1

Match the description to the formula.

1. Total holding period return
2. Expected return on one stock
3. Variance of return on one stock
4. Coefficient of variation
5. Sharpe ratio
6. Expected return for a portfolio
7. Variance for a two-asset portfolio
8. Covariance of returns between two assets
9. Correlation between the returns on two assets
10. CAPM

QUESTION 2

Robert paid $100 for a stock one year ago.The total return on the stock was 10 percent.Therefore, the stock must be selling for $110 today.

1. True
2. False

QUESTION 3

Whenever the outcome of an event has a number of different possibilities that have equal probability of occurrence, then the expected value of the outcome is equal to the simple average of the individual events.

1. True
2. False

QUESTION 4

Variance can be a negative.

1. True
2. False

QUESTION 5

Variance is equal to the square root of standard deviation.

1. True
2. False

QUESTION 6

If the returns on two assets have a correlation coefficient of one, then there are no benefits of diversification by combining these assets in a two-asset portfolio.

1. True
2. False

QUESTION 7

Which of the following investment classes had the greatest average return in the historical data?

1. Short term government bonds
2. Long term government bonds
3. Large US stocks
4. Small US stocks

QUESTION 8

Which of the following investment classes had the greatest variability in returns in the historical data?

1. Short term government bonds
2. Long term government bonds
3. Large US stocks
4. Small US stocks

QUESTION 9

Which of the following statements is correct if investors are risk averse?

1. The greater the risk associated with an investment, the lower the return investors expect from it.
2. When choosing between two investments that have the same level of risk, investors prefer the investment with the higher return.
3. If two investments have the same expected return, investors prefer the riskier alternative.
4. When choosing between two investments that have the same level of risk, investors prefer the investment with the lower return.

QUESTION 10

Common stock portfolios that offer the highest expected return for a given level of risk are know as

1. efficient portfolios.
2. inefficient portfolios.
3. unusual portfolios.
4. empty portfolios.

QUESTION 11

Which of the following risks is considered a "nondiversifiable" risk in common stock returns?

1. the company CEO becomes ill
2. the company receives a new contract for a large purchase of its products
3. the US Congress eliminates the corporate income tax
4. the company loses a lawsuit filed by its employees

QUESTION 12

The statistic calculated as the weighted average of the squared deviations from the mean is known as

1. standard deviation
2. standard weight
3. standard fit
4. variance

QUESTION 13

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

1. 1.25 percent
2. 2.50 percent
3. 3.75 percent
4. 5.00 percent