Exam Prep Chapter.9 Characterizing Risk and Return 5e

Finance, 5e (Cornett)

Chapter 9 Characterizing Risk and Return

1) Which of these includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment?

A) average return

B) dollar return

C) market return

D) portfolio

2) Which of these is the dollar return characterized as a percentage of money invested?

A) average return

B) dollar return

C) market return

D) percentage return

3) Which of these is a measure summarizing the overall past performance of an investment?

A) average return

B) dollar return

C) market return

D) percentage return

4) Which of these statements is true?

A) When people purchase a stock, they know exactly what their dollar and percent return are going to be.

B) Many people purchase stocks as they find comfort in the certainty for this safe form of investing.

C) When people purchase a stock, they know the short-term return, but not the long-term return.

D) When people purchase a stock, they do not know what their return is going to be—either short term or in the long run.

5) Which of the following is defined as the volatility of an investment, which includes firm specific risk as well as market risk?

A) diversifiable risk

B) market risk

C) standard deviation

D) total risk

6) Which of these is a measure of risk to reward earned by an investment over a specific period of time?

A) coefficient of variation

B) market deviation

C) standard deviation

D) total variation

7) Which of the following is an index that tracks 500 companies, which allows for a great deal of diversification?

A) Nasdaq

B) Fortune 500

C) S&P 500

D) Wall Street Journal

8) Which of these is defined as a combination of investment assets held by an investor?

A) bundle

B) market basket

C) portfolio

D) All of these choices are correct.

9) Which of the following is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification?

A) firm specific risk

B) market risk

C) modern portfolio risk

D) total risk

10) Which of these is the portion of total risk that is attributable to overall economic factors?

A) firm specific risk

B) market risk

C) modern portfolio risk

D) total risk

11) Which of the following is another term for market risk?

A) firm specific risk

B) modern portfolio risk

C) nondiversifiable risk

D) total risk

12) Which of the following is the concept and procedure for combining securities into a portfolio to minimize risk?

A) firm specific theory

B) modern portfolio theory

C) optimal portfolio theory

D) total portfolio theory

13) Which of these is the investor's combination of securities that achieves the highest expected return for a given risk level?

A) efficient portfolio

B) modern portfolio

C) optimal portfolio

D) total portfolio

14) Which of these is the term for portfolios with the highest return possible for each risk level?

A) efficient portfolios

B) modern portfolios

C) optimal portfolios

D) total portfolios

15) Which of the following makes this a true statement: The shape of the efficient frontier implies that

A) diminishing returns apply to risk-taking in the investment world.

B) increasing returns apply to risk-taking in the investment world.

C) returns are not impacted by risk-taking in the investment world.

D) None of these choices complete the sentence to make it true.

16) Which of the following is a measurement of the co-movement between two variables that ranges between −1 and +1?

A) coefficient of variation

B) correlation

C) standard deviation

D) total risk

17) To find the percentage return of an investment

A) multiply the dollar return by the investment's value at the beginning of the period.

B) divide the dollar return by the investment's value at the beginning of the period.

C) multiply the dollar return by the investment's value at the end of the period.

D) divide the dollar return by the investment's value at the end of the period.

18) Which statement is true?

A) The larger the standard deviation, the lower the total risk.

B) The larger the standard deviation, the higher the total risk.

C) The larger the standard deviation, the more portfolio risk.

D) The standard deviation is not an indication of total risk.

19) We commonly measure the risk-return relationship using which of the following?

A) coefficient of variation

B) correlation coefficient

C) standard deviation

D) expected returns

20) MedTech Corp. stock was $50.95 per share at the end of last year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500 shares of MedTech, what was your percent return?

A) 7.20 percent

B) 8.83 percent

C) 22.67 percent

D) 23.55 percent

21) Rx Corp. stock was $60.00 per share at the end of last year. Since then, it paid a $1.00 per share dividend last year. The stock price is currently $62.50. If you owned 400 shares of Rx, what was your percent return?

A) 1.67 percent

B) 4.17 percent

C) 5.60 percent

D) 5.83 percent

22) TechNo stock was $25 per share at the end of last year. Since then, it paid a $1.50 per share dividend last year. The stock price is currently $23. If you owned 300 shares of TechNo, what was your percent return?

A) −2 percent

B) −8 percent

C) 6 percent

D) 6.5 percent

23) Noble stock was $60.00 per share at the end of last year. Since then, it paid a $2.00 per share dividend last year. The stock price is currently $58. If you owned 400 shares of Noble, what was your percent return?

A) −3.33 percent

B) 0 percent

C) 3.33 percent

D) 3.45 percent

24) WayCo stock was $75 per share at the end of last year. Since then, it paid a $3 per share dividend last year. The stock price is currently $70. If you owned 200 shares of WayCo, what was your percent return?

