Test Bank Risk And Return Chapter.7 5th Edition

Fundamentals of Corporate Finance, 5e (Parrino)

Chapter 7 Risk and Return

1) The rate of return that investors require for an investment depends on the risk associated with that investment.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

2) The capital appreciation component of a stock's return considers the change in price of a stock divided by the initial price of the stock.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

3) If the price of a security has increased since the original purchase of the asset, then the total return of the security (if no dividends were paid during the period) is equal to the capital appreciation component return.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

4) The income component of return for a common stock comes from the cash dividend a firm pays.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

5) If the capital appreciation return from owning a stock is positive, then the total return from owning the same stock can be negative.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

6) In order to keep the total return of a stock equal to 100 percent, the income component for that stock must be zero.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

7) Robert paid $100 for a stock one year ago. The total return on the stock was 10 percent. This means that the stock must be selling for $110 today.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

8) Whenever the outcome of an event has a number of different possibilities that have equal probability of occurrence, then the expected value of the outcome is equal to the simple average of the individual events.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

9) You have placed a wager such that you will either receive nothing if you lose the bet or you will receive $10 if you win the bet. If your expected cash receipt is $9, then there is a 100 percent probability that you will win the wager.

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

10) The smaller the range of expected future returns, the greater the risk of a given investment as measured by its mean.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

11) If the returns of two stocks are negatively correlated, then the associated covariance is also negative.

Learning Objective: LO 46

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

12) The distributions of rates of return for Companies AA and BB are given below:

State of the Probability Company Company

Economy AA BB

Boom 0.2 30% -10%

Normal 0.6 10% 5%

Recession 0.2 -5% 50%

We can conclude from the above information that any rational investor would be better off investing in only Company AA instead of investing only in Company BB.

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

13) A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Learning Objective: LO 6

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

14) The expected return on the market portfolio is equal to the market risk premium.

Learning Objective: LO 8

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

15) The variance of a distribution can be negative.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

16) The standard deviation of a return distribution can be a negative value.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

17) The normal distribution is completely described by its mean and standard deviation where 50 percent of the distribution's probability is less than the mean and 50 percent of the distribution's probability is greater than the mean.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

18) The variance is denominated in squared units, whereas the standard deviation is denominated in the same units as the expected value.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

19) The best measure of assessing the risk of an investment is its expected return.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

20) Variance is equal to the square root of standard deviation.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

21) If you are calculating the variance and standard deviation of percentage returns on a stock, the variance will always be larger than the standard deviation assuming the standard deviation is less than one.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

22) The coefficient of variation is calculated by dividing the variance of the returns of an asset by the expected rate of return of that asset.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

23) The coefficient of variation is a good measure of the amount of risk that an asset will contribute to a diversified portfolio of assets.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

24) If you are building a diversified portfolio, then your goal is to select assets that have a correlation coefficient of zero in order to minimize the risk of your portfolio.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

25) If the returns on two assets have a correlation coefficient of positive one, then there are benefits from diversification by combining these assets in a two-asset portfolio.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

26) Utilizing the fact that values of two or more assets do not always move in the same direction at the same time in forming a risk reduction portfolio is called diversification.

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement

27) If you are trying to determine whether to purchase Security A or Security B for your portfolio, then you can consider the coefficient of variation in order to understand the risk-return relationship of the individual securities.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement

28) The coefficient of variation is the same as the Sharpe Ratio.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

29) If two assets with correlation coefficients of less than one make up a portfolio, then the portfolio does not take advantage of any diversification benefits.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

30) If the covariance between the returns on two assets is equal to zero, then the correlation coefficient must also be zero.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

31) If the distribution of returns on an asset has a variance of zero, then covariance of returns between that asset and the returns on any other asset must equal zero.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

32) If you were to completely diversify your portfolio by purchasing a portion of every asset in the investment universe, then the expected return of your portfolio is equal to the risk-free rate.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

33) Complete diversification means that the portfolio is no longer subject to market risk.

Learning Objective: LO 6

Bloomcode: Knowledge

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

34) Based on the historical performance provided in the chapter, the beta of a small stock should be greater than the beta of a corporate bond.

Learning Objective: LO 7

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

35) The appropriate measure of risk for a diversified portfolio is beta.

Learning Objective: LO 7

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

36) The market risk-premium is equal to the expected return on the market less the risk-free rate.

