Unit 5: Risk and Return

Question 1

True or false

The standard deviation is always the square root of the variance.

Answer 1

True

Question 2

Wendy bought a share of stock for $100 and received a $5 dividend. If the stock price rises to $105 then the total dollar return is _____

Answer 2

$10

Question 3

If an investor buys a stock for $10 and later sells it for $16, she will have a capital gain/loss of how many dollars?

Answer 3

Capital gain of $6

Question 4

What is arithmetic average return?

Answer 4

The return earned in an average year over a multi-year period.

Question 5

How do you calculate the expected return on a security or asset?

Answer 5

The sum of the possible returns multiplied by their probabilities.

E(R) =Σ R_j X P_j

• R_j = value of the jth outcome
• P_{j = associated probability of occurence}
• Σ = the sum over all j

Question 6

What is Dividend Yield calculated?

Answer 6

Dt/Pt

Question 7

Given the same set of data which will be smaller? The geometric average return… or … the arithmetic average return?

Answer 7

Geometric Average Return.

Question 8

The function to calculate Standard deviation is

Answer 8

STDEV()

Question 9

What is variance?

Answer 9

The average squared deviation between the actual return and the average return

Question 10

What will the dividend income on 1,000 shares of XYZ corp stock if XYZ Corp distributes a dividend of $0.20 per share?

Answer 10

$200

Question 11

What is expected return?

Answer 11

the future gain or loss from a risky asset.

Question 13

The total dollar return on a stock is the sum of the ____ and the _____.

Answer 13

dividend; capital gain.

Question 14

True or false

Value at Risk is a statistical measure of maximum loss used by banks and other financial institutions to manage risk exposures.

Answer 14

True

Question 15

What is the formula for Capital Gains Yield?

Answer 15

(P_t+1 - Pt)/P_t

Question 16

If Sharon receives a #2 dividend per share on 100 shares, her total dividend income is ____

Answer 16

$200

Question 17

What is a portfolio?

Answer 17

A group of assets such as stocks and bonds held by an investor.

Question 18

What is standard deviation?

Answer 18

The positive square root of the variance.

Question 19

true or false

Risk is directly related to the return

Answer 19

True

Question 20

What are the two most commonly used measures of volatility?

Answer 20

• Variance
• Standard Deviation

Question 21

What is efficient capital market?

Answer 21

Market in which security prices reflect available information.

Question 22

True or false

Variance and standard deviation are the two most commonly used measures of volatility.

Answer 22

True

Question 23

What is value at risk (VaR)?

Answer 23

Statistical measure of maximum loss used by banks and other financial institutions to manage risk exposures.

Question 24

Randy invested $100 and made a total dollar return of $10 over the course of the year. If Randy sells the stock at the end of the year, the year-end total cash is ____

Answer 24

$110

Question 25

What is a portfolio weight(s)?

Answer 25

Percentage of a portfolio’s total value in a particular asset.

Question 26

What is geometric average return?

Answer 26

The average compound return earned per year over a multi-year period.

Question 27

CBA corp stock drops from $50 to $40. If an investor owns 100 shares, his total capital loss will be ____

Answer 27

$ -1000

Question 28

If you purchase a stock for $25 and received a $2 dividend at the end of the year your dividend yield is?

Answer 28

$2/$25 = 0.08 = 8%

Question 29

True or false

There is no relationship between risk and reward

Answer 29

False

Question 30

Dividends are the _____ component of the total return from investing in a stock

Answer 30

income

Question 31

The price of ABC corp rises from $10 to $15 per share. If an investor owns 100 shares, her capital gain is _____?

Answer 31

$500

Question 32

True or false

Stock market history indicates the greater the risk the lower the potential reward

Answer 32

false

Question 33

What is the arithmetic average return on a stock that had the following returns for the last 4 years?

5%, -4%, 3% and 12%?

Answer 33

4%

Question 34

What is risk premium?

Answer 34

The excess return required from an investment in a risky asset over a risk-free asset.

Question 35

2 ways you can make money from investments in stocks are….

Answer 35

• Dividends
• Capital gains

Question 36

If an investor buys a stock for $10 and later sells it for $16, she will have a _____ _____ of $6.

Answer 36

Capital gain

Question 37

The positive square root of the variance is called _______ ______

Answer 37

standard deviation

Question 38

True or false

The higher the risk, the higher the return

Answer 38

True