c. Capital gain.
d. None of the above.
ANS: C DIF: E REF: 6.1 Understanding Returns

4. What is one of the most important lessons from capital market history?
a. Risk does not matter.
b. There is a positive relationship between risk and return.
c. You are always better off investing in stock.
d. T-bills are the highest yielding investment.
ANS: B DIF: E REF: 6.2 The History of Returns

5. What is the purpose of diversification?
a. Maximize possible returns.
b. Increase the risk of your portfolio.
c. Lower the overall risk of your portfolio.
d. None of the above.
ANS: C DIF: E REF: 6.4 The Power of Diversification

NARRBEGIN: Bavarian Sausage
Bavarian Sausage
You bought a share of Bavarian Sausage stock for $46.50 at the beginning of the year. During the year
the stock paid a $2.75 dividend and at the end of the year it trades at $52.75.
NARREND

6. Refer to Bavarian Sausage. What is the total return of your stock investment?
a. 5.91%
b. 13.44%

, c. 26.69%
d. 19.35%
ANS: D
(52.75 + 2.75 - 46.5)/46.5 = .1935

DIF: E REF: 6.1 Understanding Returns NAR: Bavarian Sausage

7. Refer to Bavarian Sausage. What is the capital gain/loss on your stock investment?
a. 5.91%
b. 13.44%
c. 19.35%
d. 28.24%
ANS: B
(52.75-46.5)/46.5 = .1344

DIF: E REF: 6.1 Understanding Returns NAR: Bavarian Sausage

8. Refer to Bavarian Sausage. What is the total dollar return on your investment?
a. $9.00
b. $2.75
c. $6.25
d. $52.75
ANS: A
52.75 + 2.75 - 46.50 = 9

DIF: E REF: 6.1 Understanding Returns NAR: Bavarian Sausage

NARRBEGIN: Bavarian Sausage 2
Bavarian Sausage 2
You bought a share of Bavarian Sausage stock for $46.50 at the beginning of the year. During the year
the stock paid a $2.75 dividend and at the end of the year it trades at $44.75.
NARREND

9. Refer to Bavarian Sausage 2. What is the total return on your investment?
a. 2.15%
b. -3.76%
c. 8.06%
d. 5.91%
ANS: A
(44.75 + 2.75 - 46.5)/46.5 = .0215

DIF: E REF: 6.1 Understanding Returns NAR: Bavarian Sausage 2

10. Refer to Bavarian Sausage 2. What is the capital gain’s yield of your investment?
a. 2.15%
b. -3.76%
c. 8.06%
d. 5.91%
ANS: B
(44.75-46.5)/44.75 = -.0376

, DIF: E REF: 6.1 Understanding Returns NAR: Bavarian Sausage 2

11. If the return on your common stock investment is on average 18% and the return on Treasury bills was
5% over the same period of time, what is the risk premium that you earned.
a. 23%
b. 13%
c. 18%
d. 5%
ANS: B
18-5 = 13

DIF: E REF: 6.2 The History of Returns

NARRBEGIN: Stock Returns
Year Return
Stock A Stock B Stock C
1 15% 12% 5%
2 25% 14% -6%
3 8% 9% 10%
4 16% 25% 1%
5 5% 3% 15%

NARREND

12. What is the variance of returns for stock A?
a. .00607
b. .00653
c. .00655
d. .00506
ANS: A
avg = (.15 + .25 + .08 + .16 + .05)/5 = .138

Var = .00607

DIF: E REF: 6.3 Volatility and Risk NAR: Stock Returns

13. What is the standard deviation of returns for stock A?
a. 8.09%
b. 8.08%
c. 7.79%
d. 6.53%
ANS: C
.00607^(1/2) = .0779

DIF: E REF: 6.3 Volatility and Risk NAR: Stock Returns

14. What is the variance of returns for stock B?
a. .00653
b. .00607
c. .00528