BUSN 379 Week 5 : Risk and Return – Homework ES
Homework ES
1. (TCO 8) Over the period of 1955-2006: (Points : 3)
long-term government bonds underperformed large corporate stocks.
small-company stocks underperformed large-company stocks.
inflation exceeded the rate of return on U.S. Treasury bills.
U.S. Treasury bills outperformed long-term government bonds.
2. (TCO 8) Which of the following is true regarding the efficient market hypothesis? (Points : 3)
It argues that efficient markets are not volatile throughout a trading day.
It suggests that an efficient market can only consider historical information when determining current security prices.
It proves that market inefficiencies do not exist in either the short-run or the long-run.
It implies that all investments in an efficient market have a net present value of zero.
3. (TCO 8) Which of the following factors will affect the expected rate of return on a security? Select all that apply: (Points : 4)
multiple states of the economy
probability of occurrence for any one economic state
market rate of return given a particular economic state
security beta
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 expected return of this investment? (Points : 3)
11%
17%
16.60%
10%
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, approximately how much would you invest in Stock A? (Points : 3)
$96,000
$150,000
$75,000
More than $200,000
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 of Stock I and II respectively? (Points : 3)
0.6 and 1.2
1.2 and 0.6
1.2 and 0.4
Cannot be determined with the information given
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 lower risk premium than Stock II
Stock I has a lower expected return than Stock II
8. (TCO 8) Which statements are false regarding risk? Select all that apply: (Points : 4)
The expected return is always the same as the actual return
A key to assessing risk is determining how much risk an investment adds to a portfolio
Risks can always be diversified
The higher the risk, the higher the return investors require for the investment
9. (TCO 8) What is systematic risk? Provide two or three examples. How can you diversify it? (Points : 3)
