Question 1

Bama Entertainment has common stock with a beta of 1.46.The market risk premium is 9.3 percent and the risk-free rate is 4.6 percent.What is the expected return on this stock?
A)16.31 percent
B)16.67 percent
C)17.40 percent
D)18.03 percent
E)18.13 percent

Accepted Answer

E(R) = 0.046 + 1.46(0.092) = 18.03 percent

Question 2

A stock has a beta of 1.56 and an expected return of 17.3 percent.A risk-free asset currently earns 5.1 percent.If a portfolio of the two assets has a beta of 1.06,what are the portfolio weights?
A)Stock weight = 0.28; risk-free weight = 0.72
B)Stock weight = 0.032; risk-free weight = 0.68
C)Stock weight = 0.44; risk-free weight = 0.56
D)Stock weight = 0.68; risk-free weight = 0.32
E)Stock weight = 0.72; risk-free weight = 0.28

Accepted Answer

β_P = 1.06 = x(1.56) + (1 - x)(0)x = 0.68Stock weight is 0.68 and the risk-free weight is 0.32

Question 3

Ben & Terry's has an expected return of 12.9 percent and a beta of 1.25.The expected return on the market is 11.7 percent.What is the risk-free rate?
A)3.87 percent
B)4.24 percent
C)4.61 percent
D)6.29 percent
E)6.92 percent

Accepted Answer

E(R) = 0.129 = R_f + 1.25(0.117 - R_f)R_f = 6.92 percent

Question 4

The stock of Wiley United has a beta of 0.92.The market risk premium is 8.4 percent and the risk-free rate is 3.2 percent.What is the expected return on this stock?
A)8.87 percent
B)10.69 percent
C)11.11 percent
D)11.52 percent
E)12.01 percent

Accepted Answer

E(R) = 0.032 + 0.92(0.086) = 11.11 percent

Question 5

Consider the following information:  What is the variance of a portfolio invested 30 percent each in Stocks A and B and 40 percent in Stock C?
A)0.000065
B)0.000163
C)0.000289
D)0.000528
E)0.001740

Accepted Answer

E(R_Boom) = (0.30 × 0.06) + (0.30 × 0.11) + (0.40 × 0.17) = 0.119E(R_Bust) = (0.30 × 0.19) + (0.30 × -0.04) + (0.40 × 0.23) = 0.137E(R_Portfolio) = (0.72 × 0.119) + (0.28 × 0.137) = 0.12404Variance = 0.72(0.119 - 0.12404)² + 0.28(0.137 - 0.12404)² = 0.000065

Question 6

A stock has an expected return of 15.0 percent,the risk-free rate is 3.2 percent,and the market risk premium is 8.1 percent.What must the beta of this stock be?
A)0.88
B)0.94
C)1.08
D)1.31
E)1.46

Accepted Answer

E(R) = 0.15 = 0.032 + β(0.081)β = 1.46

Question 7

You own a portfolio equally invested in a risk-free asset and two stocks.If one of the stocks has a beta of 1.12 and the total portfolio is equally as risky as the market,what must the beta be for the other stock in your portfolio?
A)1.37
B)1.54
C)1.88
D)1.98
E)2.97

Accepted Answer

β_P = 1 = (1/3)(0) + (1/3)(1.12) + (1/3)(x)x = 1.88

Question 8

Currently,the risk-free rate is 4.0 percent.Stock A has an expected return of 9.6 percent and a beta of 1.08.Stock B has an expected return of 13.5 percent.The stocks have equal reward-to-risk ratios.What is the beta of Stock B?
A)1.21
B)1.33
C)1.52
D)1.78
E)1.83

Accepted Answer

(0.096 - 0.04)/1.08 = (0.135 - 0.04)/β_B; β_B = 1.83

Question 9

Stock J has a beta of 1.17 and an expected return of 14.4 percent,while Stock K has a beta of 0.68 and an expected return of 7.6 percent.You want a portfolio with the same risk as the market.What is the expected return of your portfolio?
A)10.67 percent
B)11.18 percent
C)11.62 percent
D)12.04 percent
E)13.13 percent

Accepted Answer

β_P = 1.0 = 1.17x + 0.68(1 - x)x = 0.653061E(R_P) = 0.653061(0.144) + (1 - 0.653061)(0.076) = 12.04 percent

