Risk and Returns Questions With Answers

Risk and returns questions
1) Which of the following is true of risk?

A) Risk and return are inversely proportionate to each other.
B) Higher the risk associated with a security the lower is its return.
C) Risk is a measure of the uncertainty surrounding the return that an investment will earn.
D) Riskier investments tend to have lower returns as compared to T-bills, which are risk free.
Answer: C
Diff: 1
Topic: Risk Defined
Learning Objective: LG 1
Learning Outcome: F-11
AACSB: Analytical Thinking
2) Nico bought 100 shares of Cisco Systems stock for $30.00 per share on January 1, 2021. He
received a dividend of $2.00 per share at the end of 2021, and at that time the stock was selling
for $34. What return did Nico earn in 2021 on the stock?
A) +13%
B) +20%
C) +7%
D) Nico did not earn a return because he did not sell the shares in 2020.
Answer: B
Diff: 1
Topic: Return Defined
3) Last year, Mike bought 100 shares of Dallas Corporation common stock for $53 per share.
During the year he received dividends of $1.45 per share. The stock is currently selling for $60
per share. What rate of return did Mike earn over the year?
A) 11.7 percent
B) 13.2 percent
C) 14.1 percent
D) 15.9 percent
Answer: D
Diff: 1
4) If an investor prefers an investment with a higher expected return regardless of its risk, then he
could be called a ________ investor.
A) risk-seeking
B) risk-neutral
C) risk-averse
D) risk-aware
Answer: B
Diff: 1
Topic: Risk Preferences
5) If an investor prefers investments with greater risk even if they have lower expected returns,
then he could be called a ________ investor.
A) risk-seeking
B) risk-indifferent
C) risk-averse
D) risk-neutral
Answer: A
Diff: 1
6) Risk aversion is the behavior exhibited by investors who require ________.

A) an increase in return, for a given decrease in risk
B) an increase in return, for a given increase in risk
C) no changes in return, for a given increase in risk
D) decrease in return, for a given increase in risk
Answer: B
Diff: 1
7) Tim purchased a bounce house one year ago for $6,500. During the year it generated $4,000 in
cash flow. If Tim sells the bounce house today, he could receive $6,100 for it. What would be his
total rate of return under these conditions?
Answer: Realized return = = 55.38%

Diff: 1
8) Perry purchased 100 shares of Ferro, Inc. common stock for $25 per share one year ago.
During the year, Ferro, Inc. paid cash dividends of $2 per share. The stock is currently selling for
$30 per share. If Perry sells all of his shares of Ferro, Inc. today, what rate of return would he
earn?
Answer: Realized return = = 28%

Diff: 1
9) Asset A was purchased six months ago for $25,000 and has generated $1,500 cash flow during
that period. What is the asset's total rate of return if it can be sold for $26,750 today?
Answer: Realized return = = 13%

Annual rate of return = 13% × 2 = 26%
Diff: 1
10) ________ is one way of assessing an asset's risk. It is found by subtracting the pessimistic
outcome from the optimistic outcome.
A) Variance
B) Standard deviation
C) Probability distribution
D) Range
Answer: D
Diff: 1
Topic: Risk Assessment
11) A certain investment has a 50% chance of paying $100 and 50% chance of paying -$100. A
risk-averse investor ________.
A) would not be willing to buy this investment at any price greater than or equal to $0
B) would be willing to buy this investment as long as the price is above $0
C) would be willing to buy this investment at a price between $1 and $5
D) would be willing to accept this investment as a gift
Answer: A
Diff: 1
12) Standard deviation is a measure of relative dispersion that is useful in comparing the risks of
assets with different expected returns.
Answer: FALSE
Diff: 1
Topic: Risk Measurement
13) The ________ measures the dispersion around the expected value.
A) coefficient of variation
B) chi square
C) mean
D) standard deviation
Answer: D
Diff: 1
14) Which asset would the risk-averse financial manager prefer? (See below.)
A) Asset A
B) Asset B
C) Asset C
D) Asset D
Answer: D
Diff: 1
AACSB: Reflective Thinking
14) The expected value and the standard deviation of returns for asset A is ________. (See
below.)
Asset A
A) 12 percent and 4 percent

