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Asset Allocation: RISK PREMIUM (Expected Return) 1/2

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1. Which of the following statements about risk is false?a. Risk requires the possibility of at least one outcome less favorable than the expected value.b. Risk requires the possibility of more than one outcome.c. Risk is one of the determinants of the required return.d. Risk aversion generally is assumed in finance to be a characteristic of the "marginal investor."e. All of the above statements are true.

Suppose a portfolio had an arithmetic average return of 8 percent for a 4-year period. Which one of these statements must be true regarding this portfolio for the period?A) At least one of the 4 years produced an annual rate of return of 8 percent.B) If the standard deviation of the portfolio is greater than zero, then the geometric average portfolio return is less than 8 percent.C) The standard deviation of the portfolio must be lower than the standard deviation of a comparable portfolio that had an arithmetic average return of 9 percent.D) If the standard deviation of the portfolio is zero, then the geometric average return must also be zero.E) The holding period return must be less than 8 percent.

Which one of these statements correctly reflects historical history for the period 1926-2015?A) U.S. Treasury bills had a negative rate of return during the Great Depression.B) The rate of return in any given year is a good estimate of the rate of return for the following year.C) For large-company stocks, both the worst and best annual rate of return occurred during the period 1930-35.D) The annual rate of return on U.S. Treasury bills never exceeded 8 percent.E) The maximum annual rate of return on large-company stocks was 33 percent.

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