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Exam 7: Risk and Return

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Question 21

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If the capital appreciation return from owning a share is positive, then the total return from owning the same share can be negative.

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Question 22

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The variance is equal to the square root of the standard deviation.

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Question 23

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The market risk-premium is equal to the expected return on the market less the risk-free rate of return.

Babs purchased a piece of real estate last year for $85,000. The real estate is now worth $102,000. If Babs needs to have a total return of 25 per cent during the year, then what is the dollar amount of income that she needed to have to reach her objective?

In order for the total return of a share to be equal to -100 per cent, the income return component for that share must be zero.

Sayers purchased a share with a coefficient of variation equal to 0.125. The expected return on the shares is 20 per cent. What is the variance of the share?

Julio purchased a share one year ago for $27. The share is now worth $32, and the total return to Julio for owning the share was 37 per cent. What is the dollar amount of dividends that he received for owning the share during the year?

The covariance of the returns between Wildcat Stock and Sun Devil Stock is 0.09875. The variance of Wildcat is 0.2116, and the variance of Sun Devil is 0.1369. What is the correlation coefficient between the returns of the two shares?

Robert paid $100 for a share one year ago. The total return on the share was 10 per cent. Therefore, the share must be selling for $110 today.

The expected return on KarolCo. shares is 16.5 per cent. If the risk-free rate is 5 per cent and the beta of KarolCo is 2.3, then what is the risk premium on the market?

Horse Stock returns have exhibited a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns?

If you know the risk-free rate, the market risk-premium, and the beta of a share, then using the CAPM you will be able to calculate the expected rate of return for the share.

The variance is denominated in squared units, whereas the standard deviation is denominated in the same units as the expected value.

The expected return on Kiwi Computers shares is 16.6 per cent. If the risk-free rate is 4 per cent and the expected return on the market is 10 per cent, then what is Kiwi's beta?

If you are calculating the variance and standard deviation of returns for a share, the variance will always be larger than the standard deviation.

If you were to regress the historical returns of a share on the historical return of a general market index, you would plot the line of best fit through those data points. The slope of that line represents the beta of the share in question. However, in most instances the date points do not lie exactly on that line. Describe why.

The normal distribution is completely described by its mean and standard deviation where 50 per cent of the distribution's probability is less than the mean and 50 per cent greater than the mean.

Francis purchased a share one year ago for $20, and it is now worth $24. The share paid a dividend of $3 during the year. What was the share's rate of return from capital appreciation during the year? (Round your answer to the nearest per cent.)

Complete diversification means that the portfolio is no longer subject to market risk. b False

The expected return of the market portfolio is equal to the market risk premium.