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32 Cards in this Set

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An asset's return on investment has two components, one of which is ____, which reflects the cash you receive directly while you own the investment.
a. the capital gain
b. your reward for bearing risk
c. your total dollar return
d. the income component
e. your gross return on that investment
d. the income component
None
Why do short-term govt bonds have a risk premium?
a. They are not default-free.
b. They are virtually identical to short-term corporate bonds.
c. The government cannot easily raise tax money to repay the bonds.
d. The short time period to maturity.
e. Short-term govt bonds don't have a risk premium.
e. Short-term government bonds don't have a risk premium.
None
You note that the return on investment A tends to vary only slightly from its average, definitely less so than does investment B. Based on this, you believe that:
a. A has a lower inflation premium than B.
b. A has a lower return volatility than B.
c. A has a higher variance than B.
d. A has a higher standard deviation than B.
e. A must be one of the smallest firms listed on the NYSE, while B must be one of the 500 largest stocks in the US.
b. A has a lower return volatility than B
None
Standard deviation is one of the most common measures of ___.
a. the normal return
b. the inflation rate
c. the risk premium
d. return on investment
e. return volatility
e. return volatility
None
You are interested in assessing the nominal return and risk of an investment. Which of the following would you consider the least helpful in your analysis?
a. The risk premium
b. The variance of returns
c. The standard deviation of returns
d. The average return
e. The minimum return
e. The minimum return
None
Last year you purchased 1,000 shares of Sun Microsystems stock for $15 per share. According to today's quote in The Wall Street Journal, the stock is currently selling for $3 per share. The stock pays no dividends. Your return on this investment is comprised of ___.
a. retained earnings and dividend yields
b. an income return and a capital gains return
c. a real return only
d. a capital gains return only
e. there is no return, since you lost money on this investment
d. a capital gains return only
None
The observed yield to maturity on U.S. Treasury bonds is a(n) ___.
a. real return
b. inflation premium
c. default rate
d. nominal return
e. risk premium
d. nominal return
None
Over the 1926 to 2001 period, the nominal risk premium on common stocks has averaged ___ per year.
a. 0.0%
b. 1.8%
c. 2.2%
d. 8.8%
e. 13.4%
d. 8.8%
None
An investment earned the following returns for the years 1999 through 2002: –30%, 40%, 15%, and 7%. What is the VARIANCE of returns for this investment?
a. 0.0839
b. 0.1126
c. 0.1576
d. 0.1844
e. 0.2897
a. 0.0839
avg returns, sub avg from each return, add results, divide added results by # of returns
None
You purchased 500 shares of preferred stock on Jan 1, 2002, for $50 per share. The
stock pays an annual dividend of $8 per share. On Dec 31, 2002, the market price is $54 per share. What is your percentage return on investment for the year?
a. 4%
b. 8%
c. 16%
d. 20%
e. 24%
e. 24%
None
Given the following historical returns, what is the standard deviation? Year 1 = 30%; year 2 = –15%; year 3 = 10%; year 4 = 18%; year 5 = 2%.
a. 2.87%
b. 7.01%
c. 11.18%
d. 14.75%
e. 16.94%
e. 16.94%
None
The percentage of a portfolio's total value invested in a particular asset is called that asset's:
a. Portfolio return.
b. Portfolio weight.
c. Portfolio risk.
d. Rate of return.
e. Investment value.
b. Portfolio weight.
None
Risk that affects a large number of assets, each to a greater or lesser degree, is called:
a. Idiosyncratic risk.
b. Diversifiable risk.
c. Systematic risk.
d. Asset-specific risk.
e. Total risk.
c. Systematic risk.
None
Risk that affects at most a small number of assets is called:
a. Portfolio risk.
b. Undiversifiable risk.
c. Market risk.
d. Unsystematic risk.
e. Total risk.
d. Unsystematic risk
None
The principle of diversification tells us that:
a. Concentrating an investment in two or three large stocks will eliminate all of your risk.
b. Concentrating an investment in two or three large stocks will reduce your overall risk.
c. Spreading an investment across many diverse assets cannot (in an efficient market) eliminate any risk.
d. Spreading an investment across many diverse assets will eliminate all of the risk.
e. Spreading an investment across many diverse assets will eliminate some of the risk.
e. Spreading an investment across many diverse assets will eliminate some of the risk.
