assignment 3

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School

Trent University *

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5220H

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Finance

Date

Apr 3, 2024

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Uploaded by KidPartridgeMaster940

¥ Question Completion Status: T NCT 1CTOL. MNOOCTOJIITICITHIU T Test Information Description Instructions Multiple Attempts Force Completion This is the third of five online assessments you will receive during this course. As outlined in the course syllabus, the score you receive on this assessment will account for 7% of your final grade. This Third Assessment consists of 25 multiple choice questions and draws from material that we discussed during Weeks 5 and 6 of lecture. This assessment primarily focuses on Chapter 10 ("Capital Markets and the Pricing of Risk") and selected topics From Chapter 11 ("Optimal Portfolio Choice and the Capital Asset Pricing Model"), specifically: - 11.1 - The Expected Return of a Portfolio - 11.2 - The Volatility of a Two-Stock Portfolio Good luck! Please complete and submit the Third Assessment by 11:59 pm Eastern on Friday February 23, 2024. Assessment grading and feedback will be made available to all students after the due date has passed. Not allowed. This test can only be taken once. This test can be saved and resumed later. Your answers are saved automatically. QUESTION 1 1 points Saved Common risk is also called: O firm-specific risk. @® market risk. O independent risk. O diversifiable risk. QUESTION 2 1 points Saved Suppose that KAN's beta is 1.5. If the market risk premium is 8% and the risk- free interest rate is 4%, then the expected return for KAN stock is? O 13.5% O 8.0% @® 16.0% O 10.0%

(J $9Y5,000,0U0U. Use the following information to answer the problem(s) below. Consider two banks. Bank A has 1000 loans outstanding each for $100,000, that it expects to be fully repaid today. Each of Bank A's loans have a 6% probability of default, in which case the bank will receive $0 for each of the defaulting loans. Bank B has 100 loans of $1 million outstanding, which it also expects to be fully repaid today. Each of Bank B's loans have a 5% probability of default, in which case the bank will receive $0 for each of the defaulting loans. The chance of default is independent across all the loans. The expected overall payoff to Bank A is: @® $94,000,000. O $6,000,000. (O $5,000,000. QUESTION 4 1 points Use the following information to answer the question(s) below. Company | Ticker | Beta Ford Motor Company | F | 277 International Business Machines| IBM | 0.73 Merck | MRK | 0.90 If the market risk premium is 6% and the risk-free rate is 4%, then the expected return of investing in Ford Motor Company is closest to: O 10.0%. O 17.1%. @® 20.6%. O 16.2%. QUESTION 5 1 points Use the following information to answer the question(s) below. Company | Ticker | Beta Ford Motor Company | F | 277 International Business Machines| I1BM | 0.73 Merck | MRK | 0.90 If the expected return on the market is 11% and the risk-free rate is 4%, then the expected return of investing in IBM is closest to: O 11.0%. O 10.3%. ® 9.1%. O 12.0%. QUESTION 6 1 points Use the following information to answer the question(s) below. Suppose that the market portfolio is equally likely to increase by 24% or decrease by 8%. Security "X" goes up on average by 29% when the market goes up and goes down by 11% when the market goes down. Security "Y" goes down Sy A~~~y 1 a1l T Y B B N S a1 o 1 1 Saved Saved Saved

The beta for security "X" is closest to: O 1.00. O 0.80. @® 1.25. O o. QUESTION 7 1 points Use the following information to answer the question(s) below. Suppose that the market portfolio is equally likely to increase by 24% or decrease by 8%. Security "X" goes up on average by 29% when the market goes up and goes down by 11% when the market goes down. Security "Y" goes down on average by 16% when the market goes up and goes up by 16% when the market goes down. Security "Z" goes up on average by 4% when the market goes up and goes up by 4% when the market goes down. The beta for security "Z" is closest to: O 0.25. O -1.00. O -0.25. @ 0.00. QUESTION 8 1 points Use the following information to answer the question(s) below. Suppose that the market portfolio is equally likely to increase by 24% or decrease by 8%. Security "X" goes up on average by 29% when the market goes up and goes down by 11% when the market goes down. Security "Y" goes down on average by 16% when the market goes up and goes up by 16% when the market goes down. Security "Z" goes up on average by 4% when the market goes up and goes up by 4% when the market goes down. The risk-free rate is closest to: @® 4%. O 16%. O 0%. O 8%. QUESTION 9 1 points Use the information for the question(s) below. Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster” drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has 10 separate less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $100 million in net income for Little Cure. The probability of the FDA approving a drug is 50%. Saved Saved Saved

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(&4 O $25 million. @® $16 million. (O $500 million. O $50 million. QUESTION 10 1 points Use the information for the question(s) below. Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes Companies, Inc. (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. Suppose over the next year Ball Corporation has a return of 12.5%, Lowes Companies has a return of 20%, and Abbott Labs has a return of -10%. The return on your portfolio over the year is: O 5.0%. O 0%. O 7.5%. @® 3.5%. QUEST'ON 11 1 points Use the table for the question(s) below. Consider the following average annual returns: Investment Average Return Small Stocks 23.2% S&P 500 13.2% Corporate Bonds 7.5% Treasury Bonds 6.2% Treasury Bills 4.8% What is the excess return for Treasury Bills? ® 0% O -8.4% O -1.4% O -2.7% QUESTION 12 1 points Use the table for the question(s) below. Consider the following realized annual returns: Index Stock A Year End Realized Realized Return Return 2000 23.6% 46.3% 2001 24.7% 26.7% 2002 30.5% 86.9% 2003 9.0% 23.1% "70NAN _ N0/ N D04 Saved Saved Saved

