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Exam 7: Risk and Return

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Question 31

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The covariance of the returns between Einstein Stock and Bohr Stock is 0.0087. The standard deviation of Einstein is 0.26, and the standard deviation of Bohr is 0.37. What is the correlation coefficient between the returns of the two shares?

A) 0.090437
B) 0.096200
C) 0.90437
D) 0.96200

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Question 32

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If the expected return of a bet, which is based on a coin toss, is $15, then that means that the outcome of the bet will be a $15 cash inflow to the person making the bet.

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Question 33

Multiple Choice

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The expected return on Mike's Seafood shares is 10.8 per cent. If the expected return on the market is 10 per cent and the beta for Kiwi is 1.7, then what is the risk-free rate?

In a game of chance, the probability of winning a $50 prize is 40 per cent, and the probability of winning a $100 prize is 60 per cent. What is the expected value of a prize in the game?

Which of the following investors should be willing to pay the highest price for an asset?

If you were to completely diversify your portfolio by purchasing a portion of every asset in the investment universe, then the expected return of your portfolio is equal to the risk-free rate.

You have invested 20 per cent of your portfolio in Homer, Ltd., 40 per cent in Marge Co., and 20 per cent in Bart Resources. What is the expected return of your portfolio if Homer, Marge, and Bart have expected returns of 2 per cent, 18 per cent, and 3 per cent, respectively?

The expected return for a portfolio without borrowing or short selling

You know that the average college student eats 0.75 pounds of food at lunch. If the standard deviation of that eating is 0.2 pounds of food, then what is the total amount of food that a cafeteria should have on hand to be 95 per cent confident that it will not run out of food when feeding 50 college students.

If a random variable is drawn from a normal distribution, what is the probability that the random variable is larger than 1.96 standard deviations larger than the mean?

Explain the difference between systematic and nonsystematic risk.

Niles is making an investment with an expected return of 12 per cent. If the standard deviation of the return is 4.5 per cent, and if Niles is investing $100,000, then what dollar amount is Niles 95 per cent sure that he will have at the end of the year?

Books Brothers shares were priced at $15 per share two years ago. The share sold for $13 last year and now it sells for $18. What was the total return for owning Books Brothers share during the most recent year? Assume that no dividends were paid and round to the nearest per cent.

Genaro needs to capture a return of 40 per cent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property?

The coefficient of variation is useful when deciding which individual shares to add to your diversified portfolio.

Gwen purchased a share one year ago for $25, and it is now worth $31. The share paid a dividend of $1.50 during the year. What was the share's rate of return income during the year? (Round your answer to the nearest per cent.)

You have placed a wager such that you will either receive nothing if you lose the bet or you will receive $10 if you win the bet. If the expected cash receipt of the wager is $9, then there is a 100 per cent probability that you will win the wager.

If the covariance between the returns of two assets is equal to zero, then the correlation coefficient must also be zero.

The variance of a distribution can be a negative value.

The capital appreciation component of a share's return considers the increase in price of a share divided by the end of period price of the share.