1. What is the expected return on a stock that pays a 4 percent annual dividend and whose price is expected to appreciate annually at 6 percent?

4%

6%

10%

14%

2. What is the expected return on a portfolio consisting of an equal amount invested in each stock?

StockExpected Return

A15%

B10

C22

D14

12.25%

15.25%

17.25%

19.25%

StockExpected Return

A15%

B10

C22

D14

What is the expected return on the portfolio if 50 percent of the funds are invested in stock C, 30 percent in stock A, and 20 percent in Stock D?

12.30%

14.30%

16.30%

18.30%

Reinvestment rate risk refers to fluctuations in

rates earned when funds are reinvested

a stock's price

a stock's dividend

the cost of an investment

Sources of risk include

1. fluctuating exchange rates

2. a firm's financing decisions

3. higher interest rates

4. loss of purchasing power

1 and 2

2 and 3

2,3, and 4

1, 2, 3, and 4

6.For diversification to reduce risk,

the returns on the individual securities should be highly correlated

the prices of the stocks should be stable

one firm should offer dividends and the othershould offer capital gains

the returns on the individual securities should be negatively correlated