A) −6.67 percent

B) −2.67 percent

C) 4.00 percent

D) 4.29 percent

25) Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 10 percent and standard deviation of 15 percent. The average return and standard deviation of Idol Staff are 15 percent and 25 percent; and of Poker-R-Us are 12 percent and 35 percent.

A) Rail Haul, Poker-R-Us, Idol Staff

B) Idol Staff, Poker-R-Us, Rail Haul

C) Poker-R-Us, Idol Staff, Rail Haul

D) Idol Staff, Rail Haul, Poker-R-Us

26) Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 8 percent and standard deviation of 10 percent. The average return and standard deviation of Idol Staff are 10 percent and 20 percent; and of Poker-R-Us are 6 percent and 15 percent.

A) Rail Haul, Poker-R-Us, Idol Staff

B) Idol Staff, Rail Haul, Poker-R-Us

C) Poker-R-Us, Idol Staff, Rail Haul

D) Idol Staff, Poker-R-Us, Rail Haul

27) Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 10 percent and standard deviation of 15 percent. The average return and standard deviation of Idol Staff are 15 percent and 25 percent; and of Poker-R-Us are 12 percent and 35 percent.

A) Rail Haul, Idol Staff, Poker-R-Us

B) Idol Staff, Poker-R-Us, Rail Haul

C) Poker-R-Us, Idol Staff, Rail Haul

D) Idol Staff, Rail Haul, Poker-R-Us

28) Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 8 percent and standard deviation of 10 percent. The average return and standard deviation of Idol Staff are 10 percent and 20 percent; and of Poker-R-Us are 6 percent and 15 percent.

A) Rail Haul, Idol Staff, Poker-R-Us

B) Idol Staff, Rail Haul, Poker-R-Us

C) Poker-R-Us, Idol Staff, Rail Haul

D) Idol Staff, Poker-R-Us, Rail Haul

29) Determine which one of these three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an expected return of 14 percent and risk of 19 percent. The expected return and risk of portfolio Yellow are 15 percent and 18 percent; and for the Purple portfolio are 16 percent and 21 percent.

A) Portfolio Blue dominates portfolio Yellow.

B) Portfolio Yellow dominates portfolio Blue.

C) Portfolio Blue dominates Portfolio Purple.

D) Portfolio Purple dominates portfolio Yellow.

30) Determine which one of these three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an expected return of 7 percent and risk of 10 percent. The expected return and risk of portfolio Yellow are 13 percent and 10 percent; and for the Purple portfolio are 9 percent and 14 percent.

A) Portfolio Blue dominates portfolio Yellow.

B) Portfolio Yellow dominates portfolio Blue.

C) Portfolio Purple dominates portfolio Blue.

D) Portfolio Purple dominates portfolio Yellow.

31) Determine which one of these three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an expected return of 13 percent and risk of 17 percent. The expected return and risk of portfolio Yellow are 15 percent and 19 percent; and for the Purple portfolio are 12 percent and 18 percent.

A) Portfolio Blue dominates portfolio Yellow.

B) Portfolio Blue dominates portfolio Purple.

C) Portfolio Purple dominates portfolio Blue.

D) Portfolio Purple dominates portfolio Yellow.

32) An investor owns $10,000 of Adobe Systems stock, $15,000 of Dow Chemical, and $25,000 of Office Depot. What are the portfolio weights of each stock?

A) Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333

B) Adobe System = 0.2, Dow Chemical = 0.3, Office Depot = 0.5

C) Adobe System = 0.3, Dow Chemical = 0.2, Office Depot = 0.5

D) Adobe System = 0.2667, Dow Chemical = 0.3333, Office Depot = 0.4

33) An investor owns $2,000 of Adobe Systems stock, $4,000 of Dow Chemical, and $6,000 of Office Depot. What are the portfolio weights of each stock?

A) Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333

B) Adobe System = 0.1667, Dow Chemical = 0.3333, Office Depot = 0.5

C) Adobe System = 0.3333, Dow Chemical = 0.1667, Office Depot = 0.5

D) Adobe System = 0.2, Dow Chemical = 0.4, Office Depot = 0.6

34) Year-to-date, Company O had earned a −2.10 percent return. During the same time period, Company V earned 8.00 percent and Company M earned 6.25 percent. If you have a portfolio made up of 40 percent Company O, 30 percent Company V, and 30 percent Company M, what is your portfolio return?

