FINANCE 322 FINAL STUDY QUESTIONS AND ANSWERS

FINANCE 322 FINAL STUDY QUESTIONS AND ANSWERS You have been given this probability distribution for the holdingperiod return for GM stock: Boom Prob 0.40 HPR 30% Normal growth Prob 0.40 HPR 11% Recession Prob 0.20 HPR -10% - CORRECT ANSWER221.04% If a portfolio had a return of 15%, the risk-free asset return was 5%, and the standard deviation of the portfolio's excess returns was 30%, the Sharpe measure would be - CORRECT ANSWER-.33 Skewness is a measure of - CORRECT ANSWER-the symmetry of a distribution. The risk premium for common stocks - CORRECT ANSWERcannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory. When a distribution is negatively skewed, - CORRECT ANSWER-standard deviation underestimates risk. If a distribution has "fat tails," it exhibits - CORRECT ANSWERKurtosis The best measure of a portfolio's risk adjusted performance is the _________. - CORRECT ANSWER-Sharpe measure Which of the following measures of risk best highlights the potential loss from extreme negative returns? - CORRECT ANSWER-Value at risk (VaR) The holding-period return (HPR) for a stock is equal to - CORRECT ANSWER-the dividend yield plus the capital gains yield. You purchased a share of stock for $68. One year later, you received $5.00 as a dividend and sold the share for $74.50. What was your holding-period return? - CORRECT ANSWER16.9% Which of the following statements regarding risk-averse investors is true? - CORRECT ANSWER-They only accept risky investments that offer risk premiums over the risk-free rate. Investment Expected Return E(r)Standard Deviation1 0.12 0.13 2 0.15 0.15 3 0.21 0.16 4 0.24 0.21 U = E(r) − (A/2)s2, where A = 4.0. - CORRECT ANSWER-3 Given the capital allocation line, an investor's optimal portfolio is the portfolio that - CORRECT ANSWER-maximizes her expected utility. A fair game - CORRECT ANSWER-will not be undertaken by a risk-averse investor and is a risky investment with a zero risk premium. The presence of risk means that - CORRECT ANSWER-more than one outcome is possible. The capital allocation line can be described as the - CORRECT ANSWER-investment opportunity set formed with a risky asset and a risk-free asset. Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore, - CORRECT ANSWER-for the same return, David tolerates higher risk than Elias. In a return-standard deviation space, which of the following statements is(are) true for risk-averse investors? (The vertical and horizontal lines are referred to as the expected return-axis and the standard deviation-axis, respectively.) I) An investor's own indifference curves might intersect. II) Indifference curves have negative slopes. III) In a set of indifference curves, the highest offers the greatest utility. IV) Indifference curves of two investors might intersect. - CORRECT ANSWER-III and IV only You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to - CORRECT ANSWER-0.325. According to the mean-variance criterion, which one of the following investments dominates all others? - CORRECT ANSWER-E(r) = 0.15; Variance = 0.20