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

37) If you know the risk-free rate, the market risk-premium, and the beta of a stock, then using the Capital Asset Pricing Model (CAPM) you will be able to calculate the expected rate of return for the stock.

Learning Objective: LO 8

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

38) According to the CAPM, the firm's market risk is expected to remain constant over time.

Learning Objective: LO 7

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

39) Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's price, other things held constant.

Learning Objective: LO 7

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

40) Which of the following statements is correct?

A) The greater the risk associated with an investment, the lower the return investors expect from it.

B) When choosing between two investments that have the same level of risk, investors prefer the investment with the higher return.

C) If two investments have the same expected return, investors prefer the riskiest alternative.

D) When choosing between two investments that have the same level of risk, investors prefer the investment with the lower return.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

41) Gunther earned a 62.5 percent return on a stock that he purchased one year ago. The stock is now worth $12, and he received a dividend of $1 during the year. How much did Gunther originally pay for the stock?

A) $7.00

B) $7.50

C) $8.00

D) $8.50

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

42) Moshe purchased a stock for $30 last year. He found out today that he had a -100 percent return on his investment. Which of the following must be true?

A) The stock is worth $30 today.

B) The stock is worth $0 today.

C) The stock paid no dividends during the year.

D) The stock is worth $0 today and paid no dividends during the year.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

43) 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?

A) $3,750

B) $4,250

C) $4,750

D) $5,250

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

44) 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.

A) 17%

B) 20%

C) 23%

D) 38%

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

45) George Wilson purchased Bright Light Industries common stock for $47.50 on January 31, 2020. The firm paid dividends of $1.10 during the last 12 months. George sold the stock today (January 30, 2021) for $54.00. What is George's holding period return?

A) 16.00%

B) 14.00%

C) 11.00%

D) 19.00%

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

46) In a game of chance, the probability of winning a $50 prize is 40 percent, and the probability of winning a $100 prize is 60 percent. What is the expected value of the prize in the game?

A) $50

B) $75

C) $80

D) $100

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

47) In a game of chance, the probability of winning $50 is 40 percent and the probability of having to pay $50 is 60 percent. What is the expected value of this game?

A) -$10

B) $0

C) $10

D) $25

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

48) Use the following table to calculate the expected return from the asset.

Return Probability

0.1 0.25

0.2 0.5

0.25 0.25

A) 15.00%

B) 17.50%

C) 18.75%

D) 20.00%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

49) 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

A) 12.50%

B) 13.75%

C) 15.75%

D) 16.75%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

50) The expected return for Stock Z is 30 percent. If we know the following information about Stock Z, then what return will it produce in the Lukewarm state of the world?

Return Probability

Poor 0.2 0.25

Lukewarm ? 0.5

Dynamite 0.4 0.25

A) 20%

B) 30%

C) 40%

D) 50%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

51) The expected return for Stock V is 24.5 percent. If we know the following information about Stock V, then what is the probability that the Dynamite state of the world will occur?

Return Probability

Poor 0.15 0.2

Lukewarm 0.28 0.7

Dynamite 0.19 ?

A) 5%

B) 10%

C) 15%

D) 20%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

52) Ahmet purchased a stock for $45 one year ago. The stock is now worth $65. During the year, the stock paid a dividend of $2.50. What is Ahmet's total return?

A) 5%

B) 44%

C) 35%

D) 50%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

53) Julio purchased a stock one year ago for $27. The stock is now worth $32, and the total return to Julio for owning the stock was 37 percent. What is the dollar amount of dividends that he received from owning the stock during the year? Round your final answer to nearest whole dollar.

A) $4

B) $5

C) $6

D) $7

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

54) 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?

A) 17%

B) 20%

C) 29%

D) 35%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

55) Gwen purchased a stock one year ago for $25, and it is now worth $31. The stock paid a dividend of $1.50 during the year. What was the stock's rate of return from dividend income during the year?

A) 6%

B) 15%

C) 24%

D) 26%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

56) Genaro needs a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro would be willing to pay for the property?

A) $112,500

B) $125,000

C) $137,500

D) $150,000

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

57) Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.)

