978-0133423822 chapter 8 Part 1

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Financial Management, 12e (Titman/Keown/Martin)

Chapter 8 Risk and Return-Capital Market Theory

8.1 Portfolio Returns and Portfolio Risk

1) Which of the following portfolios is clearly preferred to the others?

Expected Standard

Return Deviation

A 14% 12%

B 22% 20%

C 18% 16%

A) Investment A

B) Investment B

C) Investment C

D) Cannot be determined

Question Status: Revised

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

2) You are considering investing in U.S. Steel. Which of the following is an example of

nondiversiiable risk?

A) Risk resulting from foreign expropriation of U.S. Steel property

B) Risk resulting from oil exploration by Marathon Oil (a U.S. Steel subsidy)

C) Risk resulting from a strike against U.S. Steel

D) None of the above

Question Status: Previous edition

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

3) You are considering buying some stock in Continental Grain. Which of the following is an

example of nondiversiiable risk?

A) Risk resulting from a general decline in the stock market

B) Risk resulting from a news release that several of Continental’s grain silos were tainted

C) Risk resulting from an explosion in a grain elevator owned by Continental

D) Risk resulting from an impending lawsuit against Continental

Question Status: Previous edition

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

4) If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return,

a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is

the expected rate of return?

A) 12%

B) 13%

C) 14%

D) 15%

Question Status: Previous edition

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

5) If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return,

a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what

would be the standard deviation?

A) 2.24

B) 2.56

C) 2.83

D) 2.98

Question Status: Previous edition

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

6) You are considering investing in a portfolio consisting of 40% Electric General and 60%

Buckstar. If the expected rate of return on Electric General is 16% and the expected return

on Buckstar is 9%, what is the expected return on the portfolio?

A) 12.50%

B) 13.20%

C) 11.80%

D) 10.00%

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

7) The expected return on MSFT next year is 12% with a standard deviation of 20%. The

expected return on AAPL next year is 24% with a standard deviation of 30%. If James

makes equal investments in MSFT and AAPL, what is the expected return on his portfolio.

A) 20%

B) 16%

C) 18%%

D) 25%

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

8) The expected return on MSFT next year is 12% with a standard deviation of 20%. The

expected return on AAPL next year is 24% with a standard deviation of 30%. The

correlation between the two stocks is .6. If James makes equal investments in MSFT and

AAPL, what is the expected return on his portfolio.

A) 21.45%

B) 25.00%

C) 4.60%

D) 15.00%

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

Use the following information, which describes the possible outcomes from investing in a

particular asset, to answer the following question(s).

State of the EconomyProbability of the StatesPercentage Returns

Economic recession 25% 5%

Moderate economic growth 55% 10%

Strong economic growth 20% 13%

9) The expected return from investing in the asset is

A) 9.00%.

B) 9.35%.

C) 10.00%.

D) 10.55%.

Question Status: Previous edition

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

10) The standard deviation of returns is

A) 8.00%.

B) 7.63%.

C) 4.68%.

D) 2.76%.

Question Status: Previous edition

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

11) What is the expected rate of return on a portfolio 18% of which is invested in an S&P

500 Index fund, 65% in a technology fund, and 17% in Treasury Bills. The expected rate of

return is 11% on the S&P Index fund, 14% on the technology fund and 2% on the Treasury

Bills.

A) 10.25%

B) 8.33%

C) 11.42%

D) 9.00%

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

12) What is the expected rate of return on a portfolio Which consists of $9,000 invested in

an S&P 500 Index fund, $32,500 in a technology fund, and $8,500 in Treasury Bills. The

expected rate of return is 11% on the S&P Index fund, 14% on the technology fund and 2%

on the Treasury Bills.

A) $154.00

B) $142.80

C) $65.00

D) $15.12

Question Status: Previous edition

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

Use the following information, which describes the expected return and standard deviation

for three diferent assets, to answer the following question(s).

Portfolio X Portfolio Y Portfolio Z

Expected return 9.5% 8.8% 9.5%

Standard deviation 4.9% 5.5% 5.5%

13) If an investor must choose between investing in either portfolio X or portfolio Y, then

A) she will always choose Asset X over Asset Y.

B) she will always choose Asset Y over Asset X.

C) she will be indiferent between investing in Asset X and Asset Y.

D) none of the above.

Question Status: Revised

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

14) An investor will get maximum risk reduction by combining assets that are

A) negatively correlated.

B) positively correlated.

C) uncorrelated.

D) perfectly, positively correlated.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

15) A negative coeicient of correlation implies that

A) on average, returns to such assets are negative.

B) asset returns tend to move in opposite directions.

C) asset return tend to move in opposite directions.

D) None of the above because the coeicient of correlation cannot be negative.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

16) The portfolio standard deviation will always be less than the standard deviation of any

asset in the portfolio.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

17) When assets are positively correlated, they tend to rise or fall together.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

18) The standard deviation of a portfolio is always just the weighted average of the

standard deviations of assets in the portfolio.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

19) A correlation coeicient of +1 indicates that returns on one asset can be exactly

predicted from the returns on another asset.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

20) Adequate portfolio diversiication can be achieved by investing in several companies in

the same industry.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

21) A portfolio will always have less risk than the riskiest asset in it if the correlation of

assets is less than perfectly positive.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

22) The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock

it is 16%. The coeicient of correlation between the stocks is .75. The standard deviation

of any portfolio combining the two stocks will be less than 20%.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

23) Most inancial assets have correlation coeicients between 0 and 1.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

24) Portfolio returns can be calculated as the geometric mean of the returns on the

individual assets in the portfolio.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

25) When constructing a portfolio, it is a good idea to put all your eggs in one basket, then

watch the basket closely.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

26) A portfolio containing a mix of stocks, bonds, and real estate is likely to be more

diversiied than a portfolio made up of only one asset class.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

27) An asset with a large standard deviation of returns can lower portfolio risk if its returns

are uncorrelated with the returns on the other assets in the portfolio.

Question Status: New question

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

28) The greater the dispersion of possible returns, the riskier is the investment.

Question Status: Previous edition

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

29) For the most part, there has been a positive relation between risk and return

historically.

Question Status: Previous edition

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

30) The beneit from diversiication is far greater when the diversiication occurs across

asset types.

Question Status: Previous edition

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof

31) Investing in foreign stocks is one way to improve diversiication of a portfolio.

Question Status: Previous edition

Objective: 8.1 Calculate the expected rate of return and volatility for a portfolio of investments and

describe how diversiication afects the returns to a portfolio of investments.

Keywords: portfolio risk and return

Principles: Principle 2: There Is a Risk-Return Tradeof