Historical returns on large-company stocks

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Homework ES

1. (TCO 8) The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield, are based on: (Points : 3)
 the largest 20 percent of the stocks traded on the NYSE.
 the stocks of the largest 10 percent of the publicly traded firms in the U.S.
 all of the stocks listed on the NYSE.
 the stocks of the 500 companies included in the S&P 500 index.

2. (TCO 8) Which of the following is true regarding the efficient market hypothesis? (Points : 3)
 It argues that efficient markets are not volatile throughout a trading day.
 It suggests that an efficient market can only consider historical information when determining current security prices.
 It proves that market inefficiencies do not exist in either the short-run or the long-run.
 It implies that all investments in an efficient market have a net present value of zero.

3. (TCO 8) Which of the following statements is true regarding systematic risk? Select all that apply: (Points : 4)
  is diversifiable
  is the total risk associated with surprise events
  it is not project or firm specific
  is measured by beta

4. (TCO 8) Assume a project that has the following returns for years 1 to 5: 15%, 4%, -13%, 34%, and 17%. What is the approximate variance of this investment? (Points : 3)
 0.03
 0.15
 17%
 20%

5. (TCO 8) Assume you are considering investing in two stocks, A & B. Stock A has an expected return of 16% and Stock B has an expected return of 9.5%. Your goal is to create a two-security portfolio that will have an expected return of 12%. If you have $250,000 to invest today, which of the following statements is true? (Points : 3)
 You would invest more in Stock A than you would invest in Stock B
 You would invest approximately $96,000 in Stock A and $154,000 in Stock B
 You would invest the same amount in each stock
 Regardless of your investment choices, you cannot obtain a return of 12%. 

6. (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows:
 
The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. What is the beta of Stock I and II respectively? (Points : 3)
 0.6 and 1.2
 1.2 and 0.6
 1.2 and 0.4
 Cannot be determined with the information given

7. (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows:
 
The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. Which statement is true? Select all that apply: (Points : 4)
  Stock II has more risk than Stock I
  Stock II has less systematic risk than Stock I
  Stock I has a higher risk premium than Stock II
  Stock I has a greater expected return than Stock II

8. (TCO 8) Which statements are false regarding risk? Select all that apply: (Points : 4)
  The expected return is always the same as the actual return
  A key to assessing risk is determining how much risk an investment adds to a portfolio
  Risks can always be diversified
  The higher the risk, the higher the return investors require for the investment

9. (TCO 8) Are all risks diversifiable? Why or why not? (Points : 3)


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(Top Tutor) Daniel C.
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School: University of Maryland
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