The Trade-Off Between Risk And Return Test Bank Docx Ch.6

Chapter 6 – The trade-off between risk and return

MULTIPLE CHOICE

1. Which of the following is an example of systematic risk?

REF: 6.4 The Power of Diversification NAT: Reflective thinking

LOC: acquire an understanding of risk and return

2. Which of the following is an example of unsystematic risk?

REF: 6.4 The Power of Diversification NAT: Reflective thinking

LOC: acquire an understanding of risk and return

3. What do you call the portion of your total return on a share investment that has resulted from an increase in the value of the share?

REF: 6.1 Understanding Returns NAT: Reflective thinking

LOC: acquire an understanding of risk and return

4. What is one of the most important lessons from capital market history?

REF: 6.2 The History of Returns NAT: Reflective thinking

LOC: acquire an understanding of risk and return

5. What is the purpose of diversification?

REF: 6.4 The Power of Diversification NAT: Reflective thinking

LOC: acquire an understanding of risk and return

Use the following information to answer questions 6 to 8.

Use the following information to answer questions 6 to 8.

You bought a Bavarian Sausage, Inc. share for $42.50 at the beginning of the year. During the year, the share paid a $2.50 dividend and at the end of the year it traded at $55.65.

6. What is the total return of your share investment?

(55.65 + 2.50 – 42.50)/42.50 = 0.3682

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

7. What is the capital gain on your share investment?

(55.65 – 42.50)/42.50 = 0.3094

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

8. What is the total dollar return on your investment?

55.65 + 2.50 – 42.50 = 15.65

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

Use the following information to answer questions 9 and 10.

Use the following information to answer questions 9 and 10.

You bought a Bavarian Sausage, Inc. share for $44.50 at the beginning of the year. During the year, the share paid a $2.50 dividend and at the end of the year it traded at $42.50.

9. What is the total return on your investment?

(42.50 + 2.50 – 44.50)/44.50 = 0.0112

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

10. What is the capital gains yield of your investment?

(42.50 – 44.50)/42.50 = –0.0471

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

11. If the return on your ordinary share investment is on average 20% and the return on Treasury bills was 6% over the same period, what is the risk premium that you earned?

20 – 6 = 14

PTS: 1 DIF: E

REF: 6.2 The History of Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

Use the following information to answer questions 12 to 19.

12. What is the variance of returns for Share A?

Avg. = (0.12 + 0.22 + 0.06 + 0.14 + 0.03)/5 = 0.114

Var. = 0.004384

PTS: 1 DIF: E

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

13. What is the standard deviation of returns for Share A?

0.004384^(1/2) = 0.0662

PTS: 1 DIF: E

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

14. What is the variance of returns for Share B?

Avg. = 0.14

Var. = 0.00528

PTS: 1 DIF: E

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

15. What is the standard deviation of returns for Share C?

Avg. = 0.052

Var. = 0.0042512

Standard deviation = 0.065201

PTS: 1 DIF: E

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

16. What is the average return for Share A?

Avg. = (0.12 + 0.22 + 0.06 + 0.14 + 0.03)/5 = 0.114

PTS: 1 DIF: E

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

17. What is the average return of Share B?

(0.14 + 0.16 + 0.10 + 0.26 + 0.04)/5 = 0.14

PTS: 1 DIF: E

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

18. What is the average return of Share C?

(0.06 – 0.05 + 0.09 + 0.02 + 0.14)/5 = 0.052

PTS: 1 DIF: E

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

19. What is the average return of a portfolio that has 30% invested in Share A, 30% invested in Share B and 40% invested in Share C?

0.3(0.14) + 0.3(0.114) + 0.4(0.052) = 0.097

PTS: 1 DIF: E

REF: 6.4 The Power of Diversification NAT: Analytic skills

LOC: acquire an understanding of risk and return

20. Bavarian Sausage’s shares have an average historical return of 16.8% and a standard deviation of 5.9%. In which range do you expect the returns of Bavarian Sausage to be 95% of the time?

16.8 ± 2(5.9) = 5.00 to 28.6

PTS: 1 DIF: M

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

21. Bavarian Sausage’s shares have an average historical return of 16.8% and a standard deviation of 5.9%. In which range do you expect the returns of Bavarian Sausage to be 68% of the time?

