Question 1

Porter Inc's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

Accepted Answer

The answer of Porter Inc's stock has an expected return...

Question 2

Dothan Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?

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The answer of Dothan Inc.'s stock has a 25% chance...

Question 3

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 4

Calculate the required rate of return for Climax Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the firm has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.

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The answer of Calculate the required rate of return for...

Question 5

Which of the following statements is CORRECT?

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The answer of Which of the following statements is CORRECT?
...

Question 6

Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occur?

Accepted Answer

When investors become more risk-averse, the market risk premium increases, which will cause a corresponding increase in the required rate of return for all stocks (as measured by the CAPM equation). Therefore, choice A is the most likely outcome. Choice B is incorrect because the required rate of return will increase for all stocks, regardless of their betas. Choice C is incorrect because the CAPM equation shows that the required rate of return is a function of the risk-free rate, the market risk premium, and the stock's beta, so if the market risk premium increases, the required rate of return on the market will also increase. Choice D is incorrect because the increase in the required rate of return will not necessarily be the same for every stock in the market. Choice E is also incorrect because the risk-free rate and expected inflation are assumed to be constant.

Question 7

You observe the following information regarding Companies X and Y:
• Company X has a higher expected return than Company Y.
• Company X has a lower standard deviation of returns than Company Y.
• Company X has a higher beta than Company Y.
Given this information, which of the following statements is CORRECT?

Accepted Answer

The answer of You observe the following information regarding Companies...

Question 8

Bae Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investment's coefficient of variation?

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The answer of Bae Inc. is considering an investment that...

Question 9

Assume that you hold a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20. You are in the process of buying 1,000 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 13.0% and a beta of 1.50. The total value of your current portfolio is $90,000. What will the expected return and beta on the portfolio be after the purchase of the Alpha stock?

Accepted Answer

The answer of Assume that you hold a well-diversified portfolio...

Question 10

Stock A has a beta of 1.2 and a standard deviation of 25%. Stock B has a beta of 1.4 and a standard deviation of 20%. Portfolio AB was created by investing in a combination of Stocks A and B. Portfolio AB has a beta of 1.25 and a standard deviation of 18%. Which of the following statements is CORRECT?

Accepted Answer

The answer of Stock A has a beta of 1.2...

Question 11

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 12

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 13

Cheng Inc. is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation?

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The answer of Cheng Inc. is considering a capital budgeting...

Question 14

The risk-free rate is 6% and the market risk premium is 5%. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is CORRECT?

Accepted Answer

The answer of The risk-free rate is 6% and the...

Question 15

Tom O'Brien has a 2-stock portfolio with a total value of $100,000. $37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio's beta?

Accepted Answer

The answer of Tom O'Brien has a 2-stock portfolio with...

Question 16

Taggart Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate of return?

Accepted Answer

The answer of Taggart Inc.'s stock has a 50% chance...

Question 17

Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is +0.6. Portfolio P has 50% invested in Stock A and 50% invested in B. Which of the following statements is CORRECT?

Accepted Answer

First, we need to calculate the expected return and standard deviation of the portfolio:

Expected return of portfolio P = 0.5(10%) + 0.5(10%) = 10%
Standard deviation of portfolio P = sqrt [0.5^2 x (25%)^2 + 0.5^2 x (25%)^2 + 2 x 0.5 x 0.5 x 25% x 25% x 0.6] = 19.1%

Next, we can calculate the beta of the portfolio using the following formula:

Portfolio beta = 0.5 x 0.8 + 0.5 x 1.2 = 1.0

So, we can eliminate options A, B, D, and E.

Option C is the correct answer because the beta of the portfolio is between the betas of Stock A and Stock B, indicating that the portfolio has more market risk than Stock A but less market risk than Stock B.

Question 18

Bill Dukes has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

Accepted Answer

The answer of Bill Dukes has $100,000 invested in a...

Question 19

Stock A has an expected return of 10% and a standard deviation of 20%. Stock B has an expected return of 13% and a standard deviation of 30%. The risk-free rate is 5% and the market risk premium, rM − rRF, is 6%. Assume that the market is in equilibrium. Portfolio AB has 50% invested in Stock A and 50% invested in Stock B. The returns of Stock A and Stock B are independent of one another, i.e., the correlation coefficient between them is zero. Which of the following statements is CORRECT?

Accepted Answer

The answer of Stock A has an expected return of...

Question 20

Cooley Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?

Accepted Answer

Cooley Company's required rate of return = risk-free rate + beta*(market risk premium)
= 4.25% + 1.40*5.50%
= 11.95%

Quiz 8: Risk and Return

Porter Inc's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

Dothan Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occur?

Bae Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investment's coefficient of variation?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Cheng Inc. is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation?

The risk-free rate is 6% and the market risk premium is 5%. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is CORRECT?

Tom O'Brien has a 2-stock portfolio with a total value of $100,000. $37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio's beta?

Taggart Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate of return?

Bill Dukes has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

Cooley Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?