A) 3.435 percent

B) 5.115 percent

C) 12.15 percent

D) 16.35 percent

35) Year-to-date, Company Y had earned a 7 percent return. During the same time period, Company R earned 9.25 percent and Company C earned −2.25 percent. If you have a portfolio made up of 35 percent Y, 40 percent R, and 25 percent C, what is your portfolio return?

A) 4.6667 percent

B) 6.1667 percent

C) 5.5875 percent

D) 12.6625 percent

36) Year-to-date, Company Y had earned a 10.8 percent return. During the same time period, Company R earned 12.20 percent and Company C earned −1.56 percent. If you have a portfolio made up of 45 percent Y, 35 percent R, and 20 percent C, what is your portfolio return?

A) 7.15 percent

B) 8.19 percent

C) 8.82 percent

D) 9.44 percent

37) The past five monthly returns for K and Company are 4.25 percent, 4.13 percent, −2.05 percent, 3.25 percent, and 7.25 percent. What is the average monthly return?

A) 1.403 percent

B) 1.744 percent

C) 3.366 percent

D) 4.186 percent

38) The past five monthly returns for K and Company are 2.28 percent, 2.64 percent, −1.05 percent, 4.25 percent, and 9.25 percent. What is the average monthly return?

A) 1.45 percent

B) 1.62 percent

C) 3.47 percent

D) 3.89 percent

39) The past five monthly returns for PG Company are 3.25 percent, −1.45 percent, 4.35 percent, 6.49 percent, and 3.75 percent. What is the average monthly return?

A) 1.366 percent

B) 1.608 percent

C) 3.278 percent

D) 3.858 percent

40) The standard deviation of the past five monthly returns for K and Company are 4.25 percent, 4.13 percent, −2.05 percent, 3.25 percent, and 7.25 percent. What is the standard deviation?

A) 1.40 percent

B) 3.89 percent

C) 3.38 percent

D) 16.83 percent

41) The standard deviation of the past five monthly returns for K and Company are 2.28 percent, 2.64 percent, −1.05 percent, 4.25 percent, and 9.25 percent. What is the standard deviation?

A) 1.45 percent

B) 1.62 percent

C) 3.47 percent

D) 3.76 percent

42) The standard deviation of the past five monthly returns for PG Company are 2.75 percent, −0.75 percent, 4.15 percent, 6.29 percent, and 3.84 percent. What is the standard deviation?

A) 2.309 percent

B) 2.581 percent

C) 3.256 percent

D) 3.406 percent

43) If you own 400 shares of Air Line Inc. at $44.50, 500 shares of BuyRite at $52.90, and 100 shares of MotorCity at $9.25, what are the portfolio weights of each stock?

A) Air Line = 0.3333, BuyRite = 0.3333, MotorCity = 0.3333

B) Air Line = 0.40, BuyRite = 0.50, MotorCity = 0.10

C) Air Line = 0.3940, BuyRite = 0.5855, MotorCity = 0.0205

D) Air Line = 0.4173, BuyRite = 0.4960, MotorCity = 0.0867

44) If you own 100 shares of Air Line Inc. at $42.50, 250 shares of BuyRite at $53.25, and 350 shares of MotorCity at $7.75, what are the portfolio weights of each stock?

A) Air Line = 0.3333, BuyRite = 0.3333, MotorCity = 0.3333

B) Air Line = 0.10, BuyRite = 0.25, MotorCity = 0.35

C) Air Line = 0.2096, BuyRite = 0.6566, MotorCity = 0.1338

D) Air Line = 0.1429, BuyRite = 0.3571, MotorCity = 0.5000

45) At the beginning of the month, you owned $6,000 of Company G, $8,000 of Company S, and $1,000 of Company N. The monthly returns for Company G, Company S, and Company N were 7.25 percent, −1.50 percent, and −0.23 percent. What is your portfolio return?

A) 1.84 percent

B) 2.08 percent

C) 3.71 percent

D) 5.52 percent

46) At the beginning of the month, you owned $8,000 of Company G, $8,000 of Company S, and $3,000 of Company N. The monthly returns for Company G, Company S, and Company N were 7.80 percent, 1.50 percent, and −0.75 percent. What is your portfolio return?

A) 2.85 percent

B) 3.80 percent

C) 4.03 percent

D) 8.55 percent

47) You have $15,040 to invest. You want to purchase shares of Company A at $42.50, Company B at $51.50, and Company F at $9.75. How many shares of each company should you purchase so that your portfolio consists of 20 percent Company A, 40 percent Company B, and 40 percent Company F? Report only whole stock shares.

