Question

In: Finance

26. Suppose that over the last 30 years, company ABC has averaged a return of 10%....

26. Suppose that over the last 30 years, company ABC has averaged a return of 10%. Over the same period, the Treasury bond rate has averaged 3%. The current estimate of the Treasury bond rate is 5%. Using the historical approach, what is the estimate of ABC’s expected return.

A. 13.0% B. 12.5%

C. 12.0%

D. 11.0%

27. Standard deviation measures:

A. systematic risk.

B. unsystematic risk.

C. total risk.

D. beta risk.

28. Investors can eliminate what type of risk by diversifying?

A. systematic risk

B. unsystematic risk

C. beta risk

D. total risk

29. Which type of risk affects many different securities?

A. return risk

B. variance risk

C. unsystematic risk

D. systematic risk

Solutions

Expert Solution

ABC average return over last 30 yeras = 10%

Treasury bond average rate of return (same period) = 3%

Since treasury bonds are risk-free, hence risk premium taken by investors of ABC company historically is = 10% - 3%

= 7%

Current Treasury bond rate = 5% (Risk free rate)

Hence, expected bond rate = Risk free rate + risk premium

= 5% + 7%

= 12%

26. C. 12%

27. C. Total risk

Standard deviation measures both systematic and unsystematic risk in a portfolio.It is a tool to measure total variability in an investment. The smaller the standard deviation, the less risky is the investment.

28. B. Unsystematic risk

Unsystematic risk means uncommon risk, risk that is not common to a segment or market but to individual firm or individual security. And hence it can safely eliminated when you diversify your portfolio and invest in various other asset classes so that risk of one security is nullified against safety of another and you do not lose out on return.

29. D. Systematic risk

Systematic risk is non-diversifiable risk and it is market risk and it can affect many securities at once like any change in government policy or taxes, inflation, liquidity risk, country risk, interest default risk. Risks which are not in an individual's control are systematic risk.

jeff jeffy answered 1 year ago
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