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Chapter 09
Characterizing Risk and Return
Multiple Choice Questions
1. Which of these includes any capital gain (or loss) that occurred as well as any income that
you received from a specific investment?
A. Average return
B. Dollar return
C. Market return
D. Portfolio
2. Which of these is the dollar return characterized as a percentage of money invested?
A. Average return
B. Dollar return
C. Market return
D. Percentage return
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3. Which of these is a measure summarizing the overall past performance of an investment?
A. Average return
B. Dollar return
C. Market return
4. Which of these statements is true?
A. When people purchase a stock, they know exactly what their dollar and percent return are
going to be.
B. Many people purchase stocks as they find comfort in the certainty for this safe form of
investing.
C. When people purchase a stock, they know the short-term return, but not the long term
return.
D. When people purchase a stock, they do not know what their return is going to be—either
short term or in the long run.
5. Which of the following is defined as the volatility of an investment, which includes firm
specific risk as well as market risk?
A. Diversifiable risk
B. Market risk
C. Standard deviation
D. Total risk
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6. Which of these is a measure of risk to reward earned by an investment over a specific period
of time?
A. Coefficient of variation
B. Market deviation
D. Total variation
7. Which of the following is an index that tracks 500 companies, which allows for a great deal of
diversification?
A. Nasdaq
B. Fortune 500
C. S&P 500
D. Wall Street Journal
8. Which of these is defined as a combination of investment assets held by an investor?
A. Bundle
B. Market basket
C. Portfolio
D. All of these
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9. Which of the following is defined as the portion of total risk that is attributable to firm or
industry factors and can be reduced through diversification?
A. Firm specific risk
B. Market risk
C. Modern portfolio risk
D. Total risk
10. Which of these is the portion of total risk that is attributable to overall economic factors?
B. Market risk
C. Modern portfolio risk
D. Total risk
11. Which of the following is another term for market risk?
B. Modern portfolio risk
C. Nondiversifiable risk
D. Total risk
12. Which of the following is the concept and procedure for combining securities into a portfolio
to minimize risk?
A. Firm specific theory
B. Modern portfolio theory
C. Optimal portfolio theory
D. Total portfolio theory
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13. Which of these is the investor's combination of securities that achieves the highest expected
return for a given risk level?
A. Efficient portfolio
B. Modern portfolio
C. Optimal portfolio
D. Total portfolio
14. Which of these is the term for portfolios with the highest return possible for each risk level?
A. Efficient portfolios
B. Modern portfolios
C. Optimal portfolios
D. Total portfolios
15. Which of the following makes this a true statement: The shape of the efficient frontier
implies that:
A. diminishing returns apply to risk-taking in the investment world.
B. increasing returns apply to risk-taking in the investment world.
C. returns are not impacted by risk-taking in the investment world.
D. None of these complete the sentence to make it true.
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16. Which of the following is a measurement of the co-movement between two variables that
ranges between -1 and +1?
B. Correlation
D. Total risk
17. To find the percentage return of an investment:
A. multiply the dollar return by the investment's value at the beginning of the period.
B. divide the dollar return by the investment's value at the beginning of the period.
C. multiply the dollar return by the investment's value at the end of the period.
D. divide the dollar return by the investment's value at the end of the period.
18. Which statement is true?
A. The larger the standard deviation, the lower the total risk.
B. The larger the standard deviation, the higher the total risk.
C. The larger the standard deviation, the more portfolio risk.
D. The standard deviation is not an indication of total risk.
19. We commonly measure the risk-return relationship using which of the following?
B. Correlation coefficient
D. Expected returns
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20. Investment Return MedTech Corp. stock was $50.95 per share at the end of last year. Since
then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500
shares of MedTech, what was your percent return?
A. 7.20 percent
B. 8.83 percent
C. 22.67 percent
D. 23.55 percent
21. Investment Return Rx Corp. stock was $60.00 per share at the end of last year. Since then, it
paid a $1.00 per share dividend last year. The stock price is currently $62.50. If you owned
400 shares of Rx, what was your percent return?
A. 1.67 percent
B. 4.17 percent
C. 5.60 percent
D. 5.83 percent
22. Investment Return TechNo stock was $25 per share at the end of last year. Since then, it
paid a $1.50 per share dividend last year. The stock price is currently $23. If you owned 300
shares of TechNo, what was your percent return?
A. -2 percent
B. -8 percent
C. 6 percent
D. 6.5 percent
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23. Investment Return Noble stock was $60.00 per share at the end of last year. Since then, it
paid a $2.00 per share dividend last year. The stock price is currently $58. If you owned 400
shares of Noble, what was your percent return?
A. -3.33 percent
B. 0 percent
C. 3.33 percent
D. 3.45 percent
24. Investment Return WayCo stock was $75 per share at the end of last year. Since then, it
paid a $3 per share dividend last year. The stock price is currently $70. If you owned 200
shares of WayCo, what was your percent return?
A. -6.67 percent
B. -2.67 percent
C. 4.00 percent
D. 4.29 percent
25. Total Risk Rank the following three stocks by their level of total risk, highest to lowest. Rail
Haul has an average return of 10 percent and standard deviation of 15 percent. The average
return and standard deviation of Idol Staff are 15 percent and 25 percent; and of Poker-R-Us
are 12 percent and 35 percent.
A. Rail Haul, Poker-R-Us, Idol Staff
B. Idol Staff, Poker-R-Us, Rail Haul
C. Poker-R-Us, Idol Staff, Rail Haul
D. Idol Staff, Rail Haul, Poker-R-Us
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26. Total Risk Rank the following three stocks by their level of total risk, highest to lowest. Rail
Haul has an average return of 8 percent and standard deviation of 10 percent. The average
return and standard deviation of Idol Staff are 10 percent and 20 percent; and of Poker-R-Us
are 6 percent and 15 percent.
A. Rail Haul, Poker-R-Us, Idol Staff
B. Idol Staff, Rail Haul, Poker-R-Us
D. Idol Staff, Poker-R-Us, Rail Haul
27. Risk versus Return Rank the following three stocks by their risk-return relationship, best to
worst. Rail Haul has an average return of 10 percent and standard deviation of 15 percent.
The average return and standard deviation of Idol Staff are 15 percent and 25 percent; and of
Poker-R-Us are 12 percent and 35 percent.
A. Rail Haul, Idol Staff, Poker-R-Us
B. Idol Staff, Poker-R-Us, Rail Haul
D. Idol Staff, Rail Haul, Poker-R-Us
28. Risk versus Return Rank the following three stocks by their risk-return relationship, best to
worst. Rail Haul has an average return of 8 percent and standard deviation of 10 percent. The
