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Chapter 6
Return and Risk Basics
TRUEFALSE QUESTIONS
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1. If standard deviation is used to measure the risk of stocks, one problem that arises
is the inability to tell which stock is riskier by looking at the standard deviation
alone.
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2. The variance or standard deviation measures the risk per unit of return.
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3. The variance gives units of measure that match those of the return data.
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4. A higher coefficient of variation indicates more risk per unit of return.
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5. A lowrisk investment will have a lower required return than a highrisk investment.
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6. Standard deviation is stated in the same units of measurement as those of the data
from which they were generated.
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7. The variance of a portfolio would be calculated by finding the variances of the
individual components of the portfolio and finding the weighted average of those
variances.
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8. Diversification occurs when we invest in several different assets rather than just a
single one.
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9. The benefits of diversification are greatest when asset returns have positive
correlations.
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10. Standard deviation is the square root of the variance.
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11. The coefficient of variation is a measure of total return on a stock.
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12. Unsystematic risk is the risk that cannot be eliminated through diversification.
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13. Although gold is a risky investment by itself, including gold in a stock portfolio can
make the portfolio less risky.
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14. If Stock A has a higher standard deviation than Stock B, it will also have a greater
coefficient of variation.
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15. If the expected return is 10%, the standard deviation is 3%, about 68% of the time
returns will be expected to fall between 10% and 13%.
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16. In general, large company stocks are less risky than small company stocks.
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17. Longterm corporate bonds tend to have a lower standard deviation than corporate
stocks.
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18. Future returns and risk cannot be predicted precisely from past measures.
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19. A stock that went from $40 per share at the beginning of the year to $45 at the end
of the year and paid a $2 dividend provided an investor with a 14% return.
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20. When we speak of exante returns, we are referring to historical information or
data.
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21. In general, securities with higher historical standard deviations have provided
higher returns.
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22. Research suggests that a portfolio of 20 or 30 different stocks has eliminated most
of the portfolios systematic risk.
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23. Research suggests that a portfolio of 20 or 30 different stocks has eliminated most
of the portfolios unsystematic risk.
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24. A portfolio is any combination of financial assets or investments.
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25. The expected rate of return on a portfolio is the weighted average of the expected
returns of the individual assets in the portfolio.
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 Spring '11
 MinLiu
 Accounting

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