A) Company A = 20 shares, Company B = 40 shares, Company F = 40 shares

B) Company A = 85 shares, Company B = 21 shares, Company F = 39 shares

C) Company A = 70 shares, Company B = 116 shares, Company F = 617 shares

D) Company A = 353 shares, Company B = 291 shares, Company F = 1538 shares

48) You have $45,050 to invest. You want to purchase shares of Company A at $10.25, Company B at $15.10, and Company F at $9.05. How many shares of each company should you purchase so that your portfolio consists of 30 percent Company A, 50 percent Company B, and 20 percent Company F? Report only whole stock shares.

A) Company A = 30 shares, Company B = 50 shares, Company F = 20 shares

B) Company A = 44 shares, Company B = 30 shares, Company F = 50 shares

C) Company A = 308 shares, Company B = 755 shares, Company F = 181 shares

D) Company A = 1,318 shares, Company B = 1,491 shares, Company F = 995 shares

49) The following table shows your stock positions at the beginning of the year, the dividends that each stock paid during the year, and the stock prices at the end of the year. What is your portfolio percentage return?

A) 3.21 percent

B) 4.06 percent

C) 7.26 percent

D) 8.97 percent

50) The following table shows your stock positions at the beginning of the year, the dividends that each stock paid during the year, and the stock prices at the end of the year. What is your portfolio percentage return?

A) 2.50 percent

B) 5.83 percent

C) 10.50 percent

D) 13.83 percent

51) The following table shows your stock positions at the beginning of the year, the dividends that each stock paid during the year, and the stock prices at the end of the year. What is your portfolio percentage return?

A) 3.85 percent

B) 11.54 percent

C) 15.38 percent

D) 17.58 percent

52) The past five monthly returns for PG Company are 1.25 percent, −1.50 percent, 4.25 percent, 3.75 percent, and 1.98 percent. What is the average monthly return?

A) 1.946 percent

B) 2.546 percent

C) 9.73 percent

D) 12.73 percent

53) Compute the standard deviation of the five monthly returns for PG&E: 1.25 percent, −1.50 percent, 4.25 percent, 3.75 percent, and 1.98 percent.

A) 1.876 percent

B) 1.946 percent

C) 2.046 percent

D) 2.287 percent

54) If you own 600 shares of Alaska Corporation at $23.25, 450 shares of Best Company at $34.50, and 150 shares of Motor Company at $6.95, what are the portfolio weights of each stock?

A) Alaska = 0.6000, Best = 0.4500, Motor = 0.1500

B) Alaska = 0.3594, Best = 0.5332, Motor = 0.1074

C) Alaska = 0.4571, Best = 0.5087, Motor = 0.0342

D) Alaska = 0.2325, Best = 0.3450, Motor = 0.0695

55) If you own 1,000 shares of Alaska Corporation at $19.95, 250 shares of Best Company at $17.50, and 250 shares of Motor Company at $2.50, what are the portfolio weights of each stock?

A) Alaska = 0.1000, Best = 0.2500, Motor = 0.2500

B) Alaska = 0.4994, Best = 0.4380, Motor = 0.0626

C) Alaska = 0.7996, Best = 0.1754, Motor = 0.0250

D) Alaska = 0.1995, Best = 0.1750, Motor = 0.0250

56) FedEx Corp. stock ended the previous year at $113.39 per share. It paid a $0.40 per share dividend last year. It ended last year at $126.69. If you owned 300 shares of FedEx, what was your dollar return and percent return?

A) $3,990, 11.73 percent

B) $4,110, 12.08 percent

C) $4,250, 12.29 percent

D) $2,009, 9.13 percent

57) Sprint Nextel Corp. stock ended the previous year at $25.00 per share. It paid a $2.57 per share dividend last year. It ended last year at $18.89. If you owned 650 shares of Sprint, what was your dollar return and percent return?

A) $2,960, 11.13 percent

B) −$4,960, −16.13 percent

C) −$3,960, −15.13 percent

D) −$2,301, −14.16 percent

58) Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an average return of 14 percent and standard deviation of 30 percent. The average return and standard deviation of WholeMart are 12 percent and 25 percent; and of Fruit Fly are 25 percent and 40 percent.

A) Fruit Fly, Night Ryder, WholeMart

B) Night Ryder, WholeMart, Fruit Fly

C) WholeMart, Fruit Fly, Night Ryder

D) WholeMart, Night Ryder, Fruit Fly

59) Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average return of 10 percent and standard deviation of 19 percent. The average return and standard deviation of Idol Staff are 12 percent and 22 percent; and of Poker-R-Us are 11 percent and 25 percent.

A) Idol Staff, Rail Haul, Poker-R-Us

B) Rail Haul, Idol Staff, Poker-R-Us

C) Idol Staff, Poker-R-Us, Rail Haul

D) Poker-R-Us, Rail Haul, Idol Staff

60) Rank the following three stocks by their risk-return relationship, best to worst. Night Ryder has an average return of 33 percent and standard deviation of 40 percent. The average return and standard deviation of WholeMart are 10 percent and 20 percent; and of Fruit Fly are 19 percent and 33 percent.