average return and standard deviation of Idol Staff are 10 percent and 20 percent; and of
Poker-R-Us are 6 percent and 15 percent.
A. Rail Haul, Idol Staff, Poker-R-Us
B. Idol Staff, Rail Haul, Poker-R-Us
D. Idol Staff, Poker-R-Us, Rail Haul
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29. Dominant Portfolios Determine which one of these three portfolios dominates another.
Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an
expected return of 14 percent and risk of 19 percent. The expected return and risk of portfolio
Yellow are 15 percent and 18 percent, and for the Purple portfolio are 16 percent and 21
percent.
A. Portfolio Blue dominates portfolio Yellow
B. Portfolio Yellow dominates portfolio Blue
C. Portfolio Purple dominates portfolio Blue
D. Portfolio Purple dominates portfolio Yellow
percent.
B. Portfolio Yellow dominates portfolio Blue
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percent.
B. Portfolio Blue dominates portfolio Purple
32. Portfolio Weights An investor owns $10,000 of Adobe Systems stock, $15,000 of Dow
Chemical, and $25,000 of Office Depot. What are the portfolio weights of each stock?
A. Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333
B. Adobe System = 0.2, Dow Chemical = 0.3, Office Depot = 0.5
C. Adobe System = 0.3, Dow Chemical = 0.2, Office Depot = 0.5
D. Adobe System = 0.2667, Dow Chemical = 0.3333, Office Depot = 0.4
33. Portfolio Weights An investor owns $2,000 of Adobe Systems stock, $4,000 of Dow
Chemical, and $6,000 of Office Depot. What are the portfolio weights of each stock?
A. Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333
B. Adobe System = 0.1667, Dow Chemical = 0.3333, Office Depot = 0.5
C. Adobe System = 0.3333, Dow Chemical = 0.1667, Office Depot = 0.5
D. Adobe System = 0.2, Dow Chemical = 0.4, Office Depot = 0.6
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34. Portfolio Return Year-to-date, Company O had earned a -2.10 percent return. During the
same time period, Company V earned 8.00 percent and Company M earned 6.25 percent. If
you have a portfolio made up of 40 percent Company O, 30 percent Company V, and 30
percent Company M, what is your portfolio return?
A. 3.435 percent
B. 5.115 percent
C. 12.15 percent
D. 16.35 percent
35. Portfolio Return Year to date, Company Y had earned a 7 percent return. During the same
time period, Company R earned 9.25 percent and Company C earned -2.25 percent. If you
have a portfolio made up of 35 percent Y, 40 percent R, and 25 percent C, what is your
portfolio return?
A. 4.6667 percent
B. 6.1667 percent
C. 5.5875 percent
D. 12.6625 percent
36. Portfolio Return Year to date, Company Y had earned a 10.8 percent return. During the same
time period, Company R earned 12.20 percent and Company C earned -1.56 percent. If you
have a portfolio made up of 45 percent Y, 35 percent R, and 20 percent C, what is your
portfolio return?
A. 7.15 percent
B. 8.19 percent
C. 8.82 percent
D. 9.44 percent
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37. Average Return The past five monthly returns for K and Company are 4.25 percent, 4.13
percent, -2.05 percent, 3.25 percent, and 7.25 percent. What is the average monthly return?
A. 1.403 percent
B. 1.744 percent
C. 3.366 percent
D. 4.186 percent
38. Average Return The past five monthly returns for K and Company are 2.28 percent, 2.64
percent, -1.05 percent, 4.25 percent, and 9.25 percent. What is the average monthly return?
A. 1.45 percent
B. 1.62 percent
C. 3.47 percent
D. 3.89 percent
39. Average Return The past five monthly returns for PG Company are 3.25 percent, -1.45
percent, 4.35 percent, 6.49 percent, and 3.75 percent. What is the average monthly return?
A. 1.366 percent
B. 1.608 percent
C. 3.278 percent
D. 3.858 percent
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40. Standard Deviation The standard deviation of the past five monthly returns for K and
Company are 4.25 percent, 4.13 percent, -2.05 percent, 3.25 percent, and 7.75 percent. What
is the standard deviation?
A. 1.40 percent
B. 3.37 percent
C. 3.53 percent
D. 16.83 percent
41. Standard Deviation The standard deviation of the past five monthly returns for K and
Company are 2.28 percent, 2.64 percent, -1.05 percent, 4.25 percent, and 9.25 percent. What
is the standard deviation?
A. 1.45 percent
B. 1.62 percent
C. 3.47 percent
D. 3.76 percent
42. Standard Deviation The standard deviation of the past five monthly returns for PG Company
are 2.75 percent, -0.75 percent, 4.15 percent, 6.29 percent, and 3.84 percent. What is the
standard deviation?
A. 2.309 percent
B. 2.581 percent
C. 3.256 percent
D. 3.406 percent
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43. Portfolio Weights If you own 400 shares of Air Line Inc. at $44.50, 500 shares of BuyRite at
$52.90, and 100 shares of MotorCity at $9.25, what are the portfolio weights of each stock?
A. Air Line = 0.3333, BuyRite = 0.3333, MotorCity = 0.3333
B. Air Line = 0.40, BuyRite = 0.50, MotorCity = 0.10
C. Air Line = 0.3940, BuyRite = 0.5855, MotorCity = 0.0205
D. Air Line = 0.4173, BuyRite = 0.4960, MotorCity = 0.0867
44. Portfolio Weights If you own 100 shares of Air Line Inc. at $42.50, 250 shares of BuyRite at
$53.25, and 350 shares of MotorCity at $7.75, what are the portfolio weights of each stock?
A. Air Line = 0.3333, BuyRite = 0.3333, MotorCity = 0.3333
B. Air Line = 0.10, BuyRite = 0.25, MotorCity = 0.35
C. Air Line = 0.2096, BuyRite = 0.6566, MotorCity = 0.1338
D. Air Line = 0.1429, BuyRite = 0.3571, MotorCity = 0.5000
45. Portfolio Return At the beginning of the month, you owned $6,000 of Company G, $8,000 of
Company S, and $1,000 of Company N. The monthly returns for Company G, Company S, and
Company N were 7.25 percent, -1.50 percent, and -0.23 percent. What is your portfolio
return?
A. 1.84 percent
B. 2.08 percent
C. 3.71 percent
D. 5.52 percent
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46. Portfolio Return At the beginning of the month, you owned $8,000 of Company G, $8,000 of
Company S, and $3,000 of Company N. The monthly returns for Company G, Company S, and
Company N were 7.80 percent, 1.50 percent, and -0.75 percent. What is your portfolio return?
A. 2.85 percent
B. 3.80 percent
C. 4.03 percent
D. 8.55 percent
47. Portfolio Weights You have $15,040 to invest. You want to purchase shares of Company Air
at $42.50, Company B at $51.50, and Company F at $9.75. How many shares of each
company should you purchase so that your portfolio consists of 20 percent Company A, 40
percent Company B, and 40 percent Company F? Report only whole stock shares.
A. Company A = 20 shares, Company B = 40 shares, Company F = 40 shares
B. Company A = 85 shares, Company B = 21shares, Company F = 39 shares
C. Company A = 71 shares, Company B = 117 shares, Company F = 615 shares
D. Company A = 353 shares, Company B = 291 shares, Company F = 1538 shares
48. Portfolio Weights You have $45,050 to invest. You want to purchase shares of Company Air
at $10.25, Company B at $15.10, and Company F at $9.05. How many shares of each
company should you purchase so that your portfolio consists of 30 percent Company A, 50
percent Company B, and 20 percent Company F? Report only whole stock shares.
A. Company A = 30 shares, Company B = 50 shares, Company F = 20 shares
B. Company A = 44 shares, Company B = 30 shares, Company F = 50 shares
C. Company A = 308 shares, Company B = 755 shares, Company F = 181 shares
D. Company A = 1,323 shares, Company B = 1,490 shares, Company F = 993 shares
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49. Portfolio Return The following table shows your stock positions at the beginning of the year,
