7. Below are the standard deviations of company stock prices throughout the year. Which one is the most risky? A. Company 1- Standard deviation=36% B. Company 2- Standard deviation=32% C. Company 3- Standard deviation=6% D. Company 4- Standard deviation=18% E. Company 5- Standard deviation=24% -Company 112. Standard deviation is a measure of which one of the following? A. average rate of return B. volatility C. probability D. risk premium E. real returns13. The real rate of return on a stock is approximately equal to the nominal rate of return: A. multiplied by (1 + inflation rate). B. plus the inflation rate. C. minus the inflation rate. D. divided by (1 + inflation rate). E. divided by (1- inflation rate).14. Which one of the following statements is correct? A. The greater the volatility of returns, the greater the risk premium. B. The lower the volatility of returns, the greater the risk premium. C. The lower the average return, the greater the risk premium. D. The risk premium is unrelated to the average rate of return. E. The risk premium is not affected by the volatility of returns.15. Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset? A. beta B. reward-to-risk ratio C. risk ratio D. standard deviation E. price-earnings ratio16. Unsystematic risk A. can be effectively eliminated by portfolio diversification. B. is compensated for by the risk premium. C. is measured by beta. D. is measured by standard deviation. E. is related to the overall economy.17. Total risk is measured by _____ and systematic risk is measured by _____. A. beta; alpha B. beta; standard deviation C. alpha; beta D. standard deviation; beta E. standard deviation; variance18. Calculate the real rate of return of a 30 year treasury based on the following information: Nominal 30 year treasury yield: 4.0% Inflation: 1.0% Federal funds rate: 0.5%4-1= 3%Finance 301 Final Exam1A) Chapter 12- Risk and Return and the Capital Asset Pricing Model1) Risk is measured by price or return volatilityGreater return= greater riska) Treasury Bills= lower returns (2-4%)b) Stocks= higher returns (6-10%)c) Market risk premium= average market return- average t-bill return2) Rate of Return a) (Cash payment+change in price)/price paidb) Dividends= quarterly payments made on some stocks (ownership)c) Interest= semi-annual payments made on bonds (debt)3) Standard Deviation of Returna) Greater standard deviation means more fluctuations and greater riskb) Calculation of SD(i) Take simple average return(ii) Take each individual observed return and subtract the average to get the deviation of return(iii) Square the resulting difference, and add the squares to get the sum of the squares(iv) Divide the sum of the squares by the total number of observations minus 1. (variance)(v) The square root of the variance is the SD of the returns4) Betaa) Measure of market related systematic risk of an asset b) Lower beta= less volatilec) A stock with a beta of 2 is twice as risky as the market5) Clicker Questionsa) Which of the following statements are true:-Simple Average Returns are more representative of actual investment performance than Compound Average Returns.-A negative percentage return in the calculation of a simple average will produce an upwards biased result.-A smaller standard deviation means more fluctuations and greater riskB) Chapter 13- Efficient Capital Markets and Random Walks1) Alphaa) Observed return of asset- expected return of assetb) Stocks that perform worse than their expected return will have a negative alphac) Example: Calculate AlphaBeta = 1.5T-Bills Rate = 3.0%Finance 301 Final Exam2S&P 500 averaged return rate= 10%Actual Return on the Portfolio = 13%Expected return= 3%+1.5(10%-3%)=.135Alpha= 13%-13.5%=-0.5%Answer: -.05%d) Example: Calculate AlphaDividend: $2Beg Price: $25End Price: $27Expected Return: 12%% return= (27-25)+2/25 = .16Alpha= .16-.12=.04 or 4%2) Unsystematic Riskfirm specific risk that can be diversified away. Risk you are not paid to take3) Systematic Riskmarket related risk measured by beta. Risk that can not be diversified away. Risk You are paid to take.4) Efficient Capital Marketsa) Asset prices react very quickly to the receipt of new informationb) Efficient Market Hypothesis- stock prices react instantaneously, completely and accurately to all publicly available information5) Random Walk Hypothesisa) In efficient markets, share prices react immediately to news and share price changes are randomb) The future direction of a path cannot be predicted solely on the basis of past movements6) Types of Market Efficiencya) Weak Form Efficiency(i) Stock prices reflect information contained in the history of past stock prices and trading volume(ii) Stock price changes are independentb) Semi-strong form efficiency(i) Stock prices reflect all publicly available information(ii) Prevents investors from earning abnormal returnsc) Strong-form efficiency(i) Stock prices reflect ALL information, including information not available to investment community7) Tests of Market Efficiencya) Behavioral Finance- challenged assumption that investors are rational and markets behave rationallyb) Fama and French Study- states that stocks with small market caps outperform stocks with large market caps, stocks with low p/e ratios outperform stocks with high p/e ratiosFinance 301 Final Exam38) Clicker Questionsa) Calculate Expected Returnbeta=.9 market return=8% Tbill=3%CAPM= 3%+.9(8%-3%)=7.5%4b) T/F: If a market is efficient, all investments lie on the risk-expected return line (true)c) If a firm is plotted above the risk-expected return line, then the stock is considered UNDERVALUED*below the line=overvaluedC) Chapter 14- Interest Rates and Bond Valuation1) Bonds in Generala) Bond- debt financial contract under which the issuer is obligated to make periodic interest payments and repay the principal at some predetermined timeb) Indenture- legal agreement between issuer of bonds and the investorsc) Principal Value/Par Amount/Maturity Value- amount that is originally borrowed and the amount that isrepaid when the bonds mature and the principal payment is dued) Interest/Coupon Rate- rate at which interest accrues or is paid by the issuer to the owner of the bond(i) Fixed Rate StructuresFixed rate Par Bond- issuer issues bond at par value and pays fixed interest semi annually on predetermined dates and repays