16.8 ± 5.9 = 10.9 to 22.7

PTS: 1 DIF: M

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

22. Bavarian Sausage’s shares have an average historical return of 16.3% and a standard deviation of 5.3%. What is the probability that the return on Bavarian Sausage will be less than 11%?

1 – 0.5 – 0.34 = 0.16

PTS: 1 DIF: H

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

23. Bavarian Sausage’s shares have an average historical return of 16.3% and a standard deviation of 5.3%. What is the probability that the return on Bavarian Sausage will be higher than 26.9%?

26.9 = 16.3 + 2(5.3)

Probability = 1 – 0.5 – 0.475 = 0.025

PTS: 1 DIF: H

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

24. Which of the following is not part of the procedure for valuing a risky asset?

REF: 6.3 Volatility and Risk NAT: Reflective thinking

LOC: acquire an understanding of risk and return

25. If you were to purchase an asset for $110 today and receive a dividend of $5 at the end of the year in addition to selling the asset for $120, then what would the capital gain on the asset be?

(120 – 110)/11

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

26. You purchased a 10-year, 6% coupon bond (the bond makes semiannual payments) last year based upon a discount rate of 6%. One year later the discount rate has fallen to 5.5%. What is your total return on the bond?

Price at purchase = 1000

Price on year later = 30PVIFA(19,5.5%) + 1000PVIFA(19,5.5%) = 1035.12

Cash received during the year = 2 × 30 = 60

Total return = (35.12 + 60)/1000 = 0.09512

PTS: 1 DIF: M

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: understand shares and bonds

27. You purchased WPC ordinary shares for $48 one year ago. You have received total dividends equal to $6 during the year. If your total return during the period is 14%, then what is the price of WPC if you sell the share today?

0.14 = (6/48) + [(P – 48)/48] ===> P = 48.72

PTS: 1 DIF: H

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

28. You purchased a share of Blue McBrushes Corp. one year ago for $80, and it generated a total return of 20% during that time. If you just sold the share for $89.50, then what were the total dividends that you received during the year?

0.2 = (d/80) + [(89.5 – 80)/80] ===> d = 6.50

PTS: 1 DIF: H

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

29. The additional return offered by a more risky investment relative to a safer one is called:

REF: 6.2 The History of Returns NAT: Reflective thinking

LOC: acquire an understanding of risk and return

30. You are analysing the performance of different asset classes for a foreign economy. You find that over the last 60 years the average annual return for equities was 12%, the average annual return for corporate bonds was 10% and the rate of inflation was about 3%. If inflation were projected to be around 1% for the foreseeable future, then what would you project the return on equities to be during that same foreseeable period?

0.01 + (0.12 – 0.03) = 0.10

PTS: 1 DIF: M

REF: 6.2 The History of Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

31. The statistical term variance is defined as:

REF: 6.3 Volatility and Risk NAT: Reflective thinking

LOC: acquire an understanding of risk and return

32. You are introduced to an investment that has an expected return of 20%, equal to the standard deviation of the distribution of returns. What is the probability that the investment will lose some of your initial investment in the first year?

Expected return = Standard deviation = 0.2

P_{Investment loss} = P_{Return < 0}

One standard deviation to the left of the expected return = 0.20 – 0.20 = 0

===> P_{Return < 0} = 0.16 = 0.50 – 0.34

PTS: 1 DIF: H

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

33. You are introduced to an investment that has an expected return of 20%, equal to the standard deviation of the distribution of returns. What is the probability that the investment will have a return less than 20% in the first year? Assume a normal distribution.

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

34. Your family has invested in a security over the last 100 years. The expected return during that period has been 0.15 and the variance of the returns has been 0.048. Your investment advisor told you that the security had a 95th percentile performance (with respect to its historical performance) this period. What was the actual return during the period?

E_X = 0.15

Var._X = 0.048 ==> Std. dev._X = 0.219

Return = 0.15 + 2(0.219) = 0.15 + 0.438 = 0.588

PTS: 1 DIF: H

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

35. Over the last three years you have earned 5%, 7% and 9% on your portfolio. What is the standard deviation of the returns of that portfolio?

E_X = (0.05 + 0.07 + 0.09)/3 = 0.07

Var._X = [((0.05 – 0.07)² + (0.07 – 0.07)² + (0.09 – 0.07)²]/(3 – 1) = 0.0004

Std. dev._X = (0.0004)^1/2 = 0.02

PTS: 1 DIF: H

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

36. You have it on good account that the probability of good returns on energy investments is equal to that of poor returns. If we define good returns as 100% and poor returns as 50%, then what is the probability of getting an exact return of 75% in the next year?