A) Night Ryder, WholeMart, Fruit Fly

B) WholeMart, Fruit Fly, Night Ryder

C) Night Ryder, Fruit Fly, WholeMart

D) Fruit Fly, Whole Mart, Night Ryder

61) An investor owns $8,000 of Adobe Systems stock, $5,000 of Dow Chemical, and $3,000 of Office Depot. What are the portfolio weights of each stock?

A) Adobe: 0.5, Dow Chemical: 0.31, Office Depot: 0.19

B) Adobe: 0.5, Dow Chemical: 0.32, Office Depot: 0.18

C) Adobe: 0.5, Dow Chemical: 0.13, Office Depot: 0.27

D) Adobe: 0.5, Dow Chemical: 0.19, Office Depot: 0.31

62) Consider the risk-return relationship in T-bills during each decade since 1950. Given this data, which of the following statements is correct?

A) The best risk-return relationship was during the 1950s.

B) The best risk-return relationship was during the 1990s.

C) Since T-bills are backed by the full faith of the U.S. government, computing the risk-return relationship for them is invalid.

D) None of these choices are correct.

63) Year-to-date, Oracle had earned a 15.0 percent return. During the same time period, Valero Energy earned −12.96 percent and McDonald's earned 1.80 percent. If you have a portfolio made up of 50 percent Oracle, 10 percent Valero Energy, and 40 percent McDonald's, what is your portfolio return?

A) 6.14 percent

B) 4.86 percent

C) 5.86 percent

D) 6.92 percent

64) The past five monthly returns for Kohl's are 2.55 percent, −8.62 percent, −14.44 percent, −1.52 percent, and 4.75 percent. What is the average monthly return?

A) 2.21 percent

B) 1.21 percent

C) −3.46 percent

D) −6.17 percent

65) The past five monthly returns for PG&E are 12.14 percent, −11.37 percent, 3.77 percent, 6.47 percent, and 3.58 percent. What is the average monthly return?

A) 2.92 percent

B) 1.21 percent

C) −3.46 percent

D) 3.17 percent

66) Compute the standard deviation of Kohl's monthly returns. The past five monthly returns for Kohl's are 5.55 percent, 8.62 percent, −4.44 percent, −1.52 percent, and 9.75 percent.

A) 4.92 percent

B) 5.07 percent

C) 6.28 percent

D) 6.12 percent

67) Consider the characteristics of the following three stocks:

The correlation between Thumb Devices and Air Comfort is −0.12. The correlation between Thumb Devices and Sport Garb is 0.89. The correlation between Air Comfort and Sport Garb is −0.85. If you can pick only two stocks for your portfolio, which two stocks should be included in your portfolio to eliminate the most risk? Why?

A) Combine Thumb Devices and Sport Garb because they have a high correlation.

B) Combine Thumb Devices and Air Comfort because of high standard deviations.

C) Combine Air Comfort and Sport Garb due to negative correlation.

D) Combine Thumb Devices and Sport Garb because Thumb Devices has the highest return and Sport Garb has the lowest standard deviation.

68) If you own 300 shares of Alaska Air at $15.88, 250 shares of Best Buy at $151.00, and 1,150 shares of Ford Motor at $3.51, what are the portfolio weights of each stock?

A) weight of Alaska Air: 10.23 percent, weight of Best Buy: 81.09 percent, weight of Ford Motor: 8.67 percent

B) weight of Alaska Air: 6.23 percent, weight of Best Buy: 71.09 percent, weight of Ford Motor: 22.67 percent

C) weight of Alaska Air: 15.23 percent, weight of Best Buy: 81.09 percent, weight of Ford Motor: 3.67 percent

D) weight of Alaska Air: 20.23 percent, weight of Best Buy: 76.09 percent, weight of Ford Motor: 3.67 percent

69) If you own 400 shares of Xerox at $15.00, 500 shares of Qwest at $10.00, and 350 shares of Liz Claiborne at $45.00, what are the portfolio weights of each stock?

A) weight of Xerox: 22.43 percent, weight of Qwest: 11.09 percent, weight of Liz Claiborne: 58.88 percent

B) weight of Xerox: 34.67 percent, weight of Qwest: 16.69 percent, weight of Liz Claiborne: 48.64 percent

C) weight of Xerox: 22.43 percent, weight of Qwest: 18.69 percent, weight of Liz Claiborne: 58.88 percent

D) weight of Xerox: 36.98 percent, weight of Qwest: 61.07 percent, weight of Liz Claiborne: 1.95 percent

70) At the beginning of the month, you owned $15,500 of General Motors, $4,500 of Starbucks, and $9,000 of Nike. The monthly returns for General Motors, Starbucks, and Nike were 7.10 percent, −1.36 percent, and −0.54 percent. What is your portfolio return?

