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    FinMan - Risk and Return Quiz

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    Jennifer Rasonabe
    This document contains a 10 question financial management quiz with multiple choice and problem solving questions. The questions cover topics such as: - Types of financial risks like market risk and systematic risk - Calculating expected returns, variance, and standard deviation - The benefits of diversification - Relating a stock's beta to its risk level compared to the market - Using the capital asset pricing model (CAPM) to calculate required rates of return for stocks and portfolios - Solving portfolio weight, expected return, beta, and required return problems.

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    FinMan - Risk and Return Quiz

    Uploaded by

    Jennifer Rasonabe
    2K views3 pages
    This document contains a 10 question financial management quiz with multiple choice and problem solving questions. The questions cover topics such as: - Types of financial risks like market risk and systematic risk - Calculating expected returns, variance, and standard deviation - The benefits of diversification - Relating a stock's beta to its risk level compared to the market - Using the capital asset pricing model (CAPM) to calculate required rates of return for stocks and portfolios - Solving portfolio weight, expected return, beta, and required return problems.

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    This document contains a 10 question financial management quiz with multiple choice and problem solving questions. The questions cover topics such as: - Types of financial risks like market risk and systematic risk - Calculating expected returns, variance, and standard deviation - The benefits of diversification - Relating a stock's beta to its risk level compared to the market - Using the capital asset pricing model (CAPM) to calculate required rates of return for stocks and portfolios - Solving portfolio weight, expected return, beta, and required return problems.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    2K views3 pages

    FinMan - Risk and Return Quiz

    Uploaded by

    Jennifer Rasonabe
    This document contains a 10 question financial management quiz with multiple choice and problem solving questions. The questions cover topics such as: - Types of financial risks like market risk and systematic risk - Calculating expected returns, variance, and standard deviation - The benefits of diversification - Relating a stock's beta to its risk level compared to the market - Using the capital asset pricing model (CAPM) to calculate required rates of return for stocks and portfolios - Solving portfolio weight, expected return, beta, and required return problems.

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    FINANCIAL MANAGEMENT QUIZ #1 (FINALS)

    NAME: _____________________________________________ SCORE:___________________

    MULTIPLE CHOICE: Write the letter of the correct answer. 2 points each. 

    ____1. The possibility of future change in price with a consequent of loss of return results in
    a. default risk
    b. liquidity risk
    c. systematic risk
    d. market risk

    ____2. The weighted average of returns anticipated over time is defined as the
    a. expected returns
    b. variance of returns
    c. standard deviation of returns
    d. rate of return

    ____3. The square root of the variance of returns is defined as the
    a. expected returns
    b. variance of returns
    c. standard deviation of returns
    d. rate of return

    ____4.  Consider the following information for the financial asset A.
    State of the World State 1 State 2 State 3
    Probability of occurrence 0.10 0.50 0.40
    Rates of Return (%) 4.00 6.00 9.00
    The expected return on this asset is
    a. 7.00%
    b. 8.00%
    c. 8.50%
    d. 23.00%

    ____5. The major benefit that diversification brings is:
    a. remove negative risk assets from the portfolio
    b. reduce the portfolio’s market risk
    c. reduce the portfolio’s expected risk
    d. reduce the portfolio’s systematic risk

    ____6. If an individual stock’s beta is greater than 1.0, then stock is:
    a. exactly as risky as the market
    b. less risky than the market
    c. riskier than the market
    d. none of the above

    ____7. If the correlation between two assets, A and B for instance is said to equal ­0.65, this means that
    a. a one­dollar increase in the value of asset A implies that asset B will fall by $0.65.
    b. a one­dollar increase in the value of asset A implies that asset B will increase by $0.65.
    c. a 1% increase in the value of asset A implies that asset B will fall by 0.65%.
    d. a 1% increase in the value of asset A implies that asset B will increase by 0.65%.

