Risk and Return (simplified version)

What are the two components of financial returns?

• Price depreciation and diversification

• Cash yield and price appreciation

• Risk premium and systematic risk

• Beta and risk-free rate

A stock’s price increased from $50 to $55, and it paid a dividend of $2 during the year. What is the total return for the stock?

• 10%

• 12%

• 14%

• 16%

What is the primary goal of diversification in portfolio management?

• Maximizing return with high risk

• Reducing risk without lowering the average return

• Eliminating all risk from investments

• Maximizing beta coefficient

What does the efficient frontier represent in portfolio theory?

• The riskiest investment options available

• The optimal combinations of risk and return for assets

• The highest beta values for individual assets

• The risk-free rate of return for a market portfolio

What is the risk premium in the CAPM equation?

• The additional return expected for taking systematic risk

• The market index return

• The cash yield from a risk-free investment

• The difference between beta and market return

What does the Sharpe ratio measure in finance?

• The relative return of a portfolio

• The risk-adjusted return of an investment

• The relationship between beta and alpha

• The volatility of a portfolio’s returns

The market portfolio has a return of 10%, a risk-free rate of 3%, and a standard deviation of 15%. What is its Sharpe ratio?

• 0.47

• 0.50

• 0.67

• 0.80

What is the main benefit of the 60:40 portfolio?

• It eliminates all risk from investments

• It optimizes diversification and balances risk and return

• It maximizes returns regardless of market conditions

• It ensures higher returns than an all-stock portfolio

What does a beta (β) coefficient of 1.5 indicate about an asset?

• The asset is less volatile than the market

• The asset moves with the market, but less aggressively

• The asset is more volatile than the market

• The asset is negatively correlated with the market

What does the Security Market Line (SML) represent?

• The relationship between systematic risk and return

• The relationship between total risk and return

• The portfolio with the highest Sharpe ratio

• The diversification benefits of a portfolio