the dividends that each stock paid during the year, and the stock prices at the end of the
year. What is your portfolio percentage return?
A. 3.21 percent
B. 4.06 percent
C. 7.26 percent
D. 8.97 percent
A. 2.50 percent
B. 5.83 percent
C. 10.50 percent
D. 13.83 percent
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A. 3.85 percent
B. 11.54 percent
C. 15.38 percent
D. 17.58 percent
52. Average Return The past five monthly returns for PG Company are 1.25 percent, -1.50
percent, 4.25 percent, 3.75 percent, and 1.98 percent. What is the average monthly return?
A. 1.946 percent
B. 2.546 percent
C. 9.73 percent
D. 12.73 percent
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53. Standard Deviation Compute the standard deviation of the five monthly returns for PG&E:
1.25 percent, -1.50 percent, 4.25 percent, 3.75 percent, and 1.98 percent.
A. 1.876 percent
B. 1.946 percent
C. 2.046 percent
D. 2.287 percent
54. Portfolio Weights If you own 600 shares of Alaska Corporation at $23.25, 450 shares of Best
Company at $34.50, and 150 shares of Motor Company at $6.95, what are the portfolio
weights of each stock?
A. Alaska = 0.6000, Best = 0.4500, Motor = 0.1500
B. Alaska = 0.3594, Best = 0.5332, Motor = 0.1074
C. Alaska = 0.4571, Best = 0.5087, Motor = 0.0342
D. Alaska = 0.2325, Best = 0.3450, Motor = 0.0695
55. Portfolio Weights If you own 1,000 shares of Alaska Corporation at $19.95, 250 shares of
Best Company at $17.50, and 250 shares of Motor Company at $2.50, what are the portfolio
weights of each stock?
A. Alaska = 0.1000, Best = 0.2500, Motor = 0.2500
B. Alaska = 0.4994, Best = 0.4380, Motor = 0.0626
C. Alaska = 0.7996, Best = 0.1754, Motor = 0.0250
D. Alaska = 0.1995, Best = 0.1750, Motor = 0.0250
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56. FedEx Corp. stock ended the previous year at $113.39 per share. It paid a $0.40 per share
dividend last year. It ended last year at $126.69. If you owned 300 shares of FedEx, what was
your dollar return and percent return?
A. $3,990; 11.73 percent
B. $4,110; 12.08 percent
C. $4,250; 12.29 percent
D. $2,009; 9.13 percent
57. Sprint Nextel Corp. stock ended the previous year at $25.00 per share. It paid a $2.57 per
share dividend last year. It ended last year at $18.89. If you owned 650 shares of Sprint, what
was your dollar return and percent return?
A. $2,960; 11.13 percent
B. -$4,960; -16.13 percent
C. -$3,960; -15.13 percent
D. -$2,301; -14.16 percent
58. Rank the following three stocks by their total risk level, highest to lowest. Night Ryder has an
average return of 14 percent and standard deviation of 30 percent. The average return and
standard deviation of WholeMart are 12 percent and 25 percent; and of Fruit Fly are 25
percent and 40 percent.
A. Fruit Fly, Night Ryder, WholeMart
B. Night Ryder, WholeMart, Fruit Fly
C. WholeMart, Fruit Fly, Night Ryder
D. WholeMart, Night Ryder, Fruit Fly
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59. Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has
an average return of 10 percent and standard deviation of 19 percent. The average return and
standard deviation of Idol Staff are 12 percent and 22 percent; and of Poker-R-Us are 11
A. Idol Staff, Rail Haul, Poker-R-Us
B. Rail Haul, Idol Staff, Poker-R-Us
C. Idol Staff, Poker-R-Us, Rail Haul
D. Poker-R-Us, Rail Haul, Idol Staff
60. Rank the following three stocks by their risk-return relationship, best to worst. Night Ryder
has an average return of 33 percent and standard deviation of 40 percent. The average return
and standard deviation of WholeMart are 10 percent and 20 percent; and of Fruit Fly are 19
A. Night Ryder, WholeMart, Fruit Fly
B. WholeMart, Fruit Fly, Night Ryder
C. Night Ryder, Fruit Fly, WholeMart
D. Fruit Fly, WholeMart, NightRyder
61. An investor owns $8,000 of Adobe Systems stock, $5,000 of Dow Chemical, and $3,000 of
Office Depot. What are the portfolio weights of each stock?
A. Adobe: 0.5; Dow Chemical: 0.31; Office Depot: 0.19
B. Adobe: 0.5; Dow Chemical: 0.32; Office Depot: 0.18
C. Adobe: 0.5; Dow Chemical: 0.13; Office Depot: 0.27
D. Adobe: 0.5; Dow Chemical: 0.19; Office Depot: 0.31
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62. Consider the risk-return relationship in T-bills during each decade since 1950. Given this
data, which of the following statements is correct?
A. The best risk-return relationship was during the 1950s.
B. The best risk-return relationship was during the 1990s.
C. Since T-bills are backed by the full faith of the U.S. government, computing the risk-return
relationship for them is invalid.
D. None of these statements is correct.
63. Year-to-date, Oracle had earned a 15.0 percent return. During the same time period, Valero
Energy earned -12.96 percent and McDonald's earned 1.80 percent. If you have a portfolio
made up of 50 percent Oracle, 10 percent Valero Energy, and 40 percent McDonald's, what is
your portfolio return?
A. 6.14 percent
B. 4.86 percent
C. 5.86 percent
D. 6.92 percent
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64. The past five monthly returns for Kohl's are 2.55 percent, -8.62 percent, -14.44 percent, -1.52
percent, and 4.75 percent. What is the average monthly return?
A. 2.21 percent
B. 1.21 percent
C. -3.46 percent
D. -6.17 percent
65. The past five monthly returns for PG&E are 12.14 percent, -11.37 percent, 3.77 percent, 6.47
percent, and 3.58 percent. What is the average monthly return?
A. 2.92 percent
B. 1.21 percent
C. -3.46 percent
D. 3.17 percent
66. Compute the standard deviation of Kohl's monthly returns. The past five monthly returns for
Kohl's are 5.55 percent, 8.62 percent, -4.44 percent, -1.52 percent, and 9.75 percent.
A. 4.92 percent
B. 5.07 percent
C. 6.28 percent
D. 6.12 percent
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67. Consider the characteristics of the following three stocks:
The correlation between Thumb Devices and Air Comfort is -0.12. The correlation between
Thumb Devices and Sport Garb is 0.89. The correlation between Air Comfort and Sport Garb
is -0.85. If you can pick only two stocks for your portfolio, which would you pick? Why?
A. Combine Thumb Devices and Sport Garb because they have a high correlation.
B. Combine Thumb Devices and Air Comfort because of high standard deviations.
C. Combine Air Comfort and Sport Garb due to negative correlation.
D. Combine Thumb Devices and Sport Garb because Thumb Devices has the highest return
and Sport Garb has the lowest standard deviation.
68. If you own 300 shares of Alaska Air at $15.88, 250 shares of Best Buy at $151.00, and 1,150
shares of Ford Motor at $3.51, what are the portfolio weights of each stock?
A. Weight of Alaska Air: 10.23 percent; Weight of Best Buy: 81.09 percent; Weight of Ford
Motor: 8.67 percent
B. Weight of Alaska Air: 6.23 percent; Weight of Best Buy: 71.09 percent; Weight of Ford
Motor: 22.67 percent
C. Weight of Alaska Air: 15.23 percent; Weight of Best Buy: 81.09 percent; Weight of Ford
Motor: 3.67 percent
D. Weight of Alaska Air: 20.23 percent; Weight of Best Buy: 76.09 percent; Weight of Ford
Motor: 3.67 percent
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69. If you own 400 shares of Xerox at $15.00, 500 shares of Qwest at $10.00, and 350 shares of
Liz Claiborne at $45.00, what are the portfolio weights of each stock?
A. Weight of Xerox: 22.43 percent; Weight of Qwest: 11.09 percent; Weight of Liz Claiborne:
58.88 percent
B. Weight of Xerox: 34.67 percent; Weight of Qwest: 16.69 percent; Weight of Liz Claiborne:
48.64 percent
C. Weight of Xerox: 22.43 percent; Weight of Qwest: 18.69 percent; Weight of Liz Claiborne:
