FINA3361 Quiz #1

Name: Answer Key Student Number: Section B&G

Instructions: /6
1. Read all the instructions before starting the quiz.
2. Label and show all your work. Do not just write numbers and expect the
marker to know what the numbers represent.
3. If you make a statement, provide proof of the validity of the statement.
4. DO NOT ROUND your answers until the final answer.
5. Show your work and explain your answer. There is 1 mark for the correct
guess that the statement is true or false and 2 marks explaining why the
statement is true or false.
Probability
State of of
Nature State of Stock A Stock B Stock C Stock M
Nature
Boom .30 25.0% -8.0% -10.0% 20.0%
Normal .50 20.0% 10.0% 9.0% 15.0%
Recession .20 -10.0% 15.0% 15.0% -5.0%
Question 1
The expected return for stock A is 15.50% and the risk for stock A is
approximately 167.25. T or F? FALSE 
n
E ( r A )=∑ r A p i=( 25 % )( .30 ) + ( 20 % )( .50 )+ (−10 % ) ( .20 )=7.5 % +10.0 %−2.0 %=15.5 %
i=1
n
σ A=∑ ( r A −E ( r A ) ) =( 25 %−15.5 % ) ( .30 ) +¿ ( 20 %−15.5 % ) ( .50 ) + (−10 %−15.5 % ) ( .20 ) ¿
2 2 2 2 2

i =1
¿ 27.075+10.125+130.05=167.250
σ A= √ σ 2A= √ 167.250=12.93251716 ≅ 12.93 %

Question 2
The correlation of the returns of stock A and stock M is positive. No calculations
required. T or F? TRUE 
As we move from one state of the economy to the next state of the economy, the
change in the returns for stock A and the market are in the same direction; thus,
the correlation will be positive. 

WINTER 2016 Page 1

 FINA3361 Quiz #1

Name: Answer Key Student Number: Section B&G

Instructions: /6
1. Read all the instructions before starting the quiz.
2. Label and show all your work. Do not just write numbers and expect the
marker to know what the numbers represent.
3. If you make a statement, provide proof of the validity of the statement.
4. DO NOT ROUND your answers until the final answer.
5. Show your work and explain your answer. There is 1 mark for the correct
guess that the statement is true or false and 2 marks explaining why the
statement is true or false.
Probability
State of of
Nature State of Stock A Stock B Stock C Stock M
Nature
Boom .30 25.0% -8.0% -10.0% 20.0%
Normal .50 20.0% 10.0% 9.0% 15.0%
Recession .20 -10.0% 15.0% 15.0% -5.0%
Question 1
The expected return for stock B is 15.50% and the risk for stock B is
approximately 167.25. T or F? FALSE
n
E ( r B )=∑ r B pi=(−8 % ) ( .30 ) + ( 10 % ) ( .50 ) + ( 15 % )( .20 )=−2.40 %+5.0 % +3.0 %=5.60 %
i=1
n
σ B=∑ ( r B−E ( r B ) ) =(−8.0 %−5.60 % ) ( .30 ) +¿ ( 10 %−5.6 % ) ( .50 ) + ( 15 %−5.6 % ) ( .20 ) ¿
2 2 2 2 2

i=1
¿ 55.488+9.68+17.672=82.840
σ B= √ σ 2B =√ 82.840=9.10164820 ≅ 9.10 %

Question 2
The correlation of the returns of stock B and stock M is positive. No calculations
required. T or F? FALSE 
As we move from one state of the economy to the next state of the economy, the
change in the returns for stock B and the market are in a different direction; thus,
the correlation will be negative. 

WINTER 2016 Page 2

 FINA3361 Quiz #1

Name: Student Number: Section B&G

Instructions: /6
1. Read all the instruction before starting the quiz.
2. Label and show all your work. Do not just write numbers and expect the
marker to know what the numbers represent.
3. If you make a statement, provide proof of the validity of the statement.
4. DO NOT ROUND your answers until the final answer.
5. Show your work and explain your answer. There is 1 mark for the correct
guess that the statement is true or false and 2 marks explaining why the
statement is true or false.
Probability
State of of
Nature State of Stock A Stock B Stock C Stock M
Nature
Boom .30 25.0% -8.0% -10.0% 20.0%
Normal .50 20.0% 10.0% 9.0% 15.0%
Recession .20 -10.0% 15.0% 15.0% -5.0%
Question 1
The expected return for stock C is 5.60% and the risk for stock C is approximately
9.76%. T or F? FALSE

n
E ( r C ) =∑ r C p i=(−10 % )( .30 )+ ( 9 % ) ( .50 ) + ( 15 % )( .20 )=−3.0 %+ 4.5 %+3.0 %=4.50 %
i=1
n
σ 2C =∑ ( r C −E ( r C ) ) =(−10.0 %−4.5 % ) (.30 )+ ¿ ( 9 %−4.5 % ) ( .50 ) + ( 15 %−4.5 % ) ( .20 ) ¿
2 2 2 2

i=1
¿ 63.075+10.125+22.05=95.25
σ C =√ σ C =√ 95.25=9.75961065 ≅ 9.76 %
2

Question 2
The correlation of the returns of stock B and stock C is positive. No calculations
required. T or F? TRUE 
As we move from one state of the economy to the next state of the economy, the
change in the returns for stock B and stock C are in the same direction; thus, the
correlation will be positive. 

WINTER 2016 Page 3

 FINA3361 Quiz #1

Name: Answer Student Number: Section B&G

Instructions: /6
1. Read all the instruction before starting the quiz.
2. Label and show all your work. Do not just write numbers and expect the
marker to know what the numbers represent.
3. If you make a statement, provide proof of the validity of the statement.
4. DO NOT ROUND your answers until the final answer.
5. Show your work and explain your answer. There is 1 mark for the correct
guess that the statement is true or false and 2 marks explaining why the
statement is true or false.
Probability
State of of
Nature State of Stock A Stock B Stock C Stock M
Nature
Boom .30 25.0% -8.0% -10.0% 20.0%
Normal .50 20.0% 10.0% 9.0% 15.0%
Recession .20 -10.0% 15.0% 15.0% -5.0%
Question 1
The expected return for stock M is 12.50% and the risk for stock M is
approximately 9.10%. T or F? FALSE 
n
E ( r M )=∑ r M pi=( 20 % )( .30 )+ (15 % ) (.50 )+ (−5 % ) ( .20 )=6.0 %+7.5 %−1.0 %=12.50 %
i =1
n
σ M =∑ ( r M −E ( r M ) ) =( 20.0 %−12.5 % ) (.30 )+ ¿ (15 %−12.5 % ) (.50 )+ (−5 %−12.5 % ) (.20 ) ¿
2 2 2 2 2

i=1
¿ 16.875+3.125+61.25=81.25
σ M = √ σ 2M =√ 81.25=9.01387819 ≅ 9.01 %

Question 2
The correlation of the returns of stock A and stock C is positive. No calculations
required. T or F? FALSE 
As we move from one state of the economy to the next state of the economy, the
change in the returns for stock C and the market are in a different direction; thus,
the correlation will be negative. 

WINTER 2016 Page 4