B) 12.7 percent and 2.3 percent
C) 12.7 percent and 4 percent
D) 12 percent and 2.3 percent
Answer: B
Diff: 1
15) The expected value, standard deviation of returns, and coefficient of variation for asset A are
________. (See below.)
Asset A
A) 10 percent, 8 percent, and 1.25, respectively

B) 9.33 percent, 8 percent, and 2.15, respectively
C) 9.35 percent, 4.68 percent, and 2.00, respectively
D) 9.35 percent, 2.76 percent, and 0.295, respectively
Answer: D
Diff: 3
16) Given the following limited information about the two assets A and B, which asset seems
preferable?
Answer: Asset A is preferred because it has a lower range for the same expected return.
Diff: 1
Topic: Risk Assessment
17) Using five years of historical data below, calculate the average return and standard deviation
of returns for Asset A.
Answer: Average return = (20 + 30 - 15 + 2 + 3) / 5 = 8%
Std deviation = = 17.4%

Diff: 2
18) Champion Breweries must choose between two asset purchases. The annual rate of return
and related probabilities given below summarize the firm's analysis.
For each asset, compute

(a) the expected rate of return.
(b) the standard deviation of the expected return.
(c) the coefficient of variation of the return.
(d) Which asset should Champion select?
Answer:
(a)
Expected Return = 15% Expected Return = 15%

(b) Asset A
× 0.30 = 7.5%
× 0.40 = 0%
× 0.30 = 7.5%
15%
Variance = 15
Standard Deviation of A = 3.87%
Asset B
× 0.40 = 40%
× 0.20 = 0%
× 0.40 = 40%
80%
Standard Deviation of B = 8.94%
(c) CVA = 3.87/15 = 0.26 CVB = 8.94/15 = 0.60
(d) Asset A; for 15% rate of return and lesser risk.
Diff: 2
19) The College Copy Shop is in the process of purchasing a high-tech copier. In its search, it
has gathered the following information about two possible copiers A and B.
(a) Compute expected rate of return for each copier.
(b) Compute variance and standard deviation of rate of return for each copier.
(c) Which copier should they purchase?
Answer:
a and b.
Expected value = 16.9% Expected value = 17.05%

Variance A = 17.48 Variance = 35.65
SD = 4.18% SD = 5.97%
(c) CV = SD / r
Copier A: CV = 4.18/16.90 = 0.25
Copier B: CV = 5.97/17.05 = 0.35
The College Copy Shop should buy copier A.
Diff: 2
20) Given the following probability distribution for assets X and Y, compute the expected rate of
return, variance, standard deviation, and coefficient of variation for the two assets. Which asset
seems to be a better investment?
Answer:
Expected value = 10.7% Expected value = 11.15%

Variance = 2.01 Variance = 0.63
SD = 1.42% SD = 0.79%
CV = SD/r
Asset X: CV = 1.42/10.70 = 0.13
Asset Y: CV = 0.79/11.15 = 0.07
Asset Y is preferred.
Diff: 2
8.3 Risk of a portfolio
21) An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K;
$25,000 will be invested in asset R, with an expected annual return of 12 percent; $10,000 will
be invested in asset J, with an expected annual return of 18 percent; and $15,000 will be invested
in asset K, with an expected annual return of 8 percent. The expected annual return of this
portfolio is ________.
A) 12.67%
B) 12.00%
C) 10.00%
D) 11.78%
Answer: B
Diff: 2
Topic: Portfolio Return and Standard Deviation
22) Akai has a portfolio of three assets. Find the expected rate of return for the portfolio
assuming he invests 50 percent of its money in asset A with 10 percent rate of return, 30 percent
in asset B with a rate of return of 20 percent, and the rest in asset C with 30 percent rate of
return.
Answer:
Expected rate of return = 17 percent.

