The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%

The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%.  The coefficient of correlation between the stocks is .75. The standard deviation of any portfolio combining the two stocks will be less than 20%.

Answer:  TRUE

The portfolio standard deviation will always be less than the standard deviation of any asset in the portfolio.

Answer:  FALSE

When assets are positively correlated, they tend to rise or fall together.

Answer:  TRUE

The standard deviation of a portfolio is always just the weighted average of the standard deviations of assets in the portfolio.

Answer:  FALSE

A correlation coefficient of +1 indicates that returns on one asset can be exactly predicted from the returns on another asset.

Answer:  TRUE

Adequate portfolio diversification can be achieved by investing in several companies in the same industry.

Answer:  FALSE

A portfolio will always have less risk than the riskiest asset in it if the correlation of assets is less than perfectly positive.

Answer:  TRUE

Most financial assets have correlation coefficients between 0 and 1.

Answer:  TRUE

Portfolio returns can be calculated as the geometric mean of the returns on the individual assets in the portfolio.

Answer:  FALSE

When constructing a portfolio, it is a good idea to put all your eggs in one basket, then watch the basket closely.

Answer:  FALSE

A portfolio containing a mix of stocks, bonds, and real estate is likely to be more diversified than a portfolio made up of only one asset class.

Answer:  TRUE

An asset with a large standard deviation of returns can lower portfolio risk if its returns are uncorrelated with the returns on the other assets in the portfolio.

Answer:  TRUE

The greater the dispersion of possible returns, the riskier is the investment.

Answer:  TRUE

For the most part, there has been a positive relation between risk and return historically.

Answer:  TRUE

The benefit from diversification is far greater when the diversification occurs across asset types.

Answer:  TRUE

Investing in foreign stocks is one way to improve diversification of a portfolio.

Answer:  TRUE

The expected return on MSFT next year is 12% with a standard deviation of 20%. The expected return on AAPL

The expected return on MSFT next year is 12% with a standard deviation of 20%.  The expected return on AAPL next year is 24% with a standard deviation of 30%.  The correlation between the two stocks is .6.  If James makes equal investments in MSFT and AAPL, what is the expected return on his portfolio.

A) 21.45%

B) 25.00%

C) 4.60%

D) 15.00%

Use the following information, which describes the possible outcomes from investing in a particular asset, to answer the following question(s).

        State of the Economy         Probability of the States       Percentage Returns

        Economic recession                              25%                                         5%

        Moderate economic growth               55%                                        10%

        Strong economic growth                     20%                                        13%

9) The expected return from investing in the asset is

A) 9.00%.

B) 9.35%.

C) 10.00%.

D) 10.55%.

10) The standard deviation of returns is

A) 8.00%.

B) 7.63%.

C) 4.68%.

D) 2.76%.

The expected return on MSFT next year is 12% with a standard deviation of 20%.  The expected return on AAPL next year is 24% with a standard deviation of 30%.  If James makes equal investments in MSFT and AAPL, what is the expected return on his portfolio.

A) 20%

B) 16%

C) 18%

D) 25%

Using the following information for McDonovan, Inc.'s stock, calculate their expected return and standard deviation.

Using the following information for McDonovan, Inc.'s stock, calculate their expected return and standard deviation.

        State                               Probability                  Return

        Boom                             20%                               40%

        Normal                         60%                               15%

        Recession                     20%                               (20%)

Answer: 

Ki =     = (.20)(40%) + (.60)(15%) + (.20)(-20%)

                                = 8% + 9% - 4% = 13%

σi =    ().

σi =    ((40% - 13%)2(.2) + (15% - 13%)2 (.6) + (-20% - 13%)2 (.2)). = 19.13%

The cash return on an investment is calculated as purchase price-selling price.

Answer:  FALSE

Because returns are more certain for the least risky investments, the required return on these investments should be higher than the required returns on more risky investments.

Answer:  FALSE

Even though an investor expects a positive rate of return, it is possible that the actual return will be negative.

Answer:  TRUE

The expected rate of return is the weighted average of the possible returns for an investment.

Answer:  TRUE

The expected rate of return is the sum of each possible return times it likelihood of occurrence.

Answer:  TRUE

The higher the standard deviation, the less risk the investment has.

Answer:  FALSE

Spartan Sofas, Inc. is selling for $50.00 per share today. In one year, Spartan will be selling for $48.00 per share

Spartan Sofas, Inc. is selling for $50.00 per share today. In one year, Spartan will be selling for $48.00 per share, and the dividend for the year will be $3.00. What is the cash return on Spartan stock?

A) $51.00

B) $1.00

C) $2.00

D) $3.00

What is the standard deviation of an investment that has the following expected scenario? 18% probability of a recession, 2.0% return; 65% probability of a moderate economy, 9.5% return; 17% probability of a strong economy, 14.2% return.

A) 3.68%

B) 1.23%

C) 8.47%

D) 6.66%

You are considering investing in a firm that has the following possible outcomes:

          Economic boom: probability of 25%; return of 25%

          Economic growth: probability of 60%; return of 15%

          Economic decline: probability of 15%; return of -5%

What is the expected rate of return on the investment?

A) 15.0%

B) 11.7%

C) 14.5%

D) 25.0%

Which of the following best measures an asset's risk?

A) Expected return

B) The standard deviation

C) The probability distribution

D) The cash return