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Use the table for the question(s) below.
Consider the following realized annual returns:
Year End
S&P 500
Realized
Return
IBM
Realized
Return
1996 23.6% 46.3%
1997 24.7% 26.7%
1998 30.5% 86.9%
1999 9.0% 23.1%
2000 -2.0% 0.2%
2001 -17.3% -3.2%
2002 -24.3% -27.0%
2003 32.2% 27.9%
2004 4.4% -5.1%
2005 7.4% -11.3%
41)
Suppose that you want to use the 10 year historical average return on IBM to forecast the expected
future return on IBM. The standard error of your estimate of the expect return is closest to:
41)
A)
3.15%
B)
33.20%
C)
3.32%
D)
16.4%
21
Use the table for the question(s) below.
Consider the following probability distribution of returns for Alpha Corporation:
Current
Stock Price
($)
Stock Price in
One Year ($) Return R
Probability
PR
$35 40% 25%
$25 $25 0% 50%
$20 -20% 25%
42)
The variance of the return on Alpha Corporation is closest to:
42)
A)
3.625%
B)
3.75%
C)
5.00%
D)
4.75%
Use the information for the question(s) below.
Suppose the market portfolio's excess return tends to increase by 30% when the economy is strong and decline by 20% when
the economy is weak. A type S firm has excess returns increase by 45% when the economy is strong and decrease by 30%
when the economy is weak. A type I firm will also have excess returns of either 45% or -30%, but the type I firm's excess
returns will depend only upon firm-specific events and will be completely independent of the state of the economy.
43)
What is the Beta for a type I firm?
43)
A)
1.0
B)
0.0
C)
1.5
D)
0.75
22
44)
Which of the following statements is false?
44)
A)
If the return is riskless and never deviates from its mean, the variance is equal to one.
B)
Two common measures of the risk of a probability distribution are its variance and standard
deviation.
C)
The variance is the expected squared deviation from the mean.
D)
The variance increases with the magnitude of the deviations from the mean.
45)
Which of the following investments offered the lowest overall return over the past eighty years?
45)
A)
Treasury Bills
B)
S&P 500
C)
Corporate Bonds
D)
Small Stocks
Use the information for the question(s) below.
Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each
other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the
firm will have a -30% return.
46)
What is the expected return for an individual firm?
46)
A)
14%
B)
-5%
C)
3%
D)
5%
47)
Common risk is also called
47)
A)
uncorrelated risk.
B)
independent risk.
C)
diversifiable risk.
D)
correlated risk.
23
Use the table for the question(s) below.
Consider the following probability distribution of returns for Alpha Corporation:
Current
Stock Price
($)
Stock Price in
One Year ($) Return R
Probability
PR
$35 40% 25%
$25 $25 0% 50%
$20 -20% 25%
48)
The standard deviation of the return on Alpha Corporation is closest to:
48)
A)
19.4%
B)
21.8%
C)
22.4%
D)
19.0%
49)
Which of the following statements is false?
49)
A)
Riskier investments must offer investors higher average returns to compensate them for the
extra risk they are taking on.
B)
Volatility seems to be a reasonable measure of risk when evaluating returns on large
portfolios and the returns of individual securities.
C)
Investments with higher volatility have rewarded investors with higher average returns.
D)
Investments with higher volatility should have a higher risk premium and therefore higher
returns.
D)
50)
Which of the following statements is false?
50)
A)
The expected or mean return is calculated as a weighted average of the possible returns,
where the weights correspond to the probabilities.
B)
When an investment is risky, there are different returns it may earn.
C)
The variance is a measure of how "spread out" the distribution of the return is.
D)
In finance, the variance of a return is also referred to as its volatility.
24
51)
Which of the following equations is incorrect?
51)
A)
SD(R) =R PR× (R-E[R])2
B)
Var(R) =RPR× (R-E[R])2
C)
Var(R)=SD(R)
D)
E[R] =R PR× R
52)
Which of the following statements is false?
52)
A)
The risk premium of a security is determined by its systematic risk and does not depend on
its diversifiable risk.
B)
The volatility in a large portfolio will decline until only the systematic risk remains.
C)
When we combine many stocks in a large portfolio, the firm-specific risks for each stock will
average out and be diversified.
D)
Fluctuations of a stock's returns that are due to firm-specific news are common risks.
53)
Which of the following statements is false?
53)
A)
We measure the degree of estimation error statistically through the standard error of the
estimate.
B)
We estimate the variance by computing the average squared deviation from the average
realized return.
C)
When focusing on the returns of a single security, its common practice to assume that all
dividends are immediately invested at the risk-free rate.
D)
We estimate the standard deviation or volatility as the square root of the variance.
25
Use the information for the question(s) below.
Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each
other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the
firm will have a -30% return.
54)
The standard deviation for the return on an portfolio of 20 type S firms is closest to:
54)
A)
15.0%
B)
5.25%
C)
23.0%
D)
5.10%
55)
Which of the following statements is false?
55)
A)
If you hold the stock beyond the date of the first dividend, then to compute you return you
must specify how you invest any dividends you receive in the interim.