58.88 percent
D. Weight of Xerox: 36.98 percent; Weight of Qwest: 61.07 percent; Weight of Liz Claiborne:
1.95 percent
70. At the beginning of the month, you owned $15,500 of General Motors, $4,500 of Starbucks,
and $9,000 of Nike. The monthly returns for General Motors, Starbucks, and Nike were 7.10
percent, -1.36 percent, and -0.54 percent. What is your portfolio return?
A. -1.12 percent
B. 1.17 percent
C. 2.54 percent
D. 3.42 percent
71. You have $10,000 to invest. You want to purchase shares of Alaska Air at $50.00, Best Buy at
$50.00, and Ford Motor at $10.00. How many shares of each company should you purchase
so that your portfolio consists of 25 percent Alaska Air, 40 percent Best Buy, and 35 percent
Ford Motor? Report only whole stock shares.
A. 50 shares of Alaska Air, 80 shares of Best Buy, and 300 shares of Ford Motor
B. 50 shares of Alaska Air, 80 shares of Best Buy, and 350 shares of Ford Motor
C. 40 shares of Alaska Air, 90 shares of Best Buy, and 300 shares of Ford Motor
D. 75 shares of Alaska Air, 40 shares of Best Buy, and 350 shares of Ford Motor
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72. Consider the following annual returns of Estee Lauder and Lowe's Companies:
Compute each stock's average return, standard deviation, and coefficient of variation.
A. Estee Lauder: 9.02 percent; 17.99 percent; 2.00 and Lowe's Companies: 10.66 percent;
18.99 percent; 1.78
B. Estee Lauder: 9.02 percent; 30.69 percent; 3.4 and Lowe's Companies: 10.66 percent;
18.99 percent; 1.78
C. Estee Lauder: 9.02 percent; 30.69 percent; 3.4 and Lowe's Companies: 10.66 percent;
25.46 percent; 2.39
D. Estee Lauder: 10.7 percent; 17.79 percent; 1.66 and Lowe's Companies: 12.64 percent;
18.99 percent; 1.50
73. Which of the following statements is correct?
A. A single stock has a lot of diversifiable risk.
B. A single stock has more market risk than a diversified portfolio of stocks.
C. Bonds and stocks have a high correlation because they are both financial assets.
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A. A dominant portfolio has the best risk-return relationship as compared to other portfolios.
B. It is not necessarily true that when an investment achieves a high return that it is risky.
C. A low standard deviation means that the investment is less likely to achieve high returns;
which means that it is more risky.
A. The dollar return is a more useful measure to compare performance because it more
accurately reflects the change in wealth of the investor.
B. A dominant portfolio is one that has the highest risk and highest return within a set of
portfolios.
C. By adding stocks to your portfolio, it is possible to effectively eliminate nearly all of the
market risk.
76. Jane Adams invests all her money in the stock of one firm. Which of the following must be
true?
A. Her return will have more volatility than the return in the overall stock market.
B. Her return will have less volatility than the return in the overall stock market.
C. Her return will have the same volatility as the return in the overall stock market.
D. There is no relationship between her return and the return in the overall stock market.
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77. Which of the following statements is correct with regards to diversification?
A. Diversifying reduces the return of the portfolio.
B. Diversifying reduces the market risk of the portfolio.
C. Diversifying reduces the dollar return of the portfolio.
78. Jenna receives an investment newsletter that recommends that she invest in a stock that has
doubled the return of the S&P 500 in the last two months. It also claims that this stock is a
"safe bet" for the future. Which of the following statements is correct regarding this
information?
A. This investment newsletter is most likely correct because they most likely have some
special knowledge about the stock.
B. The investment newsletter contains contrary information since the stock must be a high
risk and therefore cannot also be a "safe bet."
C. It is common for individual stocks to double the return of the S&P 500 and still be a "safe
bet."
79. Which of the following is correct regarding the coefficient of variation?
A. It measures the amount of standard deviation for each one percent of covariance.
B. It measures the amount of return achieved for each one percent of risk taken.
C. It measures the amount of risk taken for each one percent of return achieved.
9-28
80. Which of the following is correct regarding the total risk of a company?
A. A company can change its risk level over time.
B. Some firms are riskier because they offer many different products and/or services.
C. Companies can change their risk by reducing the amount of money they have borrowed.
81. Which of the following statements is correct regarding total risk?
A. A conglomerate will have more total risk than a firm that has one line of business.
B. All firms have about the same total risk because they are all exposed to the same market
risk.
C. Total risk can be quantified by measuring the covariance between the firm and the overall
market.
82. Which of the following statements is correct regarding total risk?
A. The coefficient of variation is a measure of the firm's total risk.
B. All firms have the same amount of total risk because they are all exposed to the same
market risk.
C. Conglomerates will have less total risk than a firm that has one line of business.
D. None of these statements are correct.
9-29
83. Interest rates, inflation and economic growth are economic factors that are examples of:
A. firm-specific risks that can be diversified away.
B. market risk.
C. external factors that are neither firm specific risk nor market risk.
A. For a few firms in completely different industries, it is possible to have a correlation that
approaches -2.0.
B. A correlation of -1.0 means that the two firms are uncorrelated or that they have no
relationship.
C. Most common stocks have low correlation with each other since they operate in different
industries.
A. Uncorrelated assets have a correlation of -1.0.
B. Most common stocks are positively correlated with each other because they are impacted
by the economic factors.
C. We can typically add many stocks together to fully eliminate the market risk in a portfolio.
9-30
A. Stocks and long-term Treasury bonds are highly positively correlated.
B. Stocks and Treasury bills are highly positively correlated.
C. Stocks, long-term Treasury bonds, and Treasury bills are all highly correlated.
87. Which of the following is incorrect?
A. It is possible to combine assets that all move in the exact same fashion over time and gain
the benefits of diversification.
B. Adding long-term Treasury bonds to a stock portfolio will reduce the risk of the portfolio.
C. The optimal portfolio is the one with the lowest amount of risk.
D. All of these statements are correct.
88. The efficient frontier portfolios are:
A. portfolios that risk adverse investors will select.
B. portfolios where all the market risk is diversified away.
C. portfolios where the correlation among assets is 0.0.
D. portfolios that dominate all others.
89. The optimal portfolio for you will be:
A. the one that offers the lowest correlation.
B. the one that offers the highest returns.
C. the one that reflects the amount of risk that you are willing to take.
D. the one that offers the most diversification.
9-31
90. Sally wants to invest in only two stocks. Which pair of stocks should Sally select?
A. Stocks A and B move downward at the same time.