A) −1.12 percent

B) 1.17 percent

C) 2.54 percent

D) 3.42 percent

71) You have $10,000 to invest. You want to purchase shares of Alaska Air at $50.00, Best Buy at $50.00, and Ford Motor at $10.00. How many shares of each company should you purchase so that your portfolio consists of 25 percent Alaska Air, 40 percent Best Buy, and 35 percent Ford Motor? Report only whole stock shares.

A) 50 shares of Alaska Air, 80 shares of Best Buy, and 300 shares of Ford Motor

B) 50 shares of Alaska Air, 80 shares of Best Buy, and 350 shares of Ford Motor

C) 40 shares of Alaska Air, 90 shares of Best Buy, and 300 shares of Ford Motor

D) 75 shares of Alaska Air, 40 shares of Best Buy, and 350 shares of Ford Motor

72) Consider the following annual returns of Estee Lauder and Lowe's Companies:

Compute each stock's average return, standard deviation, and coefficient of variation.

A) Estee Lauder: 9.02 percent, 17.99 percent, 2.00; and Lowe's Companies: 10.66 percent, 18.99 percent, 1.78

B) Estee Lauder: 9.02 percent, 30.69 percent, 3.4; and Lowe's Companies: 10.66 percent, 18.99 percent, 1.78

C) Estee Lauder: 9.02 percent, 30.69 percent, 3.4; and Lowe's Companies: 10.66 percent, 25.46 percent, 2.39

D) Estee Lauder: 10.7 percent, 17.79 percent, 1.66; and Lowe's Companies: 12.64 percent, 18.99 percent, 1.50

73) Which of the following statements is correct?

A) A single stock has a lot of diversifiable risk.

B) A single stock has more market risk than a diversified portfolio of stocks.

C) Bonds and stocks have a high correlation because they are both financial assets.

D) None of these choices are correct.

74) Which of the following statements is correct?

A) A dominant portfolio has the best risk-return relationship as compared to other portfolios.

B) When an investment achieves a high return it always has a high level of risk.

C) A low standard deviation means that the investment is less likely to achieve high returns, which means that it is more risky.

D) None of these choices are correct.

75) Which of the following statements is correct?

A) The dollar return is a more useful measure to compare performance because it more accurately reflects the change in wealth of the investor.

B) A dominant portfolio is one that has the highest risk and highest return within a set of portfolios.

C) By adding stocks to your portfolio, it is possible to effectively eliminate nearly all of the market risk.

D) None of these choices are correct.

76) Jane Adams invests all her money in the stock of one firm. Which of the following must be true?

A) Her return will have more volatility than the return in the overall stock market.

B) Her return will have less volatility than the return in the overall stock market.

C) Her return will have the same volatility as the return in the overall stock market.

D) There is no relationship between her return and the return in the overall stock market.

77) Which of the following statements is correct with regards to diversification?

A) Diversifying reduces the return of the portfolio.

B) Diversifying reduces the market risk of the portfolio.

C) Diversifying reduces the dollar return of the portfolio.

D) None of these choices are correct.

78) Jenna receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. It also claims that this stock is a "safe bet" for the future. Which of the following statements is correct regarding this information?

A) This investment newsletter is most likely correct because they most likely have some special knowledge about the stock.

B) The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet."

C) It is common for individual stocks to double the return of the S&P 500 and still be a "safe bet."

D) None of these choices are correct.

79) Which of the following is correct regarding the coefficient of variation?

A) It measures the amount of standard deviation for each one percent of covariance.

B) It measures the amount of return achieved for each one percent of risk taken.

C) It measures the amount of risk taken for each one percent of return achieved.

D) None of these choices are correct.

80) Which of the following is correct regarding the total risk of a company?

A) A company can change its risk level over time.

B) Some firms are riskier because they offer many different products and/or services.

C) Companies can increase their risk by reducing the amount of money they have borrowed.

D) None of these choices are correct.

81) Which of the following statements is correct regarding total risk?

A) A conglomerate will have more total risk than a firm that has one line of business.

B) All firms have about the same total risk because they are all exposed to the same market risk.

C) Total risk can be quantified by measuring the covariance between the firm and the overall market.

D) None of these choices are correct.

82) Which of the following statements is correct regarding total risk?

A) The coefficient of variation is a measure of the firm's total risk.