A) 12%

B) 16%

C) 32%

D) 40%

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

58) Security Analysts that have evaluated Concordia Corporation, have determined that there is a 15 percent chance that the firm will generate earnings per share of $2.40; a 60 percent probability that the firm will generate earnings per share of $3.10; and a 25 percent probability that the firm will generate earnings per share of $3.80. What are the expected earnings per share for Concordia Corporation? (Round to the nearest $0.01.)

A) $3.10

B) $3.17

C) $2.75

D) $2.91

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

59) Niles is making an investment with an expected return of 12 percent and the standard deviation of the return is 4.5 percent. If Niles is investing $100,000, he can be 90% confident that he will have at least what dollar amount at the end of the year ? (Do not round intermediate computations.)

A) $100,000.00

B) $104,597.50

C) $116,500.00

D) $119,402.50

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

60) Given the historical information in the chapter, which of the following investment classes had the highest average return?

A) Intermediate-term government bonds

B) Long-term government bonds

C) Large U.S. stocks

D) Small U.S. stocks

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

61) Given the historical information in the chapter, which of the following investment classes had the highest variability in returns?

A) Intermediate-term government bonds

B) Long-term government bonds

C) Large U.S. stocks

D) Small U.S. stocks

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

62) The expected return for an asset is 18.75 percent. If the return distribution for the asset is described in the following table, what is the variance for the asset's returns? Round intermediate computations and final answer to six decimal places.

Return Probability

0.10 0.25

0.20 0.50

0.25 0.25

A) 0.002969

B) 0.000613

C) 0.015195

D) 0.054486

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

63) The expected return for the asset shown in the following table is 18.75 percent. If the return distribution for the asset is described as below, what is the standard deviation for the asset's returns? Round intermediate computations and final answer to six decimal places.

Return Probability

0.10 0.25

0.20 0.50

0.25 0.25

A) 0.002969

B) 0.000613

C) 0.015195

D) 0.054486

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

64) You have observed that the average size of a particular goldfish is 1.5 inches long. The standard deviation of the size of the goldfish is 0.25 inches. What is the size of a goldfish such that 95 percent of the goldfish are smaller from such size? Assume a normal distribution for the size of goldfish. Round your final answer to two decimal places.

A) 1.01 inches

B) 1.09 inches

C) 1.91 inches

D) 1.99 inches

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

65) You know that the average college student eats 0.75 pounds of food at lunch. If the standard deviation is 0.2 pounds of food, then what is the total amount of food that a cafeteria should have on hand to be 95 percent confident that it will not run out of food when feeding 50 college students?

A) 17.90 pounds

B) 21.05 pounds

C) 53.95 pounds

D) 57.10 pounds

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

66) If a random variable follows a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations from the mean?

A) 1.25%

B) 2.50%

C) 3.75%

D) 5.00%

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

67) If a random variable follows a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations below the mean?

A) 95.00%

B) 96.25%

C) 97.50%

D) 98.75%

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

68) Tommie has made an investment that will generate returns that are based on the state of the economy during the year. Use the following information to calculate the standard deviation of the return distribution for Tommie's investment. Do not round intermediate computations. Round your final answer to four decimal places.

State Return Probability

Weak 0.13 0.30

OK 0.20 0.40

Great 0.25 0.30

A) 0.0453

B) 0.0467

C) 0.0481

D) 0.0495

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

69) Elrond has made an investment that will generate returns that are based on the state of the economy. Use the following information to calculate the variance of the return distribution for Elrond's investment. Do not round intermediate computations. Round your final answer to four decimal places.

State Return Probability

Weak 0.10 0.8

OK 0.17 0.1

Great 0.28 0.1

A) 0.0536

B) 0.0543

C) 0.0550

D) 0.0031

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

70) Stock A's returns have a standard deviation of 0.5, and stock B's returns have standard deviation of 0.6. The correlation coefficient between A and B equals 0.5. What is the variance of a portfolio composed of 70 percent Stock A and 30 percent Stock B?

A) 0.1549

B) 0.2179

C) 0.4668

D) 0.5500

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

71) Aquaman's stock returns have a standard deviation of 0.7, and Green Lantern's stock returns have standard deviation of 0.8. The correlation coefficient is 0.1. What is the standard deviation of a portfolio composed of 70 percent Aquaman and 30 percent Green Lantern? Round the answer to five decimal points.