B. Stocks C and D move in opposite directions at the same time.
C. Stocks E and F move upward at the same time.
D. Stocks G and H move randomly at the same time.
91. Which of the following are investor diversification problems?
A. Many employees hold mostly their employer's stocks as investments.
B. Many households hold relatively few individual stocks—the median is three.
C. Investors seem to prefer local firms thereby limiting diversification opportunities.
D. All of these are investor diversification problems.
92. Which of the following describes what will occur as you randomly add stocks to your
portfolio?
A. The nondiversifiable risk will decrease.
B. Both the diversifiable and nondiversifiable risk will decrease.
C. The portfolio return will increase.
D. The diversifiable risk will decrease.
93. Which of the following is the correct ranking from least risky to most risky?
A. Long-term Treasury bonds, stocks, Treasury bills
B. Treasury bills, long-term Treasury bonds, stocks
C. Stocks, long-term Treasury bond, Treasury bills
D. Stocks, Treasury bills, long-term Treasury bonds
9-32
94. Which of the following is correct?
A. Investors can reduce the risk in their portfolio by investing in international stocks since
they tend to have low correlation with our own stock market.
B. Combining both stocks and bonds will likely reduce risk in a portfolio because the two
assets have low correlation.
C. Your optimal portfolio is an efficient portfolio with your desired risk level.
95. Modern portfolio theory is:
A. a concept and procedure for combining securities into a portfolio to minimize risk.
B. a concept and procedure for combining securities into a portfolio to maximize return.
C. a concept and procedure for combining securities into a portfolio to maximize volatility.
D. a concept and procedure for combining securities into a portfolio to maximize dollar return.
96. The total risk of the S&P 500 Index is equal to:
A. diversifiable risk.
B. nondiversifiable risk.
C. modern portfolio risk.
D. efficient frontier risk.
9-33
97. Consider the following correlations:
Given this data, which of the following is most preferable if an investor can only select one
pair of companies?
A. Apple and IBM
B. Disney and IBM
C. Disney and Apple
D. It does not matter which two are selected—there is no preference order.
98. If you invested $1,000 in Disney and $5,000 in Oracle and the two companies returned 15
percent and 18 percent respectively, what was your portfolio's return?
A. 15.5 percent
B. 17.1 percent
C. 16.2 percent
D. 17.5 percent
9-34
99. JoJo's portfolio's return is 12 percent. She is invested in Cisco and IBM which had returns of
15 percent and 9 percent respectively. What percentage of JoJo's assets are invested in each
firm?
A. 40 percent in Cisco and 60 percent in IBM
B. 50 percent in Cisco and 50 percent in IBM
C. 30 percent in Cisco and 70 percent in IBM
D. Unable to determine with the data provided
100.Sharif's portfolio generated returns of 12 percent, 15 percent, -15 percent, 19 percent, and -
12 percent over five years. What was his average return over this period?
A. 19 percent
B. 3.8 percent
C. 17 percent
D. 2.1 percent
101.Which of the following is correct?
A. Over a long time frame, stocks have performed better than long-term Treasury bonds.
B. Average stock returns are not an indication of what an investor may earn in any one year.
C. In some years, long-term Treasury bonds performed better than stocks.
9-35
102.Which of the following is correct?
A. Total risk is measured by the standard deviation.
B. There is a positive relationship between risk and return.
C. If you observe a high variability in a stock's returns you can infer that the stock is very
risky.
103.A stock has an expected return of 12 percent and a standard deviation of 20 percent. Long-
term Treasury bonds have an expected return of 9 percent and a standard deviation of 15
percent. Given this data, which of the following statements is correct?
A. The two assets have the same coefficient of variation.
B. The stock investment has a better risk-return trade-off.
C. The bond investment has a better risk-return trade-off.
D. Both investments have the same diversifiable risk.
104.A stock has an expected return of 15 percent and a standard deviation of 20 percent. Long-
term Treasury bonds have an expected return of 9 percent and a standard deviation of 11
percent. Given this data, which of the following statements is correct?
A. The two assets have the same coefficient of variation.
B. The stock investment has a better risk-return trade-off.
C. The bond investment has a better risk-return trade-off.
D. Both investments have the same diversifiable risk.
9-36
105.From 1950 to 2007, the average return in the stock market, as measured by the S&P 500, was
13.2 percent and a standard deviation of 17 percent. Given this information, which of the
following statements is correct?
A. With an average return this high, it is unlikely that an investor will lose money in the stock
market in the next year or two.
B. With a standard deviation this high, it is likely that an investor will lose money in some
years over a 25-year investment period.
C. This investment is not very good since the standard deviation is greater than the average
return.
Essay Questions
106.You are a risk-averse investor with a low-risk portfolio of bonds. How is it possible that
adding some stocks (which are riskier than bonds) to the portfolio can lower the total risk of
the portfolio?
9-37
107.Describe the diversification potential of two assets with a -0.7 correlation. What is the
potential if the correlation is +0.7?
108.What does diversification do to the risk and return characteristics of a portfolio?
109.What is the source of firm-specific risk? What is the source of market risk?
9-38
110.Risk versus Return in Bonds Assess the risk-return relationship of the following bonds:
9-39
111.Diversifying Consider the characteristics of the following three stocks:
The correlation between T&Company and A&Company is -0.2. The correlation between
T&Company and S&Company is -0.21. The correlation between A&Company and S&Company
is 0.95. If you can pick only two stocks for your portfolio, which would you pick? Why?
9-40
112.Risk, Return, and Their Relationship Consider the following annual average return,
standard deviation, and coefficient of variation for Companies E and L. Which stock appears
better? Why?
9-41
113.Risk, Return, and Their Relationship Consider the following stocks' annual average return,
standard deviation, and coefficient of variation. Which stock appears better? Why?
114.Explain how to compute a portfolio's return.
9-42
115.Define an efficient portfolio and an efficient frontier.
116.Why is the percentage return a more useful measure than the dollar return?
117.How do we define risk in this chapter and how do we measure it?
9-43
118.Define diversifiable risk and contrast it with market risk.
119.Identify and explain a common measure for risk-return relationship.
9-44
Chapter 09 Characterizing Risk and Return Answer Key
Multiple Choice Questions
1. Which of these includes any capital gain (or loss) that occurred as well as any income that
you received from a specific investment?
A. Average return
B. Dollar return
C. Market return
D. Portfolio
AACSB: Reflective Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 09-01 Compute an investment's dollar and percentage return.
Topic: Return
2. Which of these is the dollar return characterized as a percentage of money invested?
A. Average return
B. Dollar return
C. Market return
AACSB: Reflective Thinking

