BUSN 379 - Week 5 Risk and Return Homework ES

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Homework ES

Question 1.1. (TCO 8) Which one of the following is a correct definition of an Ibbotson and Sinquefield investment category as used to report historical returns in your textbook? (Points : 3)

       U.S. Treasury bills: 1-year debt securities issued by the U.S. Department of the Treasury

       Small-company stocks: Stocks of the smallest 20 percent of the firms listed on the NYSE

       Large-company stocks: Stocks of the largest 10 percent of the firms listed on the NYSE

       Long-term U.S. government bonds: Bonds issued by the U.S. government with a 30-year maturity

Question 2.2. (TCO 8) If the financial markets are efficient, then: (Points : 3)

       stock prices should never change.

       stock prices should only respond to unexpected news and events.

       stock prices should increase or decrease slowly as new events are analyzed and the information is absorbed by the markets.

       stock prices will only change when an event actually occurs, not at the time the event is anticipated.

Question 3.3. (TCO 8) Which of the following statements is false regarding systematic risk? Select all that apply: (Points : 4)

        is always diversifiable 

        is the total risk associated with surprise events 

        affects only a specific project or firm 

        is measured by standard deviation 

Question 4.4. (TCO 8) Assume a project that has the following returns for years 1 to 5: 15%, 4%, -13%, 34%, and 17%. What is the approximate standard deviation of this investment? (Points : 3)

       0.03013

       0.1542

       17%

       20%

Question 5.5. (TCO 8) Assume you are considering investing in two stocks, A & B. Stock A has an expected return of 16% and Stock B has an expected return of 9.5%. Your goal is to create a two-security portfolio that will have an expected return of 12%. If you have $250,000 to invest today, which of the following statements is true? (Points : 3)

       You would invest more in Stock A than you would invest in Stock B

       You would invest approximately $96,000 in Stock A and $154,000 in Stock B

       You would invest the same amount in each stock

       Regardless of your investment choices, you cannot obtain a return of 12%.  

Question 6.6. (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows: 

The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. What is the beta and standard deviation of Stock I? (Points : 3)

       1.2 and 24%

       0.6 and 12%

       1.2 and 12.5%

       Cannot be determined with the information given  

Question 7.7. (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows: 

The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. Which statement is true? Select all that apply: (Points : 4)

        Stock II has more risk than Stock I 

        Stock II has less systematic risk than Stock I 

        Stock I has a higher risk premium than Stock II 

        Stock I has a greater expected return than Stock II 

Question 8.8. (TCO 8) Which statements are true regarding risk? Select all that apply: (Points : 4)

        The expected return is usually not the same as the actual return 

        A key to assessing risk is determining how much risk an investment adds to a portfolio 

        Some risks cannot be decreased or mitigated by the financial manager. 

        The higher the risk, the higher the return investors require for the investment 

Question 9. 9. (TCO 8) Are all risks diversifiable? Why or why not? (Points : 3)