A) 0.32122

B) 0.54562

C) 0.56676

D) 0.75000

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

72) View Point Industries has forecasted a rate of return of:

• 20.00 percent if the economy booms (25.00 percent probability)

• 15.00 percent if the economy is in a growth phase (45.00 percent probability)

• 2.50 percent if the economy is in decline (20.00 percent probability)

• -15.00 percent if the economy is in a depression (10.00 percent probability).

What is View Point's standard deviation of returns? Do not round intermediate computations. Round your final answer to two decimal points.

A) 17.31%

B) 9.25%

C) 15.00%

D) 10.46%

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

73) Braniff Ground Services stock has an expected return of 9 percent and a variance of 0.25 percent. What is the coefficient of variation for Braniff? Round your final answer to four decimal places.

A) 0.0278

B) 0.5556

C) 1.8001

D) 36.0002

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

74) Sayers purchased a stock with a coefficient of variation equal to 0.125. The expected return on the stock is 20 percent. What is the variance of the stock?

A) 0.000625

B) 0.025000

C) 0.625000

D) 0.790500

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

75) You have invested 40 percent of your portfolio in an investment with an expected return of 12 percent and 60 percent of your portfolio in an investment with an expected return of 20 percent. What is the expected return of your portfolio?

A) 15.2%

B) 16.0%

C) 16.8%

D) 17.6%

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

76) You have invested 25 percent of your portfolio in Homer, Inc., 50 percent in Marge Co., and 25 percent in Bart Resources. What is the expected return of your portfolio if Homer, Marge, and Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectively?

A) 7.75%

B) 10.25%

C) 8.20%

D) 9.20%

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

77) You invested $3,000 in a portfolio with an expected return of 10 percent and $2,000 in a portfolio with an expected return of 16 percent. What is the expected return of the combined portfolio?

A) 6.2%

B) 12.4%

C) 13.0%

D) 13.6%

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

78) Given the distributions of returns for the following two stocks, calculate the covariance of the returns for the two stocks. Assume the expected return is 10.8 percent for Stock 1 and 9.7 percent for Stock 2.

Prob Stock 1 Stock 2

0.4 0.09 0.11

0.5 0.11 0.08

0.1 0.17 0.13

A) 0.000094

B) 0.000516

C) 0.000321

D) 0.717507

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

79) Given the distributions of returns for the following two stocks, calculate the correlation coefficient of the returns for the two stocks. Assume the expected return for Stock 1 is 10.8 percent and 9.7 percent for Stock 2. Do not round intermediate computations.

Prob Stock 1 Stock 2

0.4 0.09 0.11

0.5 0.11 0.08

0.1 0.17 0.13

A) 0.230967

B) -0.00002548

C) 0.00032100

D) 0.17671455

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

80) Given the distributions of returns for the following two stocks, calculate the covariance of the returns for the two stocks. Assume the expected return is 14.4 percent for Stock 1 and 15.9 percent for Stock 2. Round your final answer to five decimal places.

Prob Stock 1 Stock 2

0.5 0.11 0.18

0.3 0.17 0.15

0.2 0.19 0.12

A) 0.00120

B) 0.00054

C) -0.00079

D) -0.33720

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

81) Given the distributions of returns for the following two stocks, calculate the correlation coefficient of the returns for the two stocks. Assume the expected return is 14.4 percent for Stock 1 and 15.9 percent for Stock 2. Do not round intermediate computations.

Prob Stock 1 Stock 2

0.5 0.11 0.18

0.3 0.17 0.15

0.2 0.19 0.12

A) 0.00120

B) 0.00054

C) -0.00271

D) -0.97169

Learning Objective: LO 6

Bloomcode: Evaluation

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

82) The covariance of the returns between Stock A and Stock B is 0.0087. The standard deviation of Stock A is 0.26, and the standard deviation of Stock B is 0.37. What is the correlation coefficient between the returns of the two stocks?

A) 0.090437

B) 0.096200

C) 0.90437

D) 0.96200

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

83) The covariance of the returns between Wildcat Stock and Sun Devil Stock is 0.09875. The variance of Wildcat is 0.2116, and the variance of Sun Devil is 0.1369. What is the correlation coefficient between the returns of these two stocks?

A) 0.170200

B) 0.293347

C) 0.340823

D) 0.580199

Learning Objective: LO 6

Bloomcode: Analysis

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

84) Horse Stock returns have a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns? Round your answer to six decimal places.