2007 32.2% 27.9% 2008 4.4% -5.1% 2009 7.4% -11.3% Suppose that you want to use the 10-year historical average return on the Index to forecast the expected future return on the Index. The standard error of your estimate of the expected return is closest to: O 1.95%. O 19.4%. ® 6.2%. O 3.8%. QUESTION 13 Use the table for the question(s) below. Consider the following realized annual returns: Index Stock A Year End Realized Realized Return Return 2000 23.6% 46.3% 2001 24.7% 26.7% 2002 30.5% 86.9% 2003 9.0% 23.1% 2004 -2.0% 0.2% 2005 -17.3% -3.2% 2006 -24.3% -27.0% 2007 32.2% 27.9% 2008 4.4% -5.1% 2009 7.4% -11.3% Suppose that you want to use the 10-year historical average return on the Index to forecast the expected future return on the Index. The 95% confidence interval for your estimate of the expect return is closest to: O 4.9% to 12.7%. O -9.6% to 27.3%. O 6.8% to 10.7%. @® -3.5% to 21.1%. QUESTION 14 Use the table for the question(s) below. Consider the following returns: Stock X Stock Y Stock Z Year End Realized Realized Realized Return Return Return 2004 20.1% -14.6% 0.2% 2005 72.7% 4.3% -3.2% 2006 -25.7% -58.1% -27.0% 2007 56.9% 71.1% 27.9% 2008 6.7% 17.3% -5.1% 2009 17.9% 0.9% -11.3% The covariance between Stock X's and Stock Y's returns is closest to: N\ N ro 1 points 1 points Saved Saved

QUESTION 15 1 points Use the table for the question(s) below. Consider the following returns: Stock X Stock Y Stock Z Year End Realized Realized Realized Return Return Return 2004 20.1% -14.6% 0.2% 2005 72.7% 4.3% -3.2% 2006 -25.7% -58.1% -27.0% 2007 56.9% 71.1% 27.9% 2008 6.7% 17.3% -5.1% 2009 17.9% 0.9% -11.3% The Volatility on Stock Y's returns is closest to: O 35%. O 42%. O 31%. ® 18%. QUESTION 16 1 points Which of the following investments offered the highest overall return over the past ninety-two years? (O S&P 500 @® Small stocks (O Treasury Bills (O Corporate bonds QUEST'ON 17 1 points Which of the following is NOT a diversifiable risk? (O The risk of a product liability lawsuit (O The risk of a key employee being hired away by a competitor (O The risk that the CEO is killed in a plane crash @® The risk that oil prices rise, increasing production costs QUEST'ON 18 1 points Which of the following is NOT a systematic risk? @ The risk that your new product will not receive regulatory approval (O The risk that oil prices rise, increasing production costs (O The risk that the economy slows, reducing demand for your firm's products (O The risk that the Federal Reserve raises interest rates Saved Saved Saved Saved

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QUESTION 19 Which of the following statements is FALSE? (O Two common measures of the risk of a probability distribution are its variance and standard deviation. @ If the return is riskless and never deviates from its mean, the variance is equal to one. (O The variance increases with the magnitude of the deviations from the mean. (O The variance is the expected squared deviation from the mean. QUESTION 20 Which of the following statements is FALSE? (O When an investment is risky, there are different returns it may earn. (O The expected or mean return is calculated as a weighted average of the possible returns, where the weights correspond to the probabilities. (O The variance is a measure of how "spread out" the distribution of the return is. @ In finance, the variance of a return is also referred to as its volatility. QUESTION 21 Which of the following statements is FALSE? (O Portfolios with higher volatility have historically rewarded investors with higher average returns. @ Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities. (O Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on. O Investments with higher volatility should have a higher risk premium and therefore higher returns. QUESTION 22 Which of the following statements is FALSE? (O Firm-specific news is good or bad news about the company itself. (O Firms are affected by both systematic and firm-specific risk. (O When firms carry both types of risk, only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio. @ The risk premium for a stock is affected by its idiosyncratic risk. QUESTION 23 Which of the following statements is FALSE? @® Because the risk that determines expected returns is unsystematic risk, which is measured by beta, the cost of capital for an investment is the expected return available on securities with the same beta. N Tha Cramidal Acentr Dririmea MaAaAdAl ic +lhAa maAact irmmardbamt: mantblh A €4 - 1 points 1 points 1 points 1 points 1 points Saved Saved Saved Saved Saved

(O To determine a project's cost of capital we need to estimate its beta. QUESTION 24 1 points Saved Which of the following statements is FALSE? @® Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. (O A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio. (O The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio. O Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. QUESTION 25 1 points Saved Which of the following types of risk doesn't belong? O ldiosyncratic risk @® Market risk (O Firm-specific risk O Unique risk Click Save and Submit to save and submit. Click Save All Answers to save all answers. Save All Answers Save and Submit