    ____8. A recession is an economic event that is best characterized as:
    a. Unsystematic risk that can be diversified away.
    b. Systematic risk.
    c. Market risk that can be diversified away.
    d. Unsystematic risk that cannot be diversified away
    e. Both b and c

    ____9. Which statement/s is correct?
    i. Standard deviation is the statistical measure of the variability of a set of observations. 
    ii. The coefficient of variation is equal to standard deviation divided by the expected return. 

    a. Statement i
    b. Both Statements 
    c. Statement ii
    d. None of the above

    ____10. A stock is currently being sold in the market at P20 per share. If it was estimated that the dividend 
    for this stock will grow double from today with an overall constant growth rate of 5%, how will the stock 
    be valued if the last dividend received was 0.5 and the expected return was 15%. 
    a. the stock is undervalued
    b. the stock is overvalued 
    c. the stock price and intrinsic value is equal
    d. the intrinsic value cannot be determined

    PROBLEMS. Answer the following problems. Points will depend on the difficulty.

    1. (3pts) Liberty bought 180 shares of Stock A and 140 shares of Stock B. If the selling price of these
    stocks were P45 and P27 per share.
    What is the weight of Stock A based on the portfolio value? _____________________

    Total value = 180(P45) + 140(P27) = $11,880

    The portfolio weight for each stock is:

    WeightA = 180($45)/$11,880 = .6818

    2­3. (2pts @) Compute for the following using the values of the portfolio below.

    Investment Expected Return
    Stock ABC P2,950 11%
    Stock XYZ P3,700 15%

    2. What is the expected return for the portfolio? _________________
    3. If the coefficient of variation is 1.88, what is the standard deviation of the portfolio?__________

    Total value = $2,950 + 3,700 = $6,650

    So, the expected return of this portfolio is:
    E(Rp) = ($2,950/$6,650)(0.11) + ($3,700/$6,650)(0.15) = .1323 or 13.23%
    SD = 0.9327 = 1.88x0.1323

    4­5.  (2 pts @) Consider the following information about two stocks where the probability of an economic  
    boom is 40%:

    Economic State Return A (RA) Return B (RB)


    Boom 38% 6%
    Recession –4% 12%

    4. Calculate the expected return for stock A.  ________________
    5. Calculate the expected return on a portfolio with equal proportions in the risky assets, and
    30% in a risk­free asset with expected return of 10%. ________________

    ANSWER

    a) p(boom) = 0.4 and p(recession)=0.6 (Note that probabilities always add up to 1)

    E(RA) = 0.4 × 0.38 + 0.6 × ­0.04 = 0.128 (­12.8%)
    E(RB) = 0.4 × 0.06 + 0.6 × 0.12 = 0.096 (9.6%)

    c) Portfolio weights: WA=0.35 and WB=0.35, and WF=0.3:
    E(RP) =  0.35 × 0.128 + 0.35 × 0.096 + 0.3 × 0.10 = 0.1084 (10.84%)
     
    6­7.   (2   pts)You   are   appointed   as   the   financial   manager   of   a   P4,000,000   investment   fund   named
    SUKONAKO Corp. The fund consists of four stocks with the following investment and betas. 

            STOCK             INVESTMENT BETA


    A P   400,000 1.5
    B P   600,000 ­0.50
    C P1,000,000 1.25
    D P2,000,000 0.75

    The market’s required rate of return is 14% and the risk free rate is 6%.
    6. What is the portfolio beta? __________________0.7625
    7. What is the required rate of return of the portfolio? ___________________12.1%

    8­10.(2 pts) You are to manage the P5 million portfolio of PAPASABAAKO Inc. that has a beta of 1.25
    and a required rate of return of 12%. The current  risk free rate is 5.25%. Assume that you have
    received another P500,000 and invest it in a stock with a beta of 0.75. 
    8. What is the market risk premium?__________________ 5.4%
    9. What is the new beta of the portfolio?_______________ 1.2%
    10. What is the required rate of return of the additional P500,000 investment? ___________9.3%

    11.  (2 pts) The required return on a particular stock is 28% according to the CAPM. The 
    stock’s beta is 3.0. What is the risk­free rate if the expected return on the market 
    portfolio equals 20%?________________16%

    BONUS QUESTION: SHARE YOUR BEST ACCOUNTANCY MEME ;) 2 points

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