# Week 5 : risk and return – homework es

Week 5 : Risk and Return – Homework ES

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Homework ES

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

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.

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 variance of this investment? (Points : 3)

0.03

0.15

17%

20%

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%.

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 I has more overall risk than Stock II

Stock II has less systematic risk than Stock I

Stock I has a higher risk premium than Stock II

None of the above are correct statements

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