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Exam 9: Characterizing Risk and Return

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Question 1

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Which of the following is correct?

A) Investors can reduce the risk in their portfolio by investing in international stocks since they tend to have low correlation with our own stock market.
B) Combining both stocks and bonds will likely reduce risk in a portfolio because the two assets have low correlation.
C) Your optimal portfolio is an efficient portfolio with your desired risk level.
D) All of these statements are correct.

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Question 2

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Jenna receives an investment newsletter that recommends she invest in a stock that has doubled the return of the S&P 500 in the last two months. It also claims this stock is a "safe bet" for the future. Which of the following statements is correct regarding this information?

A) This investment newsletter is most likely correct because they most likely have some special knowledge about the stock.
B) The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet."
C) It is common for individual stocks to double the return of the S&P 500 and still be a "safe bet."
D) None of these statements are correct.

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Question 3

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Which of these is a measure of risk to reward earned by an investment over a specific period of time?

Modern portfolio theory is:

Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an average return of 14 percent and standard deviation of 30 percent. The average return and standard deviation of WholeMart are 12 percent and 25 percent; and of Fruit Fly are 25 percent and 40 percent.

Interest rates, inflation and economic growth are economic factors that are examples of:

Year to date, Company Y had earned a 7 percent return. During the same time period, Company R earned 9.25 percent and Company C earned -2.25 percent. If you have a portfolio made up of 35 percent Y, 40 percent R, and 25 percent C, what is your portfolio return?

Which of the following is a measurement of the co-movement between two variables that ranges between -1 and +1?

Which of the following statements is correct?

The standard deviation of the past five monthly returns for K and Company are 4.25 percent, 4.13 percent, -2.05 percent, 3.25 percent, and 7.75 percent. What is the standard deviation?

At the beginning of the month, you owned $8,000 of Company G, $8,000 of Company S, and $3,000 of Company N. The monthly returns for Company G, Company S, and Company N were 7.80 percent, 1.50 percent, and -0.75 percent. What is your portfolio return?

MedTech Corp. stock was $50.95 per share at the end of last year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500 shares of MedTech, what was your percent return?

If you own 400 shares of Xerox at $15.00, 500 shares of Qwest at $10.00, and 350 shares of Liz Claiborne at $45.00, what are the portfolio weights of each stock?

Which of the following is correct?

The past five monthly returns for K and Company are 2.28 percent, 2.64 percent, -1.05 percent, 4.25 percent, and 9.25 percent. What is the average monthly return?

At the beginning of the month, you owned $15,500 of General Motors, $4,500 of Starbucks, and $9,000 of Nike. The monthly returns for General Motors, Starbucks, and Nike were 7.10 percent, -1.36 percent, and -0.54 percent. What is your portfolio return?

Which of these is the term for portfolios with the highest return possible for each risk level?

Jane Adams invests all her money in the stock of one firm. Which of the following must be true?

An investor owns $2,000 of Adobe Systems stock, $4,000 of Dow Chemical, and $6,000 of Office Depot. What are the portfolio weights of each stock?

Determine which one of these three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an expected return of 14 percent and risk of 19 percent. The expected return and risk of portfolio Yellow are 15 percent and 18 percent, and for the Purple portfolio are 16 percent and 21 percent.