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
9-45
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Mutta niinkauvan, kun hän jaksoi istua, sai rohdin kuontalokin
kulkea hänen koukistuneitten sormiensa läpi rullalle ja sitä tietä ne
menivät pappilan ruustinnan karvamattolangatkin. —
Pahemmin ei voinut kukaan loukata Miinaa, kun puhumalla

hänelle vaivaishoidon avusta. —
"Häpeäisit!" sanoi hän vihaisesti.
"Ota itse, jos haluat, — mie ennen vaikka kuolen…"
Ja niin kai hän olisi tehnytkin, säästöjensä loputtua, jos ei

tyttärensä olisi saanut häntä houkutelluksi luokseen, nähdessään
että vanhuksen oli mahdoton tulla toimeen yksinäisessä
tupasessaan.
Mutta ei hän sieltä sittenkään aivan mielisuosiolla lähtenyt. —
Pettymyksiä.
Kaarlo heitti pallon huimaavan korkealle ilmaan.
Suuren lapsijoukon käsivarret kohosivat kuin jännitetyt jouset, ne

tempoilivat ja värähtelivät malttamattomuudesta sillä itsekukin oli
mielestään juuri se, jonka käsiin pallon oli määrä pudota… Ja
huudot: minä, minä, minä, raikuivat kilvan puutarhan nurmikolla!
Pojat, jotka luonto on varustanut vahvemmilla käsivarsilla,

