Use the following information, which describes the expected return and standard deviation for three different assets

Use the following information, which describes the expected return and standard deviation for three different assets, to answer the following question(s).

                                                            Portfolio X         Portfolio Y          Portfolio Z

        Expected return                           9.5%                     8.8%                      9.5%

        Standard deviation                    4.9%                     5.5%                      5.5%

If an investor must choose between investing in either portfolio X or portfolio Y, then

A) she will always choose Asset X over Asset Y.

B) she will always choose Asset Y over Asset X.

C) she will be indifferent between investing in Asset X and Asset Y.

D) none of the above.

An investor will get maximum risk reduction by combining assets that are

A) negatively correlated.

B) positively correlated.

C) uncorrelated.

D) perfectly, positively correlated.

A negative coefficient of correlation implies that

A) on average, returns to such assets are negative.

B) asset returns tend to move in opposite directions.

C) asset return tend to move in opposite directions.

D) None of the above because the coefficient of correlation cannot be negative.

What is the expected rate of return on a portfolio 18% of which is invested in an S&P 500 Index fund, 65% in a technology fund, and 17% in Treasury Bills.  The expected rate of return is 11% on the S&P Index fund, 14% on the technology fund and 2% on the Treasury Bills.

A) 10.25%

B) 8.33%

C) 11.42%

D) 9.00%

What is the expected rate of return on a portfolio Which consists of $9,000 invested in an S&P 500 Index fund, $32,500 in a technology fund, and $8,500 in Treasury Bills.  The expected rate of return is 11% on the S&P Index fund, 14% on the technology fund and 2% on the Treasury Bills.

A) $154.00

B) $142.80

C) $65.00

D) $15.12

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%

You are considering investing in a portfolio consisting of 40% Electric General and 60% Buckstar

You are considering investing in a portfolio consisting of 40% Electric General and 60% Buckstar.  If the expected rate of return on Electric General is 16% and the expected return on Buckstar is 9%, what is the expected return on the portfolio?

A) 12.50%

B) 13.20%

C) 11.80%

D) 10.00% 

Which of the following portfolios is clearly preferred to the others?

                       Expected          Standard

                         Return            Deviation

        A                 14%                    12%

        B                  22%                    20%

        C                 18%                    16%

A) Investment A

B) Investment B

C) Investment C

D) Cannot be determined

You are considering investing in U.S. Steel. Which of the following is an example of nondiversifiable risk?

A) Risk resulting from foreign expropriation of U.S. Steel property

B) Risk resulting from oil exploration by Marathon Oil (a U.S. Steel subsidy)

C) Risk resulting from a strike against U.S. Steel

D) None of the above

You are considering buying some stock in Continental Grain. Which of the following is an example of nondiversifiable risk?

A) Risk resulting from a general decline in the stock market

B) Risk resulting from a news release that several of Continental's grain silos were tainted

C) Risk resulting from an explosion in a grain elevator owned by Continental

D) Risk resulting from an impending lawsuit against Continental

If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is the expected rate of return?

A) 12%

B) 13%

C) 14%

D) 15%

If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what would be the standard deviation?

A) 2.24

B) 2.56

C) 2.83

D) 2.98

Madison was hired to design and decorate the offices of a large pharmaceutical company

Madison was hired to design and decorate the offices of a large pharmaceutical company.  She accidentally read a report indicating that a new drug had just been approved by the Food and Drug administration.  She immediately bought the company's stock which doubled in price over the following week.  This outcome is inconsistent with

A) the weak-form efficient market hypothesis.

B) the semi-strong form efficient market hypothesis.

C) the strong form efficient market hypothesis.  Her action was probably illegal.

D) all of the above.

Stock prices go up when there is positive information about a company, and go down when there is negative information about the company.

Answer:  TRUE

Strategies that exploit market inefficiencies tend to lose their effectiveness when they become widely known.

Answer:  TRUE

If a market is weak form efficient, an investor can make higher than expected profits by studying the past price patterns of a stock.

Answer:  FALSE

If an individual with inside information can make higher than expected profits, the market is no more than semi-strong form efficient.

Answer:  TRUE

Under the efficient market hypothesis, would securities be properly priced.

Answer:  If markets were perfectly efficient, then investors would price a stock based on the company's expected future cash flows, so at any time the security would be properly priced. If good news becomes available, that would tend to increase the expected cash flows to a company, the stock price will go up, meaning that the new price is then the proper price for the stock.

Are markets moving toward being more efficient or toward being less efficient?

