Risk-Free Investments - Assignment Example

ACCOUNTING ASSIGNMENT 5 Solve and answer All the questions Investors require a 4 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called? a) Inflation premium b) Required return c) Real return d) Average return e) Risk premium. 2. Which one of the following is the positive square root of the variance? a) Standard deviation b) Mean c) Risk-free rate d) Average return e) Real return 3. Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment? a) The dollar return is dependent on the size of the investment while the percentage return is not. b) The dollar return is more accurate than the percentage return because the dollar return includes dividend income while the percentage return does not. c) The dollar return considers the time value of money while the percentage return does not. d) Dollar returns are based on capital gains while percentage returns are based on the total rate of return. e) Dollar returns must either be zero or a positive value while percentage returns can be negative, zero, or positive. 4. The standard deviation measures the _____ of a securitys returns over time. a) Average value b) frequency c) volatility d) Mean e) arithmetic average 5. One year ago, you purchased 500 shares of stock for $12 a share. The stock pays $0.22 a share in dividends each year. Today, you sold your shares for $28.30 a share. What is your total dollar return on this investment? a) $6,222 b) $7,432 c) $8,150 d) $7,775 e) $8,260 Total Dollar return = [dividend per share + (sale price - purchase price)] * #of shares = [0.22+ (28.30-12)] 500 6. One year ago, you purchased a 5 percent coupon bond with a face value of $1,000 when it was selling for 101.2 percent of par. Today, you sold this bond for 99.8 percent of par. What is your total dollar return on this investment? a) $36 b) $60 c) $64 d) $74 e) $82 Total Dollar return = [dividend per share + (sale price - purchase price)] * #of shares = [0.05+ (0.998-1.012)*1000 7. One year ago, you bought a stock for $36.48 a share. You received a dividend of $1.62 per share last month and sold the stock today for $41.18 a share. What is the capital gains yield on this investment? Capital gain = sale price - purchase price (41.18-36.48=4.7) capital gain yield = capital gain/purchase price (4.7/36.48)100= 12.88 a) 2.86 % b) 4.70% c) 12.88 % d) 15.62% e) 18.53 % 8. Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate? a) Expected return b) Real return c) Market rate d) Systematic return e) Risk premium 9. Stock A comprises 28 percent of Susans portfolio. Which one of the following terms applies to the 28 percent? a) Portfolio variance b) Portfolio standard deviation c) Portfolio weight d) Portfolio expected return e) Portfolio beta 10. Which one of the following describes systemic risk? a) Risk that affects a large number of assets b) An individual securitys total risk c) Diversifiable risk d) Asset specific risk e) Risk unique to a firms management 11. Which of the following terms can be used to describe unsystematic risk? I. Asset-specific risk II. Diversifiable risk III. Market risk IV. Unique risk Select one from following a) I and IV only b) II and III only c) I, II, and IV only d) II, III, and IV only e) I, II, III, and IV 12. The systematic risk principle states that the expected return on a risky asset depends only on which one of the following? a) Unique risk b) Diversifiable risk c) Asset-specific risk d) Market risk e) Unsystematic risk 13. Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset? a) Squared deviation b) Beta coefficient c) Standard deviation d) Mean e) Variance 14. You are assigned the task of computing the expected return on a portfolio containing several individual stocks. Which one of the following statements is correct concerning this task? a) The expected rate of return on the portfolio must be positive. b) The arithmetic average of the betas for each security held in the portfolio must equal 1.0. c) The portfolio beta must be 1.0. d) The summation of the return deviation from the portfolio expected return for each economic state must equal zero. e) The standard deviation of the portfolio must equal 1.0. 15. Standard deviation measures _____ risk while beta measures _____ risk. a) Systematic; unsystematic b) unsystematic; systematic c) total; unsystematic d) total; systematic e)asset-specific; market 16. Systematic risk is: a) Totally eliminated when a portfolio is fully diversified. b) Defined as the total risk associated with surprise events. c) Risk that affects a limited number of securities. d) Measured by beta. e) Measured by standard deviation. 17. Noahs Landing stock is expected to produce the following returns given the various states of the economy. What is the expected return on this stock? 4.05 percent 4.23 percent 4.51 percent 5.47 percent 20.26 percent (0.3*-0.27)+(0.65*0.160+(0.05*0.35)= 18. Given the following information, what is the variance of the returns on this stock? 0.021387 0.021449 0.021506 0.021538 0.0215641 Mean= (0.18*0.29)=(0.77*0.14)+(0.05*-0.45)= 0.1375 (0.29-0.1375)²*0.18+(0.14-0.1375)2*0.77+(-0.45-0.1375)2*0.05= 0.021448725 19. Given the following information, what is the standard deviation of the returns on this stock? 19.90 percent 20.52 percent 22.41 percent 23.79 percent 25.52 percent Mean= (0.04*0.26)+ (0.74*0.17)+(0.22*-0.44)= 0.0394 Variance= (0.26-0.0394)2*0.04+(0.17-0.0394)2*0.74+(-0.44-0.0394)2*0.22= 0.065080 20. What is the beta of the following portfolio? 1.13 1.15 1.17 1.21 1.23 (21600+13000+46000+19800=100400 (21600/100400)*1.48= 0.3184 (13000/100400)*1.13= 0.1463 (46000/100400)*0.99=0.4536 (19800/100400)*1.08=0.2130 Portfolio beta= 0.3184+0.1463+0.4563+0.2130=1.1313 Reference Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Mason, Ohio: South-Western Cengage Learning. Read More