This investments quiz aims to test your knowledge of the material covered in our free investments course. The quiz is a multiple-choice test. It consists of three sections:
- Section A: Return calculations.
- Section B: Portfolio theory.
- Section C: CAPM and APT.
The answers and solutions are provided at the bottom of this page.
Section A: Return calculations
1. You buy a single share of a stock for $10. After three months, the stock pays a dividend of $2/share. After receiving the dividend, you sell the share for $11. What is your net return?
- A: 10%.
- B: 20%
- C: 30%
- D: 130%
2. Imagine that you bought a stock three years ago. Over this period, the annual returns of this stock were −20%, 30%, and 5%. What is the geometric average return?
- A: 2.98%
- B: 5.00%
- C: 11.43%
- D: 17.88%
3. An investment fund yielded annual returns of 8% and 12% over the past two years. What is the realized volatility (standard deviation) of the fund returns?
- A: 0.00%
- B: 0.08%
- C: 1.20%
- D: 2.83%
Section B: Portfolio theory
4. You are considering investing in a stock that will yield 12% per year in the good state of the economy and −3% per year in the bad state of the economy. If the probability of the good state is 60%, what is the expected return on this stock?
- A: 6%
- B: 7%
- C: 8%
- D: 9%
5. You decide to invest €4,000 in a stock and €1,000 in treasury bonds. If the expected return on the stock is 8% and the treasury bonds yield 2%, what is the expected return on your portfolio?
- A: 5.00%
- B: 6.80%
- C: 7.25%
- D: 7.50%
6. A portfolio’s risk depends on:
- A: The investment weights.
- B: The correlation between the returns of asset pairs.
- C: The variance of asset returns.
- D: All of the above.
7. Which of the following statements is correct?
- A: Systematic risk can be eliminated via portfolio diversification.
- B: Market portfolio is an equally-weighted portfolio of all risky assets.
- C: There are no portfolios above the efficient frontier.
- D: Portfolio risk depends only on the variances of assets in the portfolio.
Section C: CAPM and APT
8. What is the expected return on a stock if it has a beta of 0.4, the risk-free rate of return is 2%, and the market return is 5%?
- A: 4%
- B: 2%
- C: 5.6%
- D: 3.2%
9. Which of the following statements is incorrect?
- A: Arbitrage pricing theory accommodates multiple systematic risk factors.
- B: CAPM posits a linear relationship between an asset’s expected return and its beta.
- C: The slope of the security market line is equal to the beta.
- D: Factor betas capture an asset’s sensitivity to systematic risk factors.
10: Which of the following is not one of the factors of the Fama French 3-factor model?
- A: Market risk
- B: Momentum
- C: Size
- D: Value
End of the investments quiz.
Answers and solutions for the investments quiz
1: C. ($11 + $2 − $10) / $10 = 30%. Read more about net returns versus gross returns.
2: A. [(1 − 20%) * (1 + 30%) * (1 + 5%)]1/3 − 1 = 2.98%. See our post geometric average return calculations.
3: D. First, calculate the average return: (8% + 12%) / 2 = 10%. Then, the realized volatility is [ (8% − 10%)2 + (12% − 10%)2 ]1/2 = 2.83%. Check the lesson on return volatility for detailed explanations.
4: A. 60% * 12% + 40% * ( −3%) = 6%. Read more about expected return calculations.
5: B. ( €4,000 / €5,000 ) * 8% + ( €1,000 / €5,000 ) * 2% = 6.8%. You can find a more detailed explanation here: Portfolio return calculation.
6: D. Read our post on portfolio risk to learn more.
7: C. There are individual assets and portfolios below the efficient frontier but not above it. A is incorrect – it is the idiosyncratic risk that can be eliminated via diversification. B is incorrect since the market portfolio is a value-weighted portfolio. D is incorrect because portfolio risk depends on covariances as well as variances.
8: D. 2% + 0.4 * (5% − 2%) = 3.2%. Go to our post on the capital asset pricing model for details.
9: C. In fact, the slope of the security market line is equal to the market risk premium.
10: B. Fama-French 3-factor model contains market risk, size factor, and value factor. Factor models are covered in our post on the arbitrage pricing theory.
What is next?
This is the end of our free course on investments. We hope you have found it useful. Feel free to browse our other courses and tutorials.