B) All firms have the same amount of total risk because they are all exposed to the same market risk.

C) Conglomerates will have less total risk than a firm that has one line of business.

D) None of these choices are correct.

83) Interest rates, inflation, and economic growth are economic factors that are examples of

A) firm-specific risks that can be diversified away.

B) market risk.

C) external factors that are neither firm specific risk nor market risk.

D) None of these choices are correct.

84) Which of the following statements is correct?

A) For a few firms in completely different industries, it is possible to have a correlation that approaches −2.0.

B) A correlation of −1.0 means that the two firms are uncorrelated or that they have no relationship.

C) Most common stocks have low correlation with each other since they operate in different industries.

D) None of these choices are correct.

85) Which of the following statements is correct?

A) Uncorrelated assets have a correlation of −1.0.

B) Most common stocks are positively correlated with each other because they are impacted by the same economic factors.

C) We can typically add many stocks together to fully eliminate the market risk in a portfolio.

D) None of these choices are correct.

86) Which of the following statements is correct?

A) Stocks and long-term Treasury bonds are highly positively correlated.

B) Stocks and Treasury bills are highly positively correlated.

C) Stocks, long-term Treasury bonds, and Treasury bills are all highly correlated.

D) None of these choices are correct.

87) Which of the following is incorrect?

A) It is possible to combine assets that all move in the exact same fashion over time and gain the benefits of diversification.

B) Adding long-term Treasury bonds to a stock portfolio will reduce the risk of the portfolio.

C) The optimal portfolio provides the highest return for the investor's desired risk.

D) All of these choices are correct.

88) The efficient frontier portfolios are

A) portfolios that risk adverse investors will select.

B) portfolios where all the market risk is diversified away.

C) portfolios where the correlation among assets is 0.0.

D) portfolios that dominate all others.

89) The optimal portfolio for you will be

A) the one that offers the lowest correlation.

B) the one that offers the highest returns.

C) the one that reflects the amount of risk that you are willing to take.

D) the one that offers the most diversification.

90) Sally wants to invest in only two stocks. Which pair of stocks should Sally select?

A) Stocks A and B move downward at the same time.

B) Stocks C and D move in opposite directions at the same time.

C) Stocks E and F move upward at the same time.

D) Stocks G and H move randomly at the same time.

91) Which of the following are investor diversification problems?

A) Many employees hold mostly their employer's stocks as investments.

B) Many households hold relatively few individual stocks—the median is three.

C) Investors seem to prefer local firms thereby limiting diversification opportunities.

D) All of these choices are correct.

92) Which of the following describes what will occur as you randomly add stocks to your portfolio?

A) The nondiversifiable risk will decrease.

B) Both the diversifiable and nondiversifiable risk will decrease.

C) The portfolio return will increase.

D) The diversifiable risk will decrease.

93) Which of the following is the correct ranking from least risky to most risky?

A) Long-term Treasury bonds, stocks, Treasury bills

B) Treasury bills, long-term Treasury bonds, stocks

C) stocks, long-term Treasury bond, Treasury bills

D) stocks, Treasury bills, long-term Treasury bonds

94) Which of the following is correct?

A) Investors can reduce the risk in their portfolio by investing in international stocks since they tend to have low correlation with our own stock market.

B) Combining both stocks and bonds will likely reduce risk in a portfolio because the two assets have low correlation.

C) Your optimal portfolio is an efficient portfolio with your desired risk level.

D) All of these choices are correct.

95) Modern portfolio theory is

A) a concept and procedure for combining securities into a portfolio to minimize risk.

B) a concept and procedure for combining securities into a portfolio to maximize return.

C) a concept and procedure for combining securities into a portfolio to maximize volatility.

D) a concept and procedure for combining securities into a portfolio to maximize dollar return.

96) The total risk of the S&P 500 Index is equal to

A) diversifiable risk.

B) nondiversifiable risk.

C) modern portfolio risk.

D) efficient frontier risk.

97) Consider the following correlations:

Given this data, which of the following is most preferable if an investor can only select one pair of companies?

A) Apple and IBM

B) Disney and IBM

C) Disney and Apple

D) It does not matter which two are selected—there is no preference.

98) If you invested $1,000 in Disney and $5,000 in Oracle and the two companies returned 15 percent and 18 percent respectively, what was your portfolio's return?

A) 15.5 percent

B) 17.1 percent

C) 16.2 percent

D) 17.5 percent

99) JoJo's portfolio's return is 12 percent. She is invested in Cisco and IBM which had returns of 15 percent and 9 percent respectively. What percentage of JoJo's assets are invested in each firm?