None
A particular risky asset's risk premium, measured relative to its beta coefficient, is its:
a. Diversifiable risk.
b. Systematic risk.
c. Reward to risk ratio.
d. Security market line.
e. Market risk premium.
c. Reward to risk ratio
None
The linear relation between an asset's expected return and its beta coefficient is the:
a. Reward to risk ratio.
b. Portfolio weight.
c. Portfolio risk.
d. Security market line.
e. Market risk premium.
d. Security market line
None
The stock in Scoundrel, Inc. shows a historical return of 13.5% with a standard deviation of 20%. The projected return on Scoundrel, based on 5 possible states of the economy, is 15.5% with a standard deviation of 22%. Which of the following is true about the stock?
a. The projected returns of Scoundrel must be positive in all possible states of the economy.
b. Projected returns vary less widely from the expected return than historical returns did from the historical average return.
c. Investors who prefer assets with high returns and relatively low risk will likely now be more interested in the stock than in the past.
d. The risk premium for the stock has likely increased.
e. Investors who choose this stock should expect, on average, to lose money.
d. The risk premium for the stock has likely increased
None
Which of the following is FALSE about calculating expected portfolio returns and variances?
a. You need to calculate the weight of each asset relative to the total portfolio to calculate the portfolio return and the portfolio variance.
b. Portfolio return can be calculated using the expected return and portfolio weight for each asset.
c. The portfolio return is needed to calculate the portfolio variance.
d. The portfolio return and variance are dependent on the possible states of nature.
e. The portfolio variance is a weighted average of the variances of the individual assets in the portfolio.
e. The portfolio variance is a weighted average of the variances of the individual assets in the portfolio.
None
Dividend Yield =
DIV / cost
Capital Gains Yield =
(curr price - cost) / cost
Percent Return =
Div Yld + Cap Gains Yld =
(DIV/cost) + ((curr price - cost) / cost)
None
Diversification works because:
a. Unsystematic risk exists.
b. Forming stocks into portfolios reduces the standard deviation of returns for each stock.
c. Firm-specific risk can be never be reduced.
d. Stocks earn higher returns than bonds.
e. Portfolios have higher returns than individual assets.
a. Unsystematic risk exists
None
In market equilibrium:
a. All assets will have the same degree of systematic risk.
b. Assets will have the same reward to risk ratio.
c. Each firm's reward to risk ratio will be based on a different risk-free rate of return.
d. Systematic risk can be diversified away.
e. All assets will have the same risk premium.
b. Assets will have the same reward to risk ratio.
None
The CAPM implies that the expected return for a particular asset does NOT depend on:
a. The amount of unsystematic risk.
b. The reward for bearing systematic risk.
c. The pure time value of money.
d. The reward to risk ratio.
e. The risk-free interest rate.
a. The amount of unsystematic risk.
None
Stock A has a beta coefficient of 0.9, and stock B has a beta coefficient of 1.2. Which of the following statements is FALSE regarding these two stocks?
a. Stock A is less risky from the market's perspective than a typical stock, and stock B is more risky than a typical stock.
b. Stock B, if purchased, will increase the market risk of a portfolio more than stock A would (if purchased).
c. Stock A necessarily must have a lower standard deviation of returns than stock B.
d. Stock B must have a higher expected return than stock A if markets are efficient.
e. Stock A has the same reward to risk ratio as stock B
c. Stock A necessarily must have a lower standard deviation of returns than stock B
None
Which of the following risks is irrelevant to a well-diversified investor?
a. Asset-specific risk
b. Market risk
c. Non-diversifiable risk
d. Systematic risk
e. All risks are always relevant
a. Asset-specific risk
None
A security has an unexpected negative news announcement specific to that security. Most likely, the __.
a. security's required return on investment will increase.
b. security's required return on investment will remain unchanged.
c. security's required return on investment will decrease.
d. market risk premium will increase.
e. security's market price will remain unchanged.
a. security's required return on investment will increase
None
If portfolio weights are positive: 1) Can the return on a portfolio ever be greater than the largest return on an individual security in the portfolio? 2) Can the variance of a portfolio ever be greater than the largest variance of an individual security in the portfolio?
a. 1) yes; 2) yes
b. 1) yes; 2) no
c. 1) no; 2) yes
d. 1) no; 2) no
e. 1) maybe; 2) no
d. 1) no; 2) no
None
In terms of minimizing portfolio risk—and assuming you only buy securities and do not short sell them—which of the following assets is the most desirable?
a. A zero beta asset like Treasury bills
b. A negative beta asset like gold
c. A small, positive beta asset like an electric utility stock
d. A typical, average asset with beta equal to one
e. A large, positive beta asset like a start-up technology stock
b. A negative beta asset like gold
None
You own 50 shares of stock A, which has a price of $12 per share, and 100 shares of stock B, which has a price of $3 per share. What is the portfolio weight for stock A in your portfolio?
a. 25%
b. 33%
c. 50%
d. 67%
e. 75%
d. 67%
None
What is the expected return for the following stock?
State Probability Return
Average .50 .25
Recession .35 .05
Depression .15 -.35

a. .05
b. .08
c. .09
d. .10
e. .12
c. .09
None