FIN350 in Class Work No. 2 ( Risk & Returns, Part 1)

FIN350 In Class Work No. 2 ( Risk & Returns, part 1)

Please also go over lecture slides.

1. The stand alone risk of a stock is measured by

(a) the stock price

(b) stock returns

(d) the mean of the stock price

(e) none of the above

The risk of a stock is measured by the variance or standard deviation of stock returns. Standard deviation is also called volatility.

2. Which of the following statement is NOT true for a portfolio made up of several stocks?

a. The expected return = weighted average of each stock’s expected return.

b. The portfolio standard deviation is >= the weighted average of each stock’s standard deviation.

c. The portfolio beta is the weighted average of each stock’s beta

d. The portfolio standard deviation is <= the weighted average of each stock’s standard deviation.

3. Which of the following statements is correct?

a. lower beta stocks have a higher required return.

b. Two securities with the same stand-alone risk must have same betas.

c. Company-specific risk can be diversified away.

d. The market risk premium is not affected by investors’ attitudes about risk.

e. All above statements are correct.

4. Inflation, recession, and high interest rates are economic events that are characterized as

a. Company-specific risk that can be diversified away.

b. Market risk.

c. Systematic risk that can be diversified away.

d. Diversifiable risk.

e. Unsystematic risk that can be diversified away.

5.The risk that remains in a well-diversified stock portfolio is

(a) systematic risk (also called market risk)

(b) firm-level risk

(d) unique risk

(e) none of the above

Firm-level risk (also called idiosyncratic risk or unique risk) can be diversified away in a well-diversified portfolio.

6 A portfolio is .

A) a group of assets, such as stocks and bonds, held collectively by an investor

B) the expected return on a risky asset

C) the expected return on a collection of risky assets that are in the same industry

D) the variance of returns for a risky asset

7. Beta is a statistical measure of

A) unsystematic risk.

B) stand alone risk.

C) the relationship between an investment's returns and the market return.

D) default risk.

E) the standard deviation.

8. Betas measure

(a) firm-level risk

(b) unique risk

(d) idiosyncratic risk

(e) none of the above

9.What is the beta of the market portfolio (market index)?

(a)0

(b)1

(d) 2

(e) none of the above

This is based on the fact that market index moves at the same rate with make movement.

10. What is the beta of the treasury bills?

(a) 0

(b)1

(d) 2

(e) none of the above

The return of treasury bill is fixed. Plus there is no default risk.

11. Which of the following statements best describes what would be expected to happen as you randomly select stocks and add them to your portfolio?

a. Adding more such stocks will reduce the portfolio’s unsystematic, or diversifiable, risk.

b. Adding more such stocks will reduce the portfolio’s beta.

c. Adding more such stocks will increase the portfolio’s expected return.

d. Adding more such stocks will reduce the portfolio’s market risk.

e. Adding more such stocks will have no effect on the portfolio’s risk

12. Most investors are:

a. risk neutral (do not care about risk.)

b. risk averse

c. risk loving

13. What is the rate of investment return for an investor who pays $900 for a seven-year zero-coupon bond and sells the bond one year later for $890?

A) -8.9%

B) -0.9%

C) -1.1%

D) -1%

E) -0.7%

14. Can the beta of a security be negative?

A. Yes, but this is rare.

B. Yes, most stocks have negative betas.

C. No, all stocks must have positive betas.

15. If an investor chooses to hold just one stock in her/his portfolio (thus exposed to more risk than a diversified investor), should the investor be compensated for the firm-specific risk (earn higher returns)?

A. Yes

B. No.

16. If stock A has an expected return of 10%, stock B has an expected return of 5%. What will be the expected return of a portfolio that invests 40% of the fund in stock A and 60% in stock B?

A. 10%

B. 5%

C. 15%

D. 7.5%

E. 7%

0.4*0.1+0.6*0.05=0.07

FIN350 In Class Work No. 2 ( Risk & Returns)

1. The stand alone risk of a stock is measured by

(a) the stock price

(b) stock returns

(d) the mean of the stock price

(e) none of the above

The risk of a stock is measured by the variance or standard deviation of stock returns. Standard deviation is also called volatility.

2. Which of the following statement is NOT true for a portfolio made up of several stocks?

a. The expected return = weighted average of each stock’s expected return.

b. The portfolio standard deviation is >= the weighted average of each stock’s standard deviation.

c. The portfolio beta is the weighted average of each stock’s beta

d. The portfolio standard deviation is <= the weighted average of each stock’s standard deviation.

3. Which of the following statements is correct?

a. lower beta stocks have a higher required return.

b. Two securities with the same stand-alone risk must have same betas.

c. Company-specific risk can be diversified away.

d. The market risk premium is not affected by investors’ attitudes about risk.

e. All above statements are correct.

4. Inflation, recession, and high interest rates are economic events that are characterized as

a. Company-specific risk that can be diversified away.

b. Market risk.

c. Systematic risk that can be diversified away.

d. Diversifiable risk.

e. Unsystematic risk that can be diversified away.

5.The risk that remains in a well-diversified stock portfolio is

(a) systematic risk (also called market risk)

(b) firm-level risk

(d) unique risk

(e) none of the above

Firm-level risk (also called idiosyncratic risk or unique risk) can be diversified away in a well-diversified portfolio.

6 A portfolio is .

A) a group of assets, such as stocks and bonds, held collectively by an investor

B) the expected return on a risky asset

C) the expected return on a collection of risky assets that are in the same industry

D) the variance of returns for a risky asset

7. Beta is a statistical measure of

A) unsystematic risk.

B) stand alone risk.

C) the relationship between an investment's returns and the market return.

D) default risk.

E) the standard deviation.

8. Betas measure

(a) firm-level risk

(b) unique risk

(d) idiosyncratic risk

(e) none of the above

9.What is the beta of the market portfolio (market index)?

(a)0

(b)1

(d) 2

(e) none of the above

This is based on the fact that market index moves at the same rate with make movement.

10. What is the beta of the treasury bills?

(a) 0

(b)1

(d) 2

(e) none of the above

The return of treasury bill is fixed. Plus there is no default risk.

11. Which of the following statements best describes what would be expected to happen as you randomly select stocks and add them to your portfolio?

a. Adding more such stocks will reduce the portfolio’s unsystematic, or diversifiable, risk.

b. Adding more such stocks will reduce the portfolio’s beta.

c. Adding more such stocks will increase the portfolio’s expected return.

d. Adding more such stocks will reduce the portfolio’s market risk.

e. Adding more such stocks will have no effect on the portfolio’s risk

12. Most investors are:

a. risk neutral (do not care about risk.)

b. risk averse

c. risk loving

13. What is the rate of investment return for an investor who pays $900 for a seven-year zero-coupon bond and sells the bond one year later for $890?

A) -8.9%

B) -0.9%

C) -1.1%

D) -1%

E) -0.7%

14. Can the beta of a security be negative?

A. Yes, but this is rare.

B. Yes, most stocks have negative betas.

C. No, all stocks must have positive betas.

C. Yes

D. No.

16. If stock A has an expected return of 10%, stock B has an expected return of 5%. What will be the expected return of a portfolio that invests 40% of the fund in stock A and 60% in stock B?

A. 10%

B. 5%

C. 15%

D. 7.5%

E. 7%

0.4*0.1+0.6*0.05=0.07