rynnistivät etualalle, työntäen kilpailussa heikommat tytöt syrjään.
Mutta yksi niistä — pienin ehkä — vilkas ja vikkelä kuin orava,
pujottausi vikkelästi joukon läpi, ennätti edelle ja ojensi itsepäisesti
pienet, valkoisen pitsin verhoamat käsivartensa ylös, kohti putoavaa
palloa, joka kiisi kuin nuoli suoraan ja empimättä pieniin, pehmoisiin
tytön käsiin.
"Minä!" kajahti riemuhuuto lapsen suusta ja ylpeänä voitostaan

keikautti hän valkohiuksista päätänsä.
Pojat katselivat vähän nyrpeissään sivu suun mennyttä voittoa ja

sieltä täältä kuului ääniä, jotka sanoivat:
"Eihän se Elli olisi voittanut, jos —"
"Eikähän se Elli oikeastaan olisi saanut —" mutta lauseitten

loppuosat haipuivat jostakin syystä niin hiljaisiksi että ainoastaan
vierustoveri saattoi kuulla ne.
Vaan kun Ellin suurien silmien voitonriemu kävi aivan

sietämättömäksi, sanoi suurin pojista kuuluvammalla äänellä: "Eikä
tämä peli oikeastaan tytöille ollutkaan!"
Kun pallopeli alkoi ikävystyttää, heittäytyivät tytöt piiritanssiin

pihamaalle ja pojat lähtivät kiipeilemään leveitä tikapuita ylös
rakennuksen katolle.
"Hei vaan, kuinka kauvas täällä näkee!" huusi kehoittavasti se,

joka ensinnä perille ehti ja sen kuultuaan nekin jotka vielä tikapuitten
juurella seisoivat kapusivat kilvassa ylös. "Ai ihmettä!" kuului
reippaasti ylhäältä.
"Kuinka kaunista!" — "Kuinka hauskaa!" — "Melkein päätä

pyörryttää!" Pääskysparven lailla viserteli poikalauma räystäällä ja
uteliaina, ihaillen korottivat tytöt kaulojansa, silmääräpäyttämättä
seuraten toverien liikkeitä.
"Kiivetkäämme mekin sinne! Yks', kaks', kolme!" huudahti Elli ja

silmänräpäyksessä oli hän jo puolitiessä portailla.
"Ei, ei Elli!" huusivat silloin isä, äiti ja kaikki muut aikaihmiset

verannalta, kauhistunein liikkein vaatien yltiöpäätä heti
laskeutumaan alas. Mutta yritteliä vitkasteli… Siitäkin — puolitiestä
— näki hän jo laajenneen, loistavan maiseman, joka tältä
korkeammalta asteelta katsottuna näytti tuhat kertaa
ihmeellisemmältä, viehättävämmältä, kun esimerkiksi verannan
kaidepuun takaa, taikkapa kellarin katoltakin, — mihinkä joskus
luvallakin oli saanut kiivetä.
"Tule alas! Kuuletko, hetipaikalla alas, sinä pahankurinen lapsi!" Ja

pahankurinen lapsi totteli, tullen alas vaikka verkkaan ja nyrpeän
näköisenä.
"Miks'en minä saa mennä sinne, yhtähyvin kun pojatkin?" nurkui

hän.
"Siksi että se ei sovi tytöille — muista se!" —
Elli painui verannan alimmalle rappuselle istumaan. Äsken niin

iloinen, toiminnanhaluinen lapsensielu oli sumennettu ja
sulkeutuneena mietti se arvoitusta: miksi en minä yhtähyvin kun
pojatkin…
*****
"Se on siis päätetty", sanoi isä tyytyväisesti. "Ja minä toivon

kaikesta sydämestäni, että menestyt lääkäriurallasi Kaarloseni! —
Mutta entäs Esko? On jo aika sinunkin vakiintua siitä, miksi aijot
maailmassa."
"Siitä olen jo kauvan ollut selvillä, isä. Kun poikasena kerran tein
huvihuoneen piirustukset, sanoit sinä että näyttää siltä kun Eskolla
olisi tulevaisuutta tällä alalla ja sitä minulla varmasti onkin! Saat
uskoa, isä, että minä kerran vien arkkitehtuuriamme loistavan
askeleen eteenpäin."
Isä hymyili. "Hyvä, olen siis selvillä ja tyytyväinen lasteni

tulevaisuudesta."
"Mutta minuthan sinä aivan syrjäytät, isä", muistutti Elli "vai eikö
sinua ollenkaan huvita tietää miksi minä aijon?
"Ah sinä! Noo — sinusta kaiketi tulee kunnianarvoisa pikku rouva,

kunhan ennättää — ellet juuri vanhaksi piiaksi aijo", nauroi isä.
Ellin raikkaat kasvot peittyivät synkkiin pilviin ja silmissään loukattu

ihmisarvo salamoi…
"Niin, tuomari Arvolahan on sinuun pahoin pikeytynyt. Ja,

luullakseni, on hänen kainalossaan tulevaisuutesi turvattu", täydensi
Kaarlo.
"Oi, kuinka te olette ilkeitä!" huudahti Elli. "Sekö se siis on tyttöjen

päämäärä ja siihenkö heillä vaan on lupa pyrkiä? 'Tulevaisuus
turvattu'… on se sekin yks' rääsyinen sana! Ikäänkuin meillä ei olisi
oikeutta, niinhyvin kuin velvollisuuttakin, itse, omintakeisesti turvata
tulevaisuuttamme!"
"Sillä tavallahan se asia kuitenkin tavallisesti tässä Jumalan

luomassa maailmassa menee —"
"Tässä miesten muokkaamassa maailmassa — niin olemme
epäilemättä lähempänä totuutta. Vai luuletteko, uskallatteko luulla
Jumalasta jotain niin alhaista, äärimmäisen ilkeämielistä, että hän
olisi sysännyt naisen siihen alennustilaan, missä tämä vuosituhansia
on saanut värjötellä?"
"Elli, Elli — elä pidä noin suurta suuta. Ehkäpä ne vuosituhannet

juuri kumoavat väitteesi —"
"Mahdollisesti, jos naisasia olisi vieläkin siinä pisteessä, missä se