Diff: 2
23) Asset #1 has a standard deviation of 20%, and Asset #2 has a standard deviation of 30%. The
correlation between the two assets is less than 1.0. The standard deviation of a portfolio that
invests 50% in Asset #1 and 50% in Asset #2 is ________.
A) 25%
B) less than 25%
C) more than 25%
D) it is impossible to say without knowing the value of the correlation coefficient
Answer: B
Diff: 2
Topic: Risk of a Portfolio
24)________ is a statistical measure of the relationship between any two series of numbers.
A) Coefficient of variation
B) Standard deviation
C) Correlation
D) Probability
Answer: C
Diff: 1
Topic: Correlation
25) Perfectly ________ correlated series move exactly together and have a correlation coefficient
of ________, while perfectly ________ correlated series move exactly in opposite directions and
have a correlation coefficient of ________.
A) negatively; -1; positively; +1
B) negatively; +1; positively; -1
C) positively; -1; negatively; +1
D) positively; +1; negatively; -1
Answer: D
Diff: 1
Topic: Correlation
26) Two assets have a correlation coefficient less than 1.0, and they have the same expected
return. Combining these assets results in a portfolio with ________ expected return and
________ risk.
A) a higher; less
B) the same; more
C) the same; less
D) a lower; more
Answer: C
Diff: 1
Topic: Correlation
Table 8.1
27) The correlation of returns between Asset A and Asset B can be characterized as ________.
(See Table 8.1)
A) perfectly positively correlated
B) perfectly negatively correlated
C) uncorrelated
D) partially correlated
Answer: B
Diff: 2
Topic: Correlation
28) If you were to create a portfolio designed to reduce risk by investing equal proportions in
each of two different assets, which portfolio would you recommend? (See Table 8.1)
A) Assets A and B
B) Assets A and C
C) none of the available combinations
D) cannot be determined
Answer: A
Diff: 2
Topic: Correlation
29) The portfolio with a standard deviation of zero ________. (See Table 8.1)
A) is comprised of Assets A and B
B) is comprised of Assets A and C
C) is not possible
D) cannot be determined
Answer: A
Diff: 2
AACB: Analytical Thinking
30) One stock has a standard deviation of 20%, and another has a standard deviation of 40%. The
correlation coefficient is 0.3. The standard deviation of a portfolio that invests 50% in each of the
two stocks equals ________.
A) 30.0%
B) 26.5%
C) 6.2%
D) 24.9%
Answer: D
Diff: 1
Topic: Diversification
31) Combining two less than perfectly positively correlated assets to reduce risk is known as
________.
A) diversification
B) valuation
C) securitization
D) risk aversion
Answer: A
Diff: 1
32) The lower the correlation between asset returns, the ________.
A) lesser the potential diversification of risk
B) greater the potential diversification of risk
C) lower the potential profit
D) lesser the assets have to be monitored
Answer: B
Diff: 1
33) Asset 1 has an expected return of 10% and a standard deviation of 20%. Asset 2 has an
expected return of 15% and a standard deviation of 30%. The correlation between the two assets
is less than 1.0. You form a portfolio by investing half of your money in asset 1 and half in asset
2. Which of the following best describes the expected return and standard deviation of your
portfolio?
A) The expected return is 12.5% and the standard deviation is less than 25%.
B) The expected return is between 10% and 15% and the standard deviation is greater than 30%.
C) The expected return is 12.5% and the standard deviation is 25%.
D) The expected return is 12.5% and the standard deviation is greater than 25%.
Answer: A
Diff: 3
Topic: Portfolio Effects
8.4 Risk and return: The Capital Asset Pricing Model (CAPM)
34) Diversifiable risk is the portion of risk that leads to higher returns and is attributable to
market factors that affect all firms.
Answer: FALSE
Diff: 1
Topic: Types of Risk
35) Systematic risk is also referred to as ________.

A) business specific risk
B) internal risk
C) nondiversifiable risk
D) maturity risk
Answer: C
Diff: 1
36) A beta coefficient of +1 represents an asset that ________.

A) has a higher expected return than the market portfolio
B) has the same expected return as the market portfolio
C) has a lower expected return than the market portfolio
D) is unaffected by market movement
Answer: B
Diff: 1
Topic: The Model: CAPM
37) A beta coefficient of -1 represents an asset that ________.

A) is more responsive than the market portfolio
B) has the same response as the market portfolio but in the opposite direction
C) is less responsive than the market portfolio
D) is unaffected by market movement
Answer: B
Diff: 1
38) The beta associated with a risk-free asset ________.