Two possibilities on any given draw: 100% or 50% ===> P_{50% return} = 0

PTS: 1 DIF: M

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

37. If you were to plot the returns of asset classes on a graph with the standard deviation on the horizontal axis and expected returns on the vertical axis, then which security class is most likely to be in the farthest upper right corner of the graph?

REF: 6.3 Volatility and Risk NAT: Reflective thinking

LOC: acquire an understanding of risk and return

38. Which of the following asset classes would give you the greatest probability of achieving a return that is closest to its expected return?

REF: 6.3 Volatility and Risk NAT: Reflective thinking

LOC: acquire an understanding of risk and return

39. You are presented with 4 distinct investment opportunities involving a Treasury bill, a Treasury bond, a corporate bond, and a share. You are told that each of these investments are expected to produce (after the cash is paid out then no other cash flows are anticipated) $100 one year from now. Which asset should be the least expensive today, in terms of dollars that you will have to pay for the asset?

Greatest risk ===> Greatest discount rate ===> Cheapest price today

PTS: 1 DIF: H

REF: 6.3 Volatility and Risk NAT: Reflective thinking

LOC: acquire an understanding of risk and return

40. If the standard deviation of a diversified portfolio is 20% and the shares in that portfolio are positively correlated, then what would we expect the average standard deviation of shares in that portfolio to be?

REF: 6.4 The Power of Diversification NAT: Reflective thinking

LOC: acquire an understanding of risk and return

41. If we are able to eliminate all of the unsystematic risk in a portfolio then, what is the result?

REF: 6.4 The Power of Diversification NAT: Reflective thinking

LOC: acquire an understanding of risk and return

Use the following information to answer questions 42 and 43.

Between 2004 and 2017, Hillary Investments produced returns as follows:

42. Calculate the expected return for Hillary Investments.

(0.08 + 0.03 + –0.01 + –0.05 + –0.03)/5 = 0.004

PTS: 1 DIF: E

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

43. What is the variance of the return of Hillary Investments?

Var. = (0.08 – 0.004)² + (0.03 – 0.004)² + (–0.01 – 0.004)² + (–0.05 – 0.004)² + (–0.03 – 0.004)²

(5 – 1)

Var. = 0.00268

PTS: 1 DIF: H

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

Use the following information to answer questions 44 and 45.

Suppose that an investor bought a bond last year for $980. The bond pays a 7% annual coupon and has a face value of $1000. Today, the same bond is selling for $960.

44. Refer to Exhibit 6-1. If the investor sells the bond this morning, what is the total dollar return of the investment?

70 + (–20) = 50

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

45. Refer to Exhibit 6-1. If the investor sells the bond this morning, what is the total percentage return of the investment?

r = [70 + (960 – 980)]/980 = 0.0510

PTS: 1 DIF: M

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

Use the following information to answer questions 46 to 48.

One year ago, Jason purchased 50 shares of Terry Corporation at $20 per share. Today, one year later, it pays a $2 per share dividend and the price is now $22 per share.

46. Refer to Terry Corporation. What is the total dollar return on the investment for the one year?

Last year = 50 × 20 = 1000

This year = 50 × (22 + 2) = 1200

Dollar gain = 1200 – 1000 = 200

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

47. Refer to Terry Corporation. What is the total percentage return on the investment for the one year?

r = [2 + (22 – 20)]/20 = 4/20 = 0.20

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

48. Refer to Terry Corporation. What is the capital gains yield on the investment for the one year?

Capital gain = (22 – 20)/20 = 0.10

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

49. What is the risk premium?

REF: 6.2 The History of Returns NAT: Reflective thinking

LOC: acquire an understanding of risk and return

Use the following information to answer questions 50 to 52.

