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HW02 Appendix, Financial Economics, Summer 2011
1. The risk premium for common stocks
A. cannot be zero, for investors would be unwilling to invest in common stocks.
B. must always be positive, in theory.
C. is negative, as common stocks are risky.
D. A and B.
E. A and C.
2. If a portfolio had a return of 15%, the risk free asset return was 3%, and the standard deviation of the
portfolio's excess returns was 34%, the risk premium would be _____.
A. 31%
B. 18%
C. 49%
D. 12%
E. 29%
3. You purchased a share of stock for $30. One year later you received $1.50 as a dividend and sold the
share for $32.25. What was your holdingperiod return?
A. 12.5%
B. 12.0%
C. 13.6%
D. 11.8%
E. none of the above
4. The presence of risk means that
A. investors will lose money.
B. more than one outcome is possible.
C. the standard deviation of the payoff is larger than its expected value.
D. final wealth will be greater than initial wealth.
E. terminal wealth will be less than initial wealth.
5. In the meanstandard deviation graph, which one of the following statements is true regarding the
indifference curve of a riskaverse investor?
A. It is the locus of portfolios that have the same expected rates of return and different standard
deviations.
B. It is the locus of portfolios that have the same standard deviations and different rates of return.
C. It is the locus of portfolios that offer the same utility according to returns and standard deviations.
D. It connects portfolios that offer increasing utilities according to returns and standard deviations.
E. none of the above.
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 Summer '08
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 Economics

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