Chapter 6 The Meaning and Measurement of Risk and Return

17) Of the following different types of securities, which is typically considered most risky?

A) long-term corporate bonds

B) long-term government bonds

C) common stocks of large companies

D) common stocks of small companies

18) Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return. What is the expected amount of return this investment will produce?

A) $4,040

B) $7,640

C) $12140

D) $1,540

19) Assume that an investment is forecasted to produce the following returns: a 30% probability of a 12% return; a 50% probability of a 16% return; and a 20% probability of a 19% return. What is the expected percentage return this investment will produce?

A) 33.3%

B) 16.1%

C) 9.5%

D) 15.4%

20) Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return. What is the standard deviation of return for this investment?

A) 5.89%

B) 16.1%

C) 2.43%

D) 15.7%

21) The category of securities with the highest historical risk premium is

A) large company stocks.

B) small company stocks.

C) government bonds.

D) small company corporate bonds.

22) If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the least risky investment?

A) common stock of large firms

B) U.S. Treasury bills

C) common stock of small firms

D) long-term government bonds

23) If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the highest risk investment?

A) common stock of large firms

B) U.S. Treasury bills

C) common stock of small firms

D) long-term government bonds

24) You are considering a security with the following possible rates of return:

Probability	Return (%)
0.15	9.5
0.25	13.6
0.50	14.9
0.10	25.3

a. Calculate the expected rate of return.

b. Calculate the standard deviation of the returns.

25) You are considering the three securities listed below.

	Returns
Probability	Stock A	Stock B	Stock C
20%	2%	-3%	5%
50%	10%	8%	8%
30%	15%	20%	12%

a. Calculate the expected return for each security.

b. Calculate the standard deviation of returns for each security.

c. Compare Stock A with Stocks B and C. Is Stock A preferred over the others?

Learning Objective 4

1) The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

2) Proper diversification generally results in the elimination of risk.