What advice should investors heed if markets are efficient? A) You can earn abnormally large returns by frequently buying and selling whenever you obtain new information. B) The best-informed traders always beat the market. C) Mutual funds run by expert managers consistently outperform index funds. D) Random stock picks will perform as well as a […]
A more risky stock has a higher ________. A) expected return B) standard deviation C) variance D) B and C ANSWER Answer: D Explanation: D) Standard deviation and variance essentially tell you the same thing—a stock’s volatility or risk.
Stocks A, B, C, and D have returns of 5%, 15%, 30%, and 110%, respectively. What is their standard deviation? A) 64.25% B) 56.75% C) 47.78% D) 32.05% ANSWER Answer: C Explanation: C) Mean return = (5% + 15% + 30% + 110%)/4 = 40%, so variance = [(5% – 40%)2 + (15% […]
Stocks A, B, C, and D have returns of 10%, 20%, 30%, and 40%, respectively. What is their variance? A) 66.67% B) 166.67% C) 4.08% D) 2.15% ANSWER Answer: B Explanation: B) Mean return = (10% + 20% + 30% + 40%)/4 = 25%, so variance = [(10% – 25%)2 + (20% – […]
Assume that the risk-free rate is 5.5% and the market risk premium is 6%. A portfolio manager has $10 million invested in a two-asset portfolio that has an (equilibrium) expected return of 12%. The manager plans to sell $3 million of Stock A with a beta of 1.6. She plans to reinvest this $3 million […]
Which of the following classifications of securities had the largest range of annual returns over the period 1950-1999? A) Large-company stocks B) Long-term government bonds C) Small-company stocks D) 3-month U.S. Treasury bills ANSWER Answer: C
Which of the following statements is true about variance? A) Variance describes how spread out a set of numbers or a value is around its mean or average. B) Variance is essentially the variability from the average. C) The larger the variance, the greater the dispersion. D) All of the above statements are true. […]
The textbook provides a history of returns from 1950 through 1999 for four classifications of securities in the United States. Rank the average standard deviation ( measure of risk) from the highest to lowest over this time period. A) Large-company stocks, small-company stocks, 3-month U.S. Treasury bills, long-term government bonds B) Long-term government bonds, 3-month […]
The chart below gives information for four classes of U.S. securities over the 50-year time period from 1950-1999. Order the securities from highest average annual return to lowest for this time period. Now rank the securities from highest to lowest based on risk. Is the information consistent with what financial theory tells us? Why or […]
Define risk. Give an example of a risk-free investment and explain why you claim it has no risk. Give an example of a risky investment and explain why you claim the investment to be risky. What will be an ideal response? ANSWER Answer: Risk is a measure of the uncertainty in a set […]