A) is greater than 1
B) is less than 1
C) is equal to 0
D) is between 0 and 1
Answer: C
Diff: 1
39) An investment banker has recommended a $100,000 portfolio containing assets B, D, and F.
$20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a
beta of 2.0; and $30,000 will be invested in asset F, with a beta of 0.5. The beta of the portfolio is
________.
A) 1.25
B) 1.33
C) 1.45
D) 1.85
Answer: C
Diff: 1
Table 8.2
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows:
40) Given the information in Table 8.2, what is the expected return of this portfolio?
A) 11.40%
B) 10.00%
C) 11.33%
D) 11.70%
Answer: C
Diff: 1
41) The beta of the portfolio in Table 8.2, containing assets X, Y, and Z is ________.
A) 1.5
B) 2.4
C) 1.6
D) 2.0
Answer: C
Diff: 1
42) The beta of the portfolio in Table 8.2 indicates this portfolio ________.
A) has more risk than the market
B) has less risk than the market
C) has an unrelated amount of risk compared to the market
D) has the same risk as the market
Answer: A
Diff: 2
43) Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A
comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all
of her investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will
be ________.
A) 0.60
B) 0.88
C) 1.00
D) 1.25
Answer: D
Diff: 1
45) Nico owns 100 shares of Stock X which has a price of $12 per share and 200 shares of Stock
Y which has a price of $3 per share. What is the proportion of Nico's portfolio invested in stock
X?
A) 77%
B) 67%
C) 50%
D) 33%
Answer: B
Diff: 1
46) What is the expected market return if the expected return on Asset X is 20 percent, its beta is
1.5, and the risk free rate is 5 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 22.5%
Answer: C
Diff: 1
47) What is Nico's portfolio beta if he invests an equal amount in Asset X with a beta of 0.60,
Asset Y with a beta of 1.60, and the risk-free asset?
A) 1.24
B) 1.00
C) 0.73
D) 0.66
Answer: C
Diff: 1
Table 8.3
Consider the following two securities X and Y.
48) Which security (X or Y) in Table 8.3 has the least total risk? Which has the least systematic
risk?
A) X; X
B) X; Y
C) Y; X
D) Y; Y
Answer: B
Diff: 2
49) Using the data from Table 8.3, what is the beta for a portfolio with two-thirds of the funds
invested in X and one-third invested in Y?
A) 0.88
B) 1.17
C) 1.33
D) 1.67
Answer: C
Diff: 2
50) Using the data from Table 8.3, what is the portfolio expected return and the portfolio beta if
you invest 35 percent in X, 45 percent in Y, and 20 percent in the risk-free asset?
A) 9.875%, 0.975
B) 10.125, 1.025
C) 8.875%, 0.975
D) 20.5%, 1.250
Answer: A
Diff: 2
51) Using the data from Table 8.3, what is the portfolio expected return if you invest 100 percent
of your money in X, borrow an amount equal to half of your own investment at the risk-free rate
and invest your borrowings in asset X?
A) 18.75%
B) 22.50%
C) 12.50%
D) 16.25%
Answer: D
Diff: 2
52) Asset Z has a beta of 1.2. The risk-free rate of return is 6 percent, while the return on the
market portfolio of assets is 10 percent. The market risk premium is ________.
A) 10.8 percent
B) 4.0 percent
C) 18.0 percent
D) 4.8 percent
Answer: B
Diff: 1
53) Asset P has a beta of 1.25. The risk-free rate of return is 2 percent, while the return on the
market portfolio of assets is 10 percent. The asset's required rate of return is ________.
A) 12.0 percent
B) 14.5 percent
C) 10.0 percent
D) 17.0 percent
Answer: A
Diff: 1

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Risk and returns questions

1) Which of the following is true of risk?

6) Risk aversion is the behavior exhibited by investors who require ________.

Answer: Realized return = = 55.38%

Answer: Realized return = = 28%

Answer: Realized return = = 13%

A) 12 percent and 4 percent

A) 10 percent, 8 percent, and 1.25, respectively

Answer: Average return = (20 + 30 - 15 + 2 + 3) / 5 = 8%

Std deviation = = 17.4%

For each asset, compute

Expected Return = 15% Expected Return = 15%

Expected value = 16.9% Expected value = 17.05%

Expected value = 10.7% Expected value = 11.15%

8.3 Risk of a portfolio

Expected rate of return = 17 percent.

35) Systematic risk is also referred to as ________.

36) A beta coefficient of +1 represents an asset that ________.

37) A beta coefficient of -1 represents an asset that ________.

38) The beta associated with a risk-free asset ________.

Consider the following two securities X and Y.

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