Chapter 10 Flashcards
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
C
Which of the following investments had the largest fluctuations overall return over the past eighty years? A) Small stocks B) S&P 500 C) Corporate bonds D) Treasury Bills
A
Which of the following statements is false?
A) The variance increases with the magnitude of the deviations from the mean.
B) The variance is the expected squared deviation from the mean.
C) Two common measures of the risk of a probability distribution are its variance and standard deviation.
D) If the return is riskless and never deviates from its mean, the variance is equal to one.
D) If the return is riskless and never deviates from its mean, the variance is equal to zero.
Which of the following statements is false?
A) When an investment is risky, there are different returns it may earn.
B) In finance, the variance of a return is also referred to as its volatility.
C) The expected or mean return is calculated as a weighted average of the possible returns, where the weights correspond to the probabilities.
D) The variance is a measure of how “spread out” the distribution of the return is.
B) In finance, the standard deviation of a return is also referred to as its volatility.
Which of the following statements is false?
A) The standard deviation is the square root of the variance.
B) Because investors dislike only negative resolutions of uncertainty, alternative measures that focus solely on downside risk have been developed, such as the semi-variance and the expected tail loss.
C) While the variance and the standard deviation are the most common measures of risk, they do not differentiate between upside and downside risk.
D) While the variance and the standard deviation both measure the variability of the returns, the variance is easier to interpret because it is in the same units as the returns themselves.
D) While the variance and the standard deviation both measure the variability of the returns, the standard deviation is easier to interpret because it is in the same units as the returns themselves.
Which of the following statements is false?
A) The expected return is the return is the return that actually occurs over a particular time period.
B) If you hold the stock beyond the date of the first dividend, then to compute you return you must specify how you invest any dividends you receive in the interim.
C) The average annual return of an investment during some historical period is simply the average of the realized returns for each year.
D) The realized return is the total return we earn from dividends and capital gains, expressed as a percentage of the initial stock price.
A
Which of the following statements is false?
A) We measure the degree of estimation error statistically through the standard error of the estimate.
B) When focusing on the returns of a single security, its common practice to assume that all dividends are immediately invested at the risk-free rate.
C) We estimate the standard deviation or volatility as the square root of the variance.
D) We estimate the variance by computing the average squared deviation from the average realized return.
B
Which of the following statements is false?
A) The standard error provides an indication of how far the sample average might deviate from the expected return.
B) The 95% confidence interval for the expected return is defined as the Historical Average Return plus or minus three standard errors.
C) We can use a security’s historical average return to estimate its actual expected return.
D) The standard error is the standard deviation of the average return.
B) The 95% confidence interval for the expected return is defined as the Historical Average Return plus or minus two standard errors.
Which of the following statements is false?
A) The compounded geometric average return is most often used for comparative purposes.
B) We should use the arithmetic average return when we are trying to estimate an investment’s expected return over a future horizon based on its past performance.
C) The geometric average return will always be above the arithmetic average return and the difference grows with the volatility of the annual returns.
D) The geometric average return is a better description of the long-run historical performance of an investment.
C) The geometric average return will always be below the arithmetic average return and the difference grows with the volatility of the annual returns.
The excess return if the difference between the average return on a security and the average return for
A) Treasury Bonds.
B) a portfolio of securities with similar risk.
C) a broad based market portfolio like the S&P 500 index.
D) Treasury Bills.
D
Which of the following statements is false?
A) Investments with higher volatility have rewarded investors with higher average returns.
B) Investments with higher volatility should have a higher risk premium and therefore higher returns.
C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities.
D) Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on.
C
Common risk is also called A) diversifiable risk. B) correlated risk. C) uncorrelated risk. D) independent risk.
B
Which of the following types of risk doesn't belong? A) Market risk B) Unique risk C) Idiosyncratic risk D) Unsystematic risk
A
Which of the following types of risk doesn't belong? A) Idiosyncratic risk B) Undiversifiable risk C) Market risk D) Systematic risk
A
Which of the following statements is false?
A) Firm specific news is good or bad news about the company itself.
B) Firms are affected by both systematic and firm-specific risk.
C) When firms carry both types of risk, only the firm-specific risk will be diversified when we combine many firms’ stocks into a portfolio.
D) The risk premium for a stock is affected by its idiosyncratic risk.
D