Consider the following historical returns for Big Diesel Incorporated:

50. Refer to Big Diesel Incorporated. What is the average return over the five-year period?

Avg. return = (0.05 + 0.09 – 0.08 + 0.05 + 0.20)/5 = 0.31/5 = 0.062

PTS: 1 DIF: E

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

51. Refer to Big Diesel Incorporated. What is the standard deviation of the returns over the five-year period?

Avg. return = (0.05 + 0.09 – 0.08 + 0.05 + 0.20)/5 = 0.31/5 = 0.062

Sum of σ² = (0.05 – 0.062)² + (0.09 –0.062)² + (–0.08 – 0.062)² + (0.05 – 0.062)² + (0.2 – 0.062)²

Sum of σ² = 0.04028

Standard deviation = (1/4 × 0.04028)^0.5 = 0.1003

PTS: 1 DIF: H

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

52. Refer to Big Diesel Incorporated. If we assume that these returns represent the full sample of Big Diesel’s returns, what is the 95% confidence interval for Big Diesel’s returns next year?

Avg. return = (0.05 + 0.09 - 0.08 + 0.05 + 0.20)/5 = 0.31/5 = 0.062

Sum of σ² = (0.05 – 0.062)² + (0.09 – 0.062)² + (–0.08 – 0.062)² + (0.05 – 0.062)² + (0.2 – 0.062)²
Sum of σ² = 0.04028

Standard deviation = (1/4 × 0.04028)^0.5 =0.1003

0.062 ± 2 × 0.1003 = –0.1386, 0.2686

PTS: 1 DIF: H

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

53. Consider the following historical returns for Big Diesel and inflation for the Australian economy:

What is the average real return for Big Diesel over the five-year time period?

Avg. nominal return = (0.05 + 0.09 – 0.08 + 0.05 + 0.20)/5 = 0.31/5 = 0.062

Avg. inflation = (0.02 + 0.02 + 0.022 + 0.022 + 0.022) = 0.106/5 = 0.0212

1 + Avg. real return = (1 + Nominal)/(1 + Inflation) = (1.062)/(1.0212) = 1.04

Avg. real return = 4.00%

PTS: 1 DIF: M

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

54. Inflation, recession and higher interest rates are economic events that are characterised as:

REF: 6.4 The Power of Diversification NAT: Reflective thinking

LOC: acquire an understanding of risk and return

55. A financial publication states that Stone Cold shares had a return of 18% last year. If the price of Stone Cold went from $22 to $22.80 over the last year, what dividend was paid?

0.18 = [x + (22.80 – $22)]/22

3.96 = x + 0.80

x = 3.16

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

56. A financial publication states that Stone Cold shares had a return of 15% last year. If the price of Stone Cold went from $20 to $20.75 over the last year, what was the dividend yield over the last year?

0.15 = [x + (20.75 – $20)]/20

3 = x + 0.75

x = 2.25

Dividend yield = 2.25/20 = 0.1125

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

Exhibit 6-2

You purchased a bond last year that pays an 8% annual coupon with a face value of $1000. At the time of purchase, the bond had a yield to maturity of 10% and had 10 years until maturity. Today, the bond trades at a yield to maturity of 9%.

57. Refer to Exhibit 6-2. What was the dollar return of this investment over the last year? (Round to the nearest dollar.)

Bond price last year:

N = 10

I = 10%

PMT = 80

FV = 1000

PV = 877.11

Bond price today:

N = 9

I = 9%

PMT = 80

FV = 1000

PV = 940.05

Dollar return = 80 + 940.05 – 877.11 = 142.94

PTS: 1 DIF: M

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

58. Refer to Exhibit 6-2. What was the percentage return of this investment over the last year?

Bond price last year:

N = 10

I = 10%

PMT = 80

FV = 1000

PV = 877.11

Bond price today:

N = 9

I = 9%

PMT = 80

FV = 1000

PV = 940.05

Percentage return = (80 + 940.05 – 877.11)/877.11 = 0.1630

PTS: 1 DIF: M

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

59. An investor seeks a 4% real return on his investment in a share fund. If there is 3% inflation in the economy, what nominal return must this share fund provide to meet his objective?

1 + Real = (1 + Nominal)/(1 + Inflation)

1.04 = (1 + x)/(1.03)

PTS: 1 DIF: E

REF: 6.2 The History of Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

60. Which statement is false regarding risk and return?

REF: 6.4 The Power of Diversification NAT: Reflective thinking

LOC: acquire an understanding of risk and return

61. Which of these is/are true regarding risk and return?

REF: 6.4 The Power of Diversification NAT: Reflective thinking

LOC: acquire an understanding of risk and return

Exhibit 6-3

Consider the following information concerning share returns and bond returns over the last 75 years:

62. Refer to Exhibit 6-3. Currently, Treasury bills yield 2.50% on the secondary market. What is a good estimate for the return on the share market in the next year given this information?