Answer:  Empirical evidence shows that since about the year 2000 pricing anomalies have diminished considerably. Hedge funds have been trying to exploit pricing inefficiencies, and by doing so, eliminate the inefficiencies. Hence, the market appears to be becoming more efficient over time.

Why do the arithmetic average return and the geometric return differ?

Why do the arithmetic average return and the geometric return differ?

Answer:  The arithmetic average return does not take what the value of the investment was at the start of each period. Hence, even though a company may have the same arithmetic return for two consecutive years, the dollar amount of those returns will be different in later years than in the first year. For instance, if the investor started with $1,000, and earned 20% the first year, lost 20% the second year, and earned 15% the third year, the average arithmetic return would be 5%, and the 20% gain the first year would be $200, but the 20% loss the second year would be $240. The investment would be worth $1104 after three years, giving an average geometric return of 3.35%, different from the average arithmetic return.

Each of the following would tend to weaken the Efficient Market Hypothesis EXCEPT

A) There is publicly available information that Boeing Aircraft has procured a contract to build 25 planes for the U.S. Government and the price of Boeing quickly goes up.

B) ACG, Inc. performed well for the past six months, but they just lost a major distribution contract, but the price of ACG stock continues to go up.

C) Louisville Slugger, Inc., gets a contract to supply bats for Little League play, a contract it never had before, and stock price remains stable.

D) Muguet Company consistently underperforms the market in October, but outperforms the market in May.

Jayden spends a lot of time studying charts of stocks past performance, but his investment return are only average.  This outcome supports

A) the weak-form efficient market hypothesis.

B) the semi-strong form efficient market hypothesis.

C) the strong form efficient market hypothesis. 

D) all of the above.

Which of the following is consistent with the efficient market hypothesis?

A) so-called value stocks outperform growth stocks.

B) stocks that have performed well over the past year continue to perform well for several more months.

C) a company announces higher than expected sales and earnings.  The stock price immediately increases by 10%. 

D) a company announces higher than expected sales and earnings.  The stock price remains unchanged.

Susan Bright will get returns of 18%, -20.3%, -14%, 17.6%, and 8.3% in the next five years on her investment in CoffeeTown, Inc

Use the following information to answer the following question(s).

Susan Bright will get returns of 18%, -20.3%, -14%, 17.6%, and 8.3% in the next five years on her investment in CoffeeTown, Inc. stock, which she purchases for $73,419.66 today.

What is the arithmetic average return on her stock if she sells it five years from today?

A) 1.92%

B) 3.98%

C) 6.47%

D) 7.11%

What is the geometric average return on her stock if she sells it five years from today?

A) -2.33%

B) .59%

C) 3.67%

D) 4.88%

How much will Susan's stock be worth if she sells it five years from today?

A) $71,423.85

B) $73,419.66

C) $75,628.75

D) $80,333.40

Arithmetic average rate of return takes compounding into effect.

Answer:  FALSE

An investor who wishes to hold a stock for five years will be most interested in geometric average rather than in the arithmetic average return.

Answer:  TRUE

If an investor holds earns 10% on her investment in the first year and loses 10% the next year, she will have neither a gain nor a loss.

Answer:  FALSE

If an investor holds a stock for three years, the value at the end of three years will always be the initial cost of the stock times (1 + arithmetic average return) to the third power.

Answer:  FALSE

Roddy Richards invested $12014.88 in Wolverine Meat Distributors (W.M.D.) five years ago

Use the following to answer the following question(s).

Roddy Richards invested $12014.88 in Wolverine Meat Distributors (W.M.D.) five years ago. The investment had yearly arithmetic returns of -9.7%, -8.1%, 15%, 7.2%, and 15.4%.

What is the arithmetic average return of Roddy Richard's investment?

A) 2.42%

B) 3.96%

C) 5.18%

D) 15.1%

What is the geometric average return of Roddy's Richard's investment?

A) 3.38%

B) 4.63%

C) 6.96%

D) 8.78%

How much money did Roddy Richards receive when he sold his shares of W.M.D.?

A) $12,014.88

B) $12,398.42

C) $13,663.47

D) $14,184.73

Marcus Berger invested $9842.33 in Hawkeyehats, Inc. four years ago. He sold the stock today for $11,396.22. What is his geometric average return?

A) 2.98%

B) 3.73%

C) 3.95%

D) There is insufficient information to derive an answer.

Michael Lynch invested $10,000 in the Rearguard Fund four years ago.  All earnings were reinvested in the fund.  If his compound annual rate of return was 7%, what is his investment worth today?

A) $1,310.80

B) $10,700

C) $12,800

D) $762.89