Question

Which of the following statements is correct?(x)Adding stocks to your portfolio can reduce firm-specific risk, but you will not eliminate market risk.(y)A low standard deviation means that the investment is less likely to achieve a much higher return than its average, but a low standard deviation indicates that the investment is less risky.(z)Expected returns may differ from actual returns because of an unforeseen economic expansion.

A.(x), (y) and (z)B.(x) and (y) onlyC.(x) and (z) onlyD.(y) and (z) onlyE.(x) only

A stock has an expected return of 12% and a standard deviation of 10%.A long-term state government bond has an expected return of 5% and a standard deviation of 3.6%. Given this data, which of the following statements is correct?

A.The stock investment has a better risk-return trade-off.

B.The bond investment has a better risk-return trade-off.

C.The two assets have the same coefficient of variation.

D.Both investments have the same diversifiable risk.

In the last six months of 2017, a company realized monthly returns of 1.75 percent, 0.25 percent, –0.45percent, –0.58 percent, 1.96percent, and 2.18percent. Given this data, which of the following statements is correct?

(x)The average return for those six monthly returnsis more than 0.84percentbut less than 0.92percent

(y)The standard deviation for those six monthly returns is more than 1.28percentbut less than 1.36percent

(z)The coefficient of variation for those six monthly returns is more than 1.44but less than 1.52

A.(x), (y) and (z)B.(x) and (y) onlyC.(x) and (z) onlyD.(y) and (z) onlyE.(z) only

Answer 1

1. Statement X is true as we can eliminate our firm risk by diversification if we add stocks but not the market risk.
Statement Y is true as low standard deviation means low risk.
Statement Z is true as well because we cannot forecast an unforeseen economic expansion

Hence, A) is correct

2. COV of stock = 10/12 = 0.833
COV of bond = 3.6/5 = 0.72 < COV of stock

The stock investment has relatively more risk, thus bond investment has a better risk return trade off.

B) is correct

3. The data is:

Returns

1.75

0.25

-0.45

-0.58

1.96

2.18

Average = 0.85

Standard deviation = 1.26

COV = 1.26/0.85 = 1.48

Hence, statements x and z are true.

C) is the correct option