A) 40 percent in Cisco and 60 percent in IBM

B) 50 percent in Cisco and 50 percent in IBM

C) 30 percent in Cisco and 70 percent in IBM

D) unable to determine with the data provided

100) Sharif's portfolio generated returns of 12 percent, 15 percent, −15 percent, 19 percent, and −12 percent over five years. What was his average return over this period?

A) 19 percent

B) 3.8 percent

C) 17 percent

D) 2.1 percent

101) The mean return computed by finding the equivalent return that is compounded for N periods is ________.

A) dollar return

B) geometric returns

C) average return

D) percentage return

102) Which of the following is correct?

A) Over a long time frame, stocks have performed better than long-term Treasury bonds.

B) Average stock returns are not an indication of what an investor may earn in any one year.

C) In some years, long-term Treasury bonds performed better than stocks.

D) All of these choices are correct.

103) Which of the following statements regarding risk of assets is correct?

A) Every decade since 1950 has seen a lot of stock market volatility.

B) The bond market has experienced the most volatility in the 1980s as interest rates varied dramatically.

C) High risk means that an investor may receive poor returns in the short run.

D) All of the statements are correct.

104) Which of the following is correct?

A) Total risk is measured by the standard deviation.

B) There is a positive relationship between risk and return.

C) If you observe a high variability in a stock's returns you can infer that the stock is very risky.

D) All of these choices are correct.

105) A stock has an expected return of 12 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 15 percent. Given this data, which of the following statements is correct?

A) The two assets have the same coefficient of variation.

B) The stock investment has a better risk-return trade-off.

C) The bond investment has a better risk-return trade-off.

D) The stock investment and the bond investment have the same diversifiable risk.

106) Which statement regarding coefficient of variation is NOT true?

A) is known as the trade-off between market risk and return.

B) is a common relative measure of risk vs. reward.

C) is the standard deviation divided by the average return.

D) A smaller coefficient of variation indicates a better risk-reward relationship.

107) A stock has an expected return of 15 percent and a standard deviation of 20 percent. Long-term Treasury bonds have an expected return of 9 percent and a standard deviation of 11 percent. Given this data, which of the following statements is correct?

A) The two assets have the same coefficient of variation.

B) The stock investment has a better risk-return trade-off.

C) The bond investment has a better risk-return trade-off.

D) The stock investment and the bond investment have the same diversifiable risk.

108) From 1950 to 2007, the average return in the stock market, as measured by the S&P 500, was 13.2 percent and a standard deviation of 17 percent. Given this information, which of the following statements is correct?

A) With an average return this high, it is unlikely that an investor will lose money in the stock market in the next year or two.

B) With a standard deviation this high, it is likely that an investor will lose money in some years over a 25-year investment period.

C) This investment is not very good since the standard deviation is greater than the average return.

D) All of these choices are correct.

109) Sharif's portfolio generated returns of 10 percent, 9 percent, −2 percent, and 6 percent over four years. What was his average return over this period?

A) 5.75 percent

B) 6.75 percent

C) 23 percent

D) 27 percent

110) Year-to-date, Oracle had earned a 12.57 percent return. During the same time period, Valero Energy earned −9.32 percent and McDonald's earned 3.45 percent. If you have a portfolio made up of 60 percent Oracle, 20 percent Valero Energy, and 20 percent McDonald's, what is your portfolio return?

A) 10.10 percent

B) 8.45 percent

C) 6.70 percent

D) 6.37 percent

111) The past three monthly returns for Kohl's are 2.25 percent, −1.54 percent, and 1.35 percent. What is the average monthly return?

A) 0.69 percent

B) 1.71 percent

C) 2.06 percent

D) 5.14 percent

112) A stock has an expected return of 12 percent and a standard deviation of 25 percent. Long-term Treasury bonds have an expected return of 5 percent and a standard deviation of 9 percent. Given this data, which of the following statements is correct?

A) The two assets have the same coefficient of variation.

B) The stock investment has a better risk-return trade-off.

C) The bond investment has a better risk-return trade-off.

D) The stock investment and the bond investment have the same diversifiable risk.

113) If you invested $30,000 in Disney and $10,000 in Oracle and the two companies returned 6 percent and 12 percent respectively, what was your portfolio's return?

A) 18.0 percent

B) 10.5 percent

C) 9.0 percent

D) 7.5 percent

114) The process of putting money in different types of investments for the purpose of reducing the overall risk of the portfolio is ________.

A) diversification

B) the S&P 500 Index

C) market risk

D) the stock market

115) Which statement is NOT true regarding efficient portfolios?

A) Combining stocks that move together over time does not offer much risk reduction.

B) Combining stocks that do not move together provides a lot of risk reduction.

C) both a and b are NOT true

D) none of the above are NOT true