B)
The realized return is the total return we earn from dividends and capital gains, expressed as
a percentage of the initial stock price.
C)
The expected return is the return is the return that actually occurs over a particular time
period.
D)
The average annual return of an investment during some historical period is simply the
average of the realized returns for each year.
Use the table for the question(s) below.
Consider the following probability distribution of returns for Alpha Corporation:
Current
Stock Price
($)
Stock Price in
One Year ($) Return R
Probability
PR
$35 40% 25%
$25 $25 0% 50%
$20 -20% 25%
56)
The expected return for Alpha Corporation is closest to:
56)
A)
10%
B)
5.00%
C)
6.67%
D)
0.00%
26
Use the information for the question(s) below.
Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before
the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1
billion in net income for Big Cure. Little Cure has 10 separate less important drugs before the FDA waiting for approval. If
approved, each of Little Cure's drugs would produce $100 million in net income for Little Cure. The probability of the FDA
approving a drug is 50%.
57)
What is the standard deviation of Big Cure's average net income for their new blockbuster drug?
57)
A)
$1 billion
B)
$100 million
C)
$500 million
D)
$0
27
Use the table for the question(s) below.
Consider the following realized annual returns:
Year End
S&P 500
Realized
Return
IBM
Realized
Return
1996 23.6% 46.3%
1997 24.7% 26.7%
1998 30.5% 86.9%
1999 9.0% 23.1%
2000 -2.0% 0.2%
2001 -17.3% -3.2%
2002 -24.3% -27.0%
2003 32.2% 27.9%
2004 4.4% -5.1%
2005 7.4% -11.3%
28
58)
Suppose that you want to use the 10 year historical average return on the S&P 500 to forecast the
expected future return on the S&P 500. The 95% confidence interval for your estimate of the expect
return is closest to:
58)
A)
-37.0% to 47.6%
B)
-10.6% to 28.2%
C)
6.8% to 10.7%
D)
4.9% to 12.7%
59)
Which of the following investments offered the highest overall return over the past eighty years?
59)
A)
Treasury Bills
B)
Corporate Bonds
C)
S&P 500
D)
Small stocks
Use the table for the question(s) below.
Consider the following average annual returns:
Investment Average Return
Small Stocks 23.2%
S&P 500 13.2%
Corporate Bonds 7.5%
Treasury Bonds 6.2%
Treasury Bills 4.8%
60)
What is the excess return for the S&P 500?
60)
A)
8.4%
B)
0%
C)
7.0%
D)
5.7%
D)
61)
Which of the following statements is false?
61)
A)
The geometric average return will always be above the arithmetic average return and the
difference grows with the volatility of the annual returns.
B)
We should use the arithmetic average return when we are trying to estimate an investment's
expected return over a future horizon based on its past performance.
C)
The geometric average return is a better description of the long-run historical performance of
an investment.
D)
The compounded geometric average return is most often used for comparative purposes.
30
62)
Which of the following statements is false?
62)
A)
Because investors dislike only negative resolutions of uncertainty, alternative measures that
focus solely on downside risk have been developed, such as the semi-variance and the
expected tail loss.
B)
The standard deviation is the square root of the variance.
C)
While the variance and the standard deviation are the most common measures of risk, they
do not differentiate between upside and downside risk.
D)
While the variance and the standard deviation both measure the variability of the returns, the
variance is easier to interpret because it is in the same units as the returns themselves.
63)
Which of the following is not a systematic risk?
63)
A)
The risk that the economy slows, reducing demand for your firm's products
B)
The risk that the Federal Reserve raises interest rates
C)
The risk that oil prices rise, increasing production costs
D)
The risk that your new product will not receive regulatory approval
31
Use the table for the question(s) below.
Consider the following realized annual returns:
Year End
S&P 500
Realized
Return
IBM
Realized
Return
1996 23.6% 46.3%
1997 24.7% 26.7%
1998 30.5% 86.9%
1999 9.0% 23.1%
2000 -2.0% 0.2%
2001 -17.3% -3.2%
2002 -24.3% -27.0%
2003 32.2% 27.9%
2004 4.4% -5.1%
2005 7.4% -11.3%
64)
The standard deviation of the returns on IBM from 1996 to 2005 is closest to:
64)
A)
11.0%
B)
31.5%
C)
33.2%
D)
16.4%
32
65)
Suppose that Luther's Beta is 0.9. If the market risk premium is 8% and the risk-free interest rate is
4%, then then expected return for Luther stock is?
65)
A)
12.9%
B)
11.2%
C)
11.6%
D)
7.6%
Use the table for the question(s) below.
Consider the following realized annual returns:
Year End
S&P 500
Realized
Return
IBM
Realized
Return
1996 23.6% 46.3%
1997 24.7% 26.7%
1998 30.5% 86.9%
1999 9.0% 23.1%
2000 -2.0% 0.2%
2001 -17.3% -3.2%
2002 -24.3% -27.0%
2003 32.2% 27.9%
2004 4.4% -5.1%
2005 7.4% -11.3%
66)
The average annual return on IBM from 1996 to 2005 is closest to:
66)
A)
18.7%
B)
18.2%
C)
29.9%
D)
16.40%