Risk premium = 0.117 – 0.041 = 0.076

Return = T-bill + Risk premium = 0.025 + 0.076

PTS: 1 DIF: M

REF: 6.2 The History of Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

63. Refer to Exhibit 6-3. Currently, investors want a 12% return on shares as a whole. Based on this information, what is a good estimate for the current return on Treasury bills?

Risk premium = 0.117 – 0.041 = 0.076

Return = T-bill + Risk premium = x + 0.076 = 0.12

x = 0.0440

PTS: 1 DIF: M

REF: 6.2 The History of Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

64. A bond was purchased last year for $900. The bond pays a 10% annual coupon and has a face value of $1000. Today, the bond has a coupon yield of 8%. What is the total return for this bond over the last year?

Price today:

Coupon yield = 0.08 = 100/Today’s price

Today’s price = 1250

Total return = (100 + 1250 – 900)/ 900 = 0.50

PTS: 1 DIF: M

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

65. Which statement is true regarding diversification?

REF: 6.4 The Power of Diversification NAT: Reflective thinking

LOC: acquire an understanding of risk and return

66. A brochure for an investment company reports average nominal returns of 9% per year. If the economy has averaged 3% inflation over these years, what is the average real return for this investment company?

1 + Real = (1 + Nominal)/(1 + Inflation)

Real = (1 .09)/(1.03) – 1 = 0.0583

PTS: 1 DIF: E

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

67. Suppose you are interested in the following two shares:

What is your expected portfolio return if you put 40% of you investment in Alpha and 60% of your investment in Beta?

0.4 × 0.10 + 0.6 × 0.06 = 0.0760

PTS: 1 DIF: M

REF: 6.4 The Power of Diversification NAT: Analytic skills

LOC: acquire an understanding of risk and return

68. A share was purchased two years ago for $20. The share does not pay dividends and sells today for $26.00. If sold today, what would be the annual realised return on your investment?

N = 2

PV = –20

PMT = 0

FV = 26

I = 14%

PTS: 1 DIF: H

REF: 6.1 Understanding Returns NAT: Analytic skills

LOC: acquire an understanding of risk and return

69. Based upon a histogram of nominal returns on equities for the last 100 years, we can conjecture that share returns follow a __________ distribution.

REF: 6.3 Volatility and Risk NAT: Reflective thinking

LOC: acquire an understanding of risk and return

70. A normal distribution is:

REF: 6.3 Volatility and Risk NAT: Reflective thinking

LOC: acquire an understanding of risk and return

71. Which of the following statements is true?

REF: 6.4 The Power of Diversification NAT: Reflective thinking

LOC: acquire an understanding of risk and return

72. Investors should expect to be compensated for bearing __________ risk, but they should not expect to be compensated for bearing __________ risk.

REF: 6.4 The Power of Diversification NAT: Reflective thinking

LOC: acquire an understanding of risk and return

73. Consider the adjusted closing prices for Louis shares.

What is the variance of returns for Louis shares?

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

74. Consider the adjusted closing prices for Louis shares.

What is the standard deviation of returns for Louis shares?

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

75. Consider the adjusted closing prices for Roxy shares.

What is the variance of returns for Roxy shares?

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

76. Consider the adjusted closing prices for Roxy shares.

What is the standard deviation of returns for Roxy shares?

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

77. Consider the adjusted closing prices for MA shares.

What is the variance of returns for MA shares?

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

78. Consider the adjusted closing prices for MA shares.

What is the variance of returns for MA shares?

REF: 6.3 Volatility and Risk NAT: Analytic skills

LOC: acquire an understanding of risk and return

SHORT ANSWER

1. What are the two components in total return?

PTS: 1 DIF: E

REF: 6.1 Understanding Returns

2. What is risk premium?

PTS: 1 DIF: E

REF: 6.2 The History of Returns

3. What is the purpose of diversification?

PTS: 1 DIF: E

REF: 6.4 The Power of Diversification

4. What are the two measures of variability of equity returns?

PTS: 1 DIF: E

REF: 6.3 Volatility and Risk

5. In a well-diversified portfolio, to what is risk is equal?

PTS: 1 DIF: E

REF: 6.4 The Power of Diversification

6. What is a systematic risk?

PTS: 1 DIF: E

REF: 6.4 The Power of Diversification