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Exam 6: The Meaning and Measurement of Risk and Return

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Question 31

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You are considering the three securities listed below. a.Calculate the expected return for each security. b.Calculate the standard deviation of returns for each security. c.Compare Stock A with Stocks B and C.Is Stock A preferred over the others?

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a. R_A = (.2)(2%)+(.5)(10%)+(.3)(15%)= 9.9...

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Question 32

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For a well-diversified investor,an investment with an expected return of 10% with a standard deviation of 3% dominates an investment with an expected return of 10% with a standard deviation of 5%.

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Question 33

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Assume that you have $330,000 invested in a stock that is returning 11.50%,$170,000 invested in a stock that is returning 22.75%,and $470,000 invested in a stock that is returning 10.25%.What is the expected return of your portfolio?

Total risk equals systematic risk plus unsystematic risk.

A stock's beta is a measure of its

Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________.

The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.

If you hold a portfolio made up of the following stocks: What is the beta of the portfolio?

You are given the following probability distribution for XYZ common stock's returns during the next year,which are assumed to be normally distributed.Show all work below,and complete the following: a.Calculate the standard deviation of the returns,and round to the nearest one-half percent. b.Draw a graphical representation of XYZ's normal distribution below (ye old bell-shaped curve).LABEL THE AXES OF THE GRAPH OR THE FOLLOWING RESULTS WILL BE MEANINGLESS.Using your result in part A for the standard deviation (rounded to the nearest one-half percent)explain and indicate on the graph,the probability that XYZ will return more than 13.5%,assuming a normal distribution.

According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's return.

The relevant risk to an investor is that portion of the variability of returns that cannot be diversified away.

Which of the following statements is MOST correct regarding beta?

Historically,investments with the highest returns have the lowest standard deviations because investors do not like risk.

The slope of the characteristic line of a security is that security's Beta.

An investor currently holds the following portfolio: If the risk-free rate of return is 2% and the market risk premium is 7%,then the required return on the portfolio is

The expected return for the market portfolio is 13%,the expected return on U.S.Treasury Bills is 2%,and the expected return on AAA-rated short-term corporate bonds is 7%.Calculate the required return for a stock with a beta equal to 1.5.

An all-stock portfolio is more risky than a portfolio consisting of all bonds.

Beta represents the average movement of a company's stock returns in response to a movement in the market's returns.

White Company stock has a beta of 2 and a required return of 23%,while Black Company stock has a beta of 1.0 and a required return of 14%.The standard deviation of returns for White Company is 10% more than the standard deviation for Black Company.The risk free rate of return according to the CAPM is

A well-diversified portfolio includes investments in 50 securities.The portfolio's systematic risk is likely to be about