Question 10

A stock has a beta of 1.47 and an expected return of 16.6 percent.The risk-free rate is 4.8 percent.What is the slope of the security market line?
A)6.49 percent
B)7.28 percent
C)8.03 percent
D)9.03 percent
E)9.99 percent

Accepted Answer

Slope = (0.166 - 0.048)/1.47 = 8.03 percent

Question 11

The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent.Stock A has a beta of 1.2 and an expected return of 13.1 percent.Stock B has a beta of 0.75 and an expected return of 11.4 percent.Are these stocks correctly priced? Why or why not?
A)No, Stock A is underpriced and Stock B is overpriced.
B)No, Stock A is overpriced and Stock B is underpriced.
C)No, Stock A is overpriced but Stock B is correctly priced.
D)No, Stock A is underpriced but Stock B is correctly priced.
E)Yes, both stocks are correctly priced.

Accepted Answer

E(R_A) = 0.042 + 1.2(0.123 - 0.042) = 13.92 percentE(R_B) = 0.042 + 0.75(0.123 - 0.042) = 10.28 percentStock A is overpriced because its expected return lies below the security market line.

Question 12

Stock A has a beta of 1.47 while Stock B has a beta of 1.08 and an expected return of 13.2 percent.What is the expected return on Stock A if the risk-free rate is 4.5 percent and both stocks have equal reward-to-risk premiums?
A)12.12 percent
B)15.07 percent
C)16.34 percent
D)16.89 percent
E)17.78 percent

Accepted Answer

(R_A - 0.045)/1.47 = (0.132 - 0.045)/1.08; R_A = 16.34 percent

Question 13

A stock has an expected return of 17.2 percent and a beta of 1.65.The risk-free rate is 5.1 percent.What is the slope of the security market line?
A)7.25 percent
B)7.33 percent
C)7.78 percent
D)7.92 percent
E)8.03 percent

Accepted Answer

Slope = (0.172 - 0.051)/1.65 = 7.33 percent

Question 14

Stock Y has a beta of 1.28 and an expected return of 13.7 percent.Stock Z has a beta of 1.02 and an expected return of 11.4 percent.What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?
A)2.38 percent
B)2.76 percent
C)3.23 percent
D)3.69 percent
E)4.08 percent

Accepted Answer

(0.137 - R_f)/1.28 = (0.114 - R_f)/1.02R_f = 2.38 percent

Question 15

Stock J has a beta of 1.47 and an expected return of 15.8 percent.Stock K has a beta of 1.05 and an expected return of 11.9 percent.What is the risk-free rate if these securities both plot on the security market line?
A)2.15 percent
B)3.34 percent
C)3.88 percent
D)4.41 percent
E)4.68 percent

Accepted Answer

(0.158 - R_f)/1.47 = (0.119 - R_f)/1.05R_f = 2.15 percent

Question 16

You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in Stock B.If the expected returns on these stocks are 9 percent and 15 percent,respectively,what is the expected return on the portfolio?
A)10.57 percent
B)11.14 percent
C)11.96 percent
D)12.52 percent
E)13.07 percent

Accepted Answer

E(R) = [1,900/($1,900 + $2,700)][0.09] + [$2,700/($1,900 + $2,700)][0.15] = 12.52 percent

Question 17

You own a stock that has an expected return of 16.00 percent and a beta of 1.33.The U.S.Treasury bill is yielding 3.65 percent and the inflation rate is 2.95 percent.What is the expected rate of return on the market?
A)12.07 percent
B)12.94 percent
C)13.64 percent
D)14.09 percent
E)14.42 percent

Accepted Answer

E(R) = 0.1600 = 0.0365 + 1.33(R_m - 0.0365)R_m = 12.94 percent

Question 18

A stock has a beta of 1.86,the expected return on the market is 14.72,and the risk-free rate is 4.65.What must the expected return on this stock be?
A)15.67 percent
B)16.75 percent
C)17.10 percent
D)20.46 percent
E)23.38 percent

