Question

Assume the risk free rate is 0.0%. The SP500 is considered the market. Six years of annual returns are provided in the table below. Use this information to help answer questions 21-22. 1 Year Returns SP500 Stock A Stock B 2013 80% 62 4.8% 2014 4.0% 32% 2.4% 2015 AV0% 32.0% -24.0% 2016 15.0% 12.0% 9.0% 2017 200% 16.0% 12.0% 2018 12.0% 9.6% 7.2% 21. Which of the following statements is most likely FALSE a. The SP500 index has a higher beta than Stock B b. The SP500 index has a higher beta than Stock A c. Stock A has a higher beta than Stock B d. Stock A index has a beta of 0.80 e. The SP500 index has a beta of 1.20 22. Over the past six years, which of the following statements is most likely TRUE: a. The SP500 index has the highest arithmetic average return, but the lowest geometric return b. The SP500 index has the highest arithmetic average return, while Stock A has the lowest geometric return c. The SP500 index has the highest arithmetic average return, while Stock B has the lowest geometric return d. The SP500 index has the lowest geometric average return, while Stock B has the highest arithmetic return e. The SP500 index has the lowest geometric average return, while Stock A has the highest arithmetic return

Answer 1

Answer 21:

Correct answer is:

e. The SP500 index has a beta of 1.20

Explanation:

It is given than SP500 is considered market. The market's beta is 1. Hence SP500's beta is 1.

As such option e is correct.

Stock A consistently has lower returns than SP500 and stock B consistently has lower returns than stock A.  As such statements given in options a, b, c and d are not likely to be false and hence options a, b, c and d are incorrect.

Answer 22:

Correct option is:

a. The SP500 has highest arithmetic average return, but the lowest geometric return

Explanation:

We calculate below arithmetic and geometric mean of returns of SP500, Stock A and Stock B.

SP500 has highest arithmetic average return at 3.2%, but the lowest geometric return at 0.68%.

As such option a is correct. Based on above values arithmetic mean and geometric mean, the options b, c, d and e are incorrect.