A) 0.028025

B) 0.217327

C) 0.359100

D) 0.993094

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement

85) Most of the risk-reduction benefits from diversification can be achieved when the correlation between two securities is:

A) 0.0

B) -0.5

C) -1.0

D) 0.5

Learning Objective: LO 6

Bloomcode: Analysis

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

86) The covariance that provides the most risk reduction between two securities with standard deviations of 0.26 and 0.32 is:

A) 0.0000

B) -0.0832

C) -0.0416

D) 0.0624

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

87) Which of the following is the best measure of the systematic risk in a portfolio?

A) Variance

B) Standard deviation

C) Covariance

D) Beta

Learning Objective: LO 7

Bloomcode: Comprehension

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

88) A portfolio with a level of systematic risk that is the same as that of the market has a beta that is:

A) equal to zero.

B) equal to one.

C) less than the beta of the risk-free asset.

D) less than zero.

Learning Objective: LO 7

Bloomcode: Comprehension

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

89) The beta of Elsenore, Inc., stock is 1.6 and the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what should investors expect as a return on Elsenore?

A) 11.20%

B) 19.20%

C) 24.00%

D) 32.00%

Learning Objective: LO 8

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

90) The beta of Ricci Co.'s stock is 3.2 and the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what should investors expect as a return on Ricci Co.?

A) 28.80%

B) 37.80%

C) 48.60%

D) 57.60%

Learning Objective: LO 8

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

91) The risk-free rate of return is currently 3 percent and the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz?

A) 8.40%

B) 10.80%

C) 13.80%

D) 19.20%

Learning Objective: LO 8

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

92) The expected return on Kiwi Computers stock is 16.6 percent. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, then what is Kiwi's beta?

A) 1.26

B) 2.10

C) 2.80

D) 3.15

Learning Objective: LO 8

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

93) The expected return on Mike's Seafood stock is 17.9 percent. If the expected return on the market is 13 percent and the beta for Mike is 1.7, then what is the risk-free rate?

A) 4.5%

B) 5.0%

C) 5.5%

D) 6.0%

Learning Objective: LO 8

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

94) The expected return on Karol Co. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of Karol Co is 2.3, then what is the risk premium on the market portfolio?

A) 2.5%

B) 5.0%

C) 7.5%

D) 10.0%

Learning Objective: LO 8

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

95) Which of the following represents a plot of the relation between expected return and systemic risk?

A) The beta coefficient

B) The covariance of returns line

C) The security market line

D) The variance

Learning Objective: LO 8

Bloomcode: Comprehension

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

96) Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the market portfolio is 11.00 percent, and the risk-free rate is 4.25 percent. What is the difference between A's and B's required rates of return?

A) 2.75%

B) 2.89%

C) 3.05%

D) 3.38%

Learning Objective: LO 8

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

97) Data for Hugh's Corporation is provided below. Hugh's recently acquired some risky assets that caused its beta to increase by 30 percent. What is the stock's new expected rate of return according to the CAPM?

Initial beta 1.00

Initial expected return (rs) 10.20%

Market risk premium, E(Rm - Rrf ) 6.00%

Percentage increase in beta 30.00%

Increase in inflation premium 2.00%

A) 12.00%

B) 14.70%

C) 15.44%

D) 16.21%

Learning Objective: LO 8

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

98) Suppose Stan holds a portfolio consisting of a $10,000 investment in each of eight different common stocks. The portfolio's beta is 1.25. Now suppose Stan decided to sell one of his stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35. What would the portfolio's new beta be?

A) 1.17

B) 1.23

C) 1.29

D) 1.36

Learning Objective: LO 8

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement Analysis and Interpretation

99) Explain the difference between systematic risk and unsystematic risk.

Learning Objective: LO 7

Bloomcode: Evaluation

AACSB: Analytic

IMA: Investment Decisions

AICPA: Measurement Analysis and Interpretation

100) While performing the regression analysis of historical returns of a stock with a historical return of a general market index, you would plot the line of best fit through those data points. The slope of that line represents the beta of the stock in question. However, in most instances the data points do not lie exactly on that line. Explain the reason.

Learning Objective: LO 7

Bloomcode: Analysis

AACSB: Analytic

IMA: Quantitative Methods

AICPA: Measurement Analysis and Interpretation

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