mouse123

The standard deviation of the rates of return is 0.25 for Stock J and 0.30 for Stock K. The covariance between the returns of J and K is 0.025. The correlation of the rates of return between J and K is:

A) 0.33.

B) 0.10.

C) 0.20.

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CovJ,K = (rJ,K)(SDJ)(SDK), where r = correlation coefficient and SDx = standard deviation of stock x
Then, (rJ,K) = CovJ,K / (SDJ × SDK) = 0.025 / (0.25 × 0.30) = 0.333

mouse123

Which of the following statements regarding the covariance of rates of return is least accurate?

A) It is a measure of the degree to which two variables move together over time.

B) It is not a very useful measure of the strength of the relationship, there is absent information about the volatility of the two variables.

C) If the covariance is negative, the rates of return on two investments will always move in different directions relative to their means.

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Negative covariance means rates of return will tend to move in opposite directions on average. For the returns to always move in opposite directions, they would have to be perfectly negatively correlated. Negative covariance by itself does not imply anything about the strength of the negative correlation.

mouse123

If the standard deviation of stock A is 10.6%, the standard deviation of stock B is 14.6%, and the covariance between the two is 0.015476, what is the correlation coefficient?

A) +1.

B) 0.0002.

C) 0.

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The formula is: (Covariance of A and B) / [(Standard deviation of A)(Standard Deviation of B)] = (Correlation Coefficient of A and B) = (0.015476) / [(0.106)(0.146)] = 1.

mouse123

If the standard deviation of stock A is 13.2 percent, the standard deviation of stock B is 17.6 percent, and the covariance between the two is 0, what is the correlation coefficient?

A) +1.

B) 0.31.

C) 0.

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Since covariance is zero, the correlation coefficient must be zero.

mouse123

If the standard deviation of stock A is 7.2%, the standard deviation of stock B is 5.4%, and the covariance between the two is -0.0031, what is the correlation coefficient?

A) -0.19.

B) -0.80.

C) -0.64.

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The formula is: (Covariance of A and B)/[(Standard deviation of A)(Standard Deviation of B)] = (Correlation Coefficient of A and B) = (-0.0031)/[(0.072)(0.054)] = -0.797.

mouse123

If the standard deviation of returns for stock A is 0.60 and for stock B is 0.40 and the covariance between the returns of the two stocks is 0.009 what is the correlation between stocks A and B?

A) 0.0020.

B) 0.0375.

C) 26.6670.

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CovA,B = (rA,B)(SDA)(SDB), where r = correlation coefficient and SDx = standard deviation of stock x
Then, (rA,B) = CovA,B / (SDA × SDB) = 0.009 / (0.600 × 0.400) = 0.0375

mouse123

Stock A has a standard deviation of 10%. Stock B has a standard deviation of 15%. The covariance between A and B is 0.0105. The correlation between A and B is:

A) 0.70.

B) 0.55.

C) 0.25.

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CovA,B = (rA,B)(SDA)(SDB), where r = correlation coefficient and SDx = standard deviation of stock x
Then, (rA,B) = CovA,B / (SDA × SDB) = 0.0105 / (0.10 × 0.15) = 0.700

mouse123

Risk aversion means that if two assets have identical expected returns, an individual will choose the asset with the:

A) higher standard deviation.

B) shorter payback period.

C) lower risk level.

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Investors are risk averse.
Given a choice between assets with equal rates of expected return, the investor will always select the asset with the lowest level of risk.
This means that there is a positive relationship between expected returns (ER) and expected risk (Es) and the risk return line (capital market line [CML] and security market line [SML]) is upward sloping.

Standard deviation is a way to quantify risk. The payback period is used to evaluate capital projects, not investment returns.

mouse123

Which of the following statements about risk aversion is CORRECT?

A) Given a choice between two assets with equal rates of return, the investor will always select the asset with the lowest level of risk.

B) Risk averse investors will not take on risk.

C) Risk aversion implies that the risk-return line, the CML, and the SML are downward sloping curves.

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Risk aversion implies that an investor will not assume risk unless compensated.

mouse123

A stock has an expected return of 4% with a standard deviation of returns of 6%. A bond has an expected return of 4% with a standard deviation of 7%. An investor who prefers to invest in the stock rather than the bond is best described as:

A) risk averse.

B) risk neutral.

C) risk seeking.

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Given two investments with the same expected return, a risk averse investor will prefer the investment with less risk. A risk neutral investor will be indifferent between the two investments. A risk seeking investor will prefer the investment with more risk.