Accepted Answer

E(R) = 0.0465 + 1.86(0.1472 - 0.0465) = 23.38 percent

Question 19

BJB,Inc.stock has an expected return of 15.15 percent.The risk-free rate is 3.8 percent and the market risk premium is 8.6 percent.What is the stock's beta?
A)1.19
B)1.21
C)1.32
D)1.48
E)1.62

Accepted Answer

E(R) = 0.1515 = 0.038 + β(0.086)β = 1.32

Question 20

A stock has a beta of 1.24,an expected return of 13.68 percent,and lies on the security market line.A risk-free asset is yielding 2.8 percent.You want to create a $6,000 portfolio consisting of Stock A and the risk-free security such that the portfolio beta is 0.65.What rate of return should you expect to earn on your portfolio?
A)8.50 percent
B)9.16 percent
C)9.33 percent
D)9.41 percent
E)9.56 percent

Accepted Answer

E(R) = 0.1368 = 0.028 + 1.24(MRP)MRP = 0.087742E(R_P) = 0.028 + 0.65(0.087742) = 8.50 percent

Quiz 11: Risk and Return

Bama Entertainment has common stock with a beta of 1.46.The market risk premium is 9.3 percent and the risk-free rate is 4.6 percent.What is the expected return on this stock?

A stock has a beta of 1.56 and an expected return of 17.3 percent.A risk-free asset currently earns 5.1 percent.If a portfolio of the two assets has a beta of 1.06,what are the portfolio weights?

Ben & Terry's has an expected return of 12.9 percent and a beta of 1.25.The expected return on the market is 11.7 percent.What is the risk-free rate?

The stock of Wiley United has a beta of 0.92.The market risk premium is 8.4 percent and the risk-free rate is 3.2 percent.What is the expected return on this stock?

Consider the following information: What is the variance of a portfolio invested 30 percent each in Stocks A and B and 40 percent in Stock C?

A stock has an expected return of 15.0 percent,the risk-free rate is 3.2 percent,and the market risk premium is 8.1 percent.What must the beta of this stock be?

You own a portfolio equally invested in a risk-free asset and two stocks.If one of the stocks has a beta of 1.12 and the total portfolio is equally as risky as the market,what must the beta be for the other stock in your portfolio?

Currently,the risk-free rate is 4.0 percent.Stock A has an expected return of 9.6 percent and a beta of 1.08.Stock B has an expected return of 13.5 percent.The stocks have equal reward-to-risk ratios.What is the beta of Stock B?

Stock J has a beta of 1.17 and an expected return of 14.4 percent,while Stock K has a beta of 0.68 and an expected return of 7.6 percent.You want a portfolio with the same risk as the market.What is the expected return of your portfolio?

A stock has a beta of 1.47 and an expected return of 16.6 percent.The risk-free rate is 4.8 percent.What is the slope of the security market line?

The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent.Stock A has a beta of 1.2 and an expected return of 13.1 percent.Stock B has a beta of 0.75 and an expected return of 11.4 percent.Are these stocks correctly priced? Why or why not?

Stock A has a beta of 1.47 while Stock B has a beta of 1.08 and an expected return of 13.2 percent.What is the expected return on Stock A if the risk-free rate is 4.5 percent and both stocks have equal reward-to-risk premiums?

A stock has an expected return of 17.2 percent and a beta of 1.65.The risk-free rate is 5.1 percent.What is the slope of the security market line?

Stock Y has a beta of 1.28 and an expected return of 13.7 percent.Stock Z has a beta of 1.02 and an expected return of 11.4 percent.What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

Stock J has a beta of 1.47 and an expected return of 15.8 percent.Stock K has a beta of 1.05 and an expected return of 11.9 percent.What is the risk-free rate if these securities both plot on the security market line?

You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in Stock B.If the expected returns on these stocks are 9 percent and 15 percent,respectively,what is the expected return on the portfolio?

You own a stock that has an expected return of 16.00 percent and a beta of 1.33.The U.S.Treasury bill is yielding 3.65 percent and the inflation rate is 2.95 percent.What is the expected rate of return on the market?

A stock has a beta of 1.86,the expected return on the market is 14.72,and the risk-free rate is 4.65.What must the expected return on this stock be?

BJB,Inc.stock has an expected return of 15.15 percent.The risk-free rate is 3.8 percent and the market risk premium is 8.6 percent.What is the stock's beta?