1. Calculate the capital gain return for a stock that was purchased at $25 one year ago and is now worth $26. It paid four quarterly dividends of $1 per share each throughout the year.
a. 4 percent
b. 16 percent
c. 20 percent
d. 12 percent

2. In Question 1, what is the total return of the security?
a. 4 percent
b. 8 percent
c. 16 percent
d. 20 percent

3. Which of the following is false?
a. The income yield of a security that has a $3 cash flow during a period, with a beginning price of $15, is 20 percent.
b. The arithmetic mean is always less than the geometric mean of a series of returns.
c. The geometric mean of 50 percent and −50 percent is −13.4 percent.
d. The greater the dispersion of a distribution, the greater the spread between the geometric mean and the arithmetic mean.

4. Calculate the expected return on a stock that has a 35-percent probability of a 30-percent return, a 40-percent probability of a 40-percent return, and a 25-percent probability of a
15-percent return.
a. 28.33 percent
b. 33.33 percent
c. 30.25 percent
d. 20 percent

5. In Question 4, what is the standard deviation?
a. 11.12 percent
b. 9.99 percent
c. 9.81 percent
d. 12 percent

6. Which of the following is false?
a. The expected return of a portfolio is always the weighted average of the expected return of each asset in the portfolio.
b. Covariance measures the co-movement between the returns of individual securities.
c. The standard deviation of a portfolio is always the weighted average of the standard deviations of individual assets in the portfolio.
d. Standard deviation is easier to interpret than variance as a measure of risk.

7. The correlation coefficient
a. Equals covariance times the individual standard deviations.
b. Measures how security returns move in relation to one another.
c. May be greater than +1.
d. Shows a stronger relationship between the returns of two securities when its absolute value is closer to 0.

8. Which of the following is false?
a. The standard deviation of a portfolio that contains two individual securities is the weighted average of individual standard deviations only when the correlation coefficient is equal to +1.
b. It is impossible to eliminate all the risk for a two-security portfolio.
c. There are n(n − 1)/2 co-movement terms and n variance terms for an n-security portfolio.
d. The more securities added, the lower the marginal risk reduction per security added.

9. According to the diagram below, which statement is false?

a. Portfolio C is the minimum variance portfolio (MVP).
b. Portfolios on the upper segment above C dominate those on the bottom segment below C.
c. Portfolios A, B, and D are attainable, but C is not.
d. A more risk-averse investor will prefer portfolios on the left side of the efficient frontier.

10. Which of the following correlation coefficients will provide the greatest diversification benefits for a given portfolio?
a. 0
b. 0.5
c. 1

  • CreatedFebruary 25, 2015
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