Free Practice Quiz Question List

4 Risk and Return Online Quiz Questions

Use this free practice quiz with 20 questions to review 4 Risk and Return, test your knowledge, and prepare for your next test or exam.

20 questions

True or false

1 point

A larger standard deviation indicates that returns fluctuated more during the measured period, but it does not show whether future returns will be positive or negative. True or false?

A
True
B
False

Choose one

1 point

A share begins the period at $\$80$ , pays a $\$2$ dividend, and ends at $\$76$ . What is its holding-period return?

A
$0\%$
B
$2.5\%$
C
$-2.5\%$
D
$5\%$

Choose one

1 point

An investment earns $20\%$ in one period and loses $20\%$ in the next. Which average is more informative for describing its long-run compounded growth, and why?

A
The arithmetic average, because it is the constant rate that reproduces the compounded ending value.
B
The geometric average, because it is the constant per-period rate that reproduces the compounded ending value.
C
The arithmetic average, because it always accounts for compounding better than the geometric average.
D
Neither average, because two observed returns cannot be averaged.

Fill in the blank

1 point

A product failure affects one company but does not reflect a broad economic event. This is an example of .

Written response

1 point

What is the finance term for expected return above a relatively low-risk benchmark that compensates investors for bearing risk?

Choose one

1 point

A portfolio invests $40\%$ in an asset returning $5\%$ and $60\%$ in an asset returning $10\%$ . What is the portfolio return?

A
$5\%$
B
$6\%$
C
$8\%$
D
$10\%$

True or false

1 point

For a two-asset portfolio with positive weights and nonzero volatilities, a correlation below $+1$ gives lower portfolio variance than the same assets would have with correlation $+1$ . True or false?

A
True
B
False

Fill in the blank

1 point

In CAPM, measures an asset's sensitivity to market movements and represents its systematic risk.

Written response

1 point

Using CAPM, calculate the expected return for an asset with beta $0.75$ , a risk-free rate of $4\%$ , and an expected market return of $10\%$ . Enter the result in percentage points, without the percent sign.

Choose all

1 point

Select all statements about diversification that are supported by the material.

A
Diversification can reduce much of the risk concentrated in a single firm.
B
Holding many investments guarantees that the portfolio cannot lose value.
C
A diversified portfolio remains exposed to broad market risk.
D
All else equal, lower correlation between assets generally creates more potential to reduce portfolio volatility.

Choose all

1 point

For a two-asset portfolio, select all inputs that directly determine portfolio variance in the formula presented in the material.

A
The portfolio weights assigned to the assets
B
The individual assets' volatilities
C
The number of calendar days in the holding period
D
The correlation between the assets' returns

Choose one

1 point

Three observed returns are $2\%$ , $4\%$ , and $6\%$ . Using the sample variance formula, what is their sample variance? Express the answer in squared percentage points.

A
$2$ squared percentage points
B
$4$ squared percentage points
C
$8$ squared percentage points
D
$16$ squared percentage points

Open ended

1 point

An investor uses standard deviation to assess an investment's risk. Explain what standard deviation captures and give at least two important limitations of using it as a risk measure.

Choose one

1 point

Which statement best describes how the correlation between two assets affects the potential for diversification to reduce portfolio volatility?

A
Combining assets with correlation $+1$ always eliminates market risk.
B
When correlation is below $+1$ , combining assets can reduce portfolio volatility.
C
Portfolio volatility depends only on the volatility of the individual assets, not their correlation.
D
Diversification guarantees that a portfolio will not lose value.

Choose one

1 point

A portfolio places equal weights in two assets. Their standard deviations are $10\%$ and $20\%$ , and their returns have correlation $0$ . Using the two-asset portfolio variance formula, what is the portfolio standard deviation? Choose the closest value.

A
$10\%$
B
Approximately $11.18\%$
C
$15\%$
D
$30\%$

True or false

1 point

True or false: A riskier investment is guaranteed to earn a higher realized return in every period.

A
True
B
False

Choose one

1 point

An investment has a $25\%$ probability of returning $-10\%$ and a $75\%$ probability of returning $10\%$ . What is its expected return?

A
$2.5\%$
B
$5\%$
C
$7.5\%$
D
$10\%$

Choose one

1 point

Investment A had a historical standard deviation of $12\%$ , while Investment B had one of $8\%$ . What does this comparison support?

A
Returns were more likely to be positive.
B
The investment had a higher expected return.
C
Returns fluctuated more during the measured period.
D
The investment was protected from extreme losses.

Written response

1 point

A product failure affects one company but not the broader market. What category of risk can diversification reduce in this situation?

Written response

1 point

A share begins the period at $\$80$ , ends at $\$84$ , and pays a $\$4$ dividend. Using $R = \frac{P_1-P_0+D}{P_0}$ , what is its holding-period return? Enter the result as a percentage-point value.