Chapter 10 Multiple Choice: 1. Which of the following investments offered the hi

Question

Chapter 10

Multiple Choice:

1. Which of the following investments offered the highest overall return over the past eighty years?

a. Treasury Bills

b. S&P 500

c. Small stocks

d. Corporate bonds

2. Consider the following probability distribution of returns for Alpha Corporation:

Current Stock Price ($)

Stock Price in One Year ($)

Return R

Probability PR

$35

40%

25%

$25

$25

0%

50%

$20

-20%

25%

The expected return for Alpha Corporation is closest to:

a. 6.67%

b. 5.00%

c. 10%

d. 0.00%

3. Consider the following average annual returns:

Investment

Average Return

Small Stocks

23.2%

S&P 500

13.2%

Corporate Bonds

7.5%

Treasury Bonds

6.2%

Treasury Bills

4.8%

What is the excess return for the S&P 500?

a. 5.7%

b. 7.0%

c. 0%

d. 8.4%

4. Which of the following statements is FALSE?

a. Fluctuations of a stock's returns that are due to firm-specific news are common risks.

b. The volatility in a large portfolio will decline until only the systematic risk remains.

c. When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified.

d.The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk.

Current Stock Price ($)

Stock Price in One Year ($)

Return R

Probability PR

$35

40%

25%

$25

$25

0%

50%

$20

-20%

25%

Explanation / Answer

1. Small ,stock is the  investments which offered the highest overall return over the past eighty years.

becuase of the high risk in nature and averaged about 10% per year on compunded basis.

2.   Expected return for Alpha Corporation:

Weighted return ( probability * return)

0 .25 * 40% = 10 %

0.50 * 0% = 0%

.25 * -20 % = -5%

5%

(b) 5%

3. Excess return for the S&P 500 :

       = (13.2% - 7.5%)

= 5.7%

   (a) 5.7%

4. (a) Fluctuations of a stock's returns that are due to firm-specific news are common risks.

this statement is false because , fluctuation of a stock 'return that are due to firm specific news are

unsystematic risk or independent risk.

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