Aabrahamin aikoina oli — mutta Jumalan kiitos, ne samaiset
vuostuhannet ovat kuitenkin olleet kehityksen, vapautuksen aikoja ja
kieltämättä me olemme matkalla oikeutta, täydellistä tasa-arvoa
kohden, olkoonpa tämä matkamme viimeinen virstapylväs vielä
kuinka kaukana tahansa."
"Sinä olet oikea naisasian agitaattori, Elli!" pisti Kaarlo väliin,

hymyillen ainaista ylimielistä hymyänsä.
"Minulla on kunnia olla! Mutta elä sinä yhtään tuolla tavalla

hymyile… Kuuleppas, se aika on onneksi mennyt, jolloin naisasialle
voitiin vaan hymyillä ja etäällä, etäällä — vaikka tulevassa — on
sekin, jolloin sille enään vaan tarvitaan hymyillä. Nyt on toiminnan,
työn ja taistelun aika!"
"Kiitä Luojaa, lapseni, että elät ajassa, joka sallii sinun nauttia työsi
hedelmiä", lausui äiti. "Minun nuoruudessani saimme tyytyä — ah
emmehän kaikkea uskaltaneet uneksiakaan — mitä te nyt saatte
todellisuudessa omistaa ja nauttia…"
"Ja kuitenkaan, äiti, ei vielä meilläkään ole läheskään kaikkea,

mitä pitäisi olla! — No niin, isä, minä olen päättänyt lukea lääkäriksi
kuten Kaarlokin." —
"Vai päättänyt? Sehän kuuluu erittäin juhlalliselta… Mutta minulta

ei totisesti riitä rahoja siihen, — saan luvan ilmoittaa."
"Vai niin, isä rukka! Olet siis ikuisessa kiitollisuuden velassa

kohtalolle, joka salli kolmannen lapsesi syntyä tytöksi, säästääkseen
kukkaroasi ja estääkseen sen julmuuden tapahtumasta, mikä olisi
ollut välttämätön, jos se kolmaskin olisi ollut poika!"
Isä näytti harmistuneelta, eikä löytänyt pitkään aikaan sanoja

vastineeksi.
"Et sinä toki henno särkeä Ellin tulevaisuutta", sanoi viimein äiti
pyytävän hellästi niinkuin ainakin.
"Te naiset olette niin hiton itsepäisiä toisinaan…"
"Ei isä, kyllä sinulta pitää riittää rahoja Ellillekin, Kaarlon ja minun
on elettävä sitä myöten. Muuten minäkin olen aivan onneton",
lämpeni Esko. "Sehän olisi muuten samaa, kuin jos riistettäisiin Elliltä
vaatteet meille pojille — ja hän työnnettäisiin alastomana pakkaseen!
Se ei saa tapahtua, isä!" —
"Voi tuota Eskoa, sehän on itse olennoitu oikeus ja hyvyys!"

riemuitsi Elli. — "Enkös olekin aina sanonut, että Esko se on, joka
meidän kotimme piirissä edustaa tulevaisuuden herttaista, ylevää,
täydellistynyttä miestä. Tuollaisesta veljestä kannattaa ylpeilläkin!"
Mutta isä vääntelihe nyrpeänä tuolissaan. Hän muistutti suurta

mehiläistä, joka on lentänyt kärpäspaperille ja koettaa turhaan
irroittautua siitä…
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Finance Applications and Theory 3Rd Edition Cornett Test Bank Full Chapter PDF

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Finance Applications and Theory 3rd

Edition Cornett Test Bank

Characterizing Risk and Return

Multiple Choice Questions

2. Which of these is the dollar return characterized as a percentage of money invested?

4. Which of these statements is true?

D. Wall Street Journal

8. Which of these is defined as a combination of investment assets held by an investor?

A. Firm specific risk

C. Modern portfolio risk

A. Firm specific risk

C. Modern portfolio risk

11. Which of the following is another term for market risk?

A. Firm specific risk

B. Modern portfolio risk

A. Firm specific theory

B. Modern portfolio theory

C. Optimal portfolio theory

D. Total portfolio theory

A. diminishing returns apply to risk-taking in the investment world.

B. increasing returns apply to risk-taking in the investment world.

C. returns are not impacted by risk-taking in the investment world.

D. None of these complete the sentence to make it true.

17. To find the percentage return of an investment:

18. Which statement is true?

C. The larger the standard deviation, the more portfolio risk.

D. The standard deviation is not an indication of total risk.

A. Rail Haul, Poker-R-Us, Idol Staff

B. Idol Staff, Poker-R-Us, Rail Haul

C. Poker-R-Us, Idol Staff, Rail Haul

D. Idol Staff, Rail Haul, Poker-R-Us

A. Rail Haul, Poker-R-Us, Idol Staff

B. Idol Staff, Rail Haul, Poker-R-Us

C. Poker-R-Us, Idol Staff, Rail Haul

D. Idol Staff, Poker-R-Us, Rail Haul

A. Rail Haul, Idol Staff, Poker-R-Us

B. Idol Staff, Poker-R-Us, Rail Haul

C. Poker-R-Us, Idol Staff, Rail Haul

D. Idol Staff, Rail Haul, Poker-R-Us

A. Rail Haul, Idol Staff, Poker-R-Us

B. Idol Staff, Rail Haul, Poker-R-Us

C. Poker-R-Us, Idol Staff, Rail Haul

D. Idol Staff, Poker-R-Us, Rail Haul

A. Portfolio Blue dominates portfolio Yellow

B. Portfolio Yellow dominates portfolio Blue

C. Portfolio Purple dominates portfolio Blue

D. Portfolio Purple dominates portfolio Yellow

A. Portfolio Blue dominates portfolio Yellow

B. Portfolio Yellow dominates portfolio Blue

C. Portfolio Purple dominates portfolio Blue

D. Portfolio Purple dominates portfolio Yellow

A. Portfolio Blue dominates portfolio Yellow

B. Portfolio Blue dominates portfolio Purple

C. Portfolio Purple dominates portfolio Blue

D. Portfolio Purple dominates portfolio Yellow

A. Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333

B. Adobe System = 0.2, Dow Chemical = 0.3, Office Depot = 0.5

C. Adobe System = 0.3, Dow Chemical = 0.2, Office Depot = 0.5

D. Adobe System = 0.2667, Dow Chemical = 0.3333, Office Depot = 0.4

A. Adobe System = 0.3333, Dow Chemical = 0.3333, Office Depot = 0.3333

B. Adobe System = 0.1667, Dow Chemical = 0.3333, Office Depot = 0.5

C. Adobe System = 0.3333, Dow Chemical = 0.1667, Office Depot = 0.5