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Exam 6: The Meaning and Measurement of Risk and Return

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Question 1

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The Beta of a T-bill is one.

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Question 2

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Which of the following is the slope of the security market line?

A) beta
B) one
C) it varies, and is steeper for riskier securities
D) the market risk premium

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Question 3

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Redesign Corp is considering a new strategy that would increase its expected return from 12% to 13.9%,but would also increase its beta from 1.2 to 1.8.If the risk free rate is 5% and the return on the market is expected to be 10%,should Redesign change its strategy?

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

Beta is a statistical measure of

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

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

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

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

You hold a portfolio with the following securities: What is the expected return for the portfolio?

A stock's beta is a measure of its

Which of the following statements is most correct concerning diversification and risk?

Asset allocation is not recommended by financial planners because mixing different types of assets,such as stocks with bonds,makes it more difficult to track performance and adjust portfolios to changing market conditions.

Investment A and Investment B both have the same expected return,but Investment A is more risky than Investment B.In the technical jargon of modern portfolio theory,Investment A is said to "dominate" Investment B.

Assume that you expect to hold a $20,000 investment for one year.It is forecasted to have a yearend value of $21,000 with a 30% probability; a yearend value of $24,000 with a 45% probability; and a yearend value of $30,000 with a 25% probability.What is the standard deviation of the holding period return for this investment?

Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $10,500 return.What is the expected amount of return this investment will produce?

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%.

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?

You hold a portfolio made up of the following stocks: If the market's expected return is 14%,and the risk free rate of return is 5%,what is the expected return of the portfolio?

Stock A has the following returns for various states of the economy: State of Stock A's expected return is