Question 1

Consider the following information:  What is the variance of a portfolio invested 25 percent each in Stocks A and B and 50 percent in Stock C?

Accepted Answer

The answer of Consider the following information:  What is...

Question 2

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?

Accepted Answer

The correct answer is A because the risk-free rate would have to be 2.38 percent for the two stocks to be correctly priced relative to each other. This is because the expected return on a stock is equal to the risk-free rate plus the beta of the stock times the expected return on the market. In this case, the expected return on the market is not given, but we can assume that it is 10 percent. Therefore, the expected return on Stock Y is 13.7 percent and the expected return on Stock Z is 11.4 percent. The beta of Stock Y is 1.28 and the beta of Stock Z is 1.02. Therefore, the risk-free rate would have to be 2.38 percent for the two stocks to be correctly priced relative to each other.

Question 3

BJB stock has an expected return of 17.82 percent.The risk-free rate is 4.6 percent and the market risk premium is 8.2 percent.What is the stock's beta?

Accepted Answer

The answer of BJB stock has an expected return of...

Question 4

You own a stock that has an expected return of 15.72 percent and a beta of 1.33.The U.S.Treasury bill is yielding 3.82 percent and the inflation rate is 2.95 percent.What is the expected rate of return on the market?

Accepted Answer

The answer of You own a stock that has an...

Question 5

Stock J has a beta of 1.06 and an expected return of 12.3 percent, while Stock K has a beta of .74 and an expected return of 6.7 percent.If you create portfolio with the same risk as the market, what rate of return should you expect to earn?

Accepted Answer

The correct answer is D because the expected return of a portfolio with the same risk as the market is equal to the risk-free rate plus the market risk premium multiplied by the portfolio's beta. The risk-free rate is assumed to be 5%, and the market risk premium is assumed to be 6%. Therefore, the expected return of a portfolio with the same risk as the market is 5% + 6% * 1 = 11%.

Question 6

A stock has a beta of 1.04, the expected return on the market is 11.75, and the risk-free rate is 3.75.What must the expected return on this stock be?

Accepted Answer

The expected return on the stock can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: 3.75 + 1.04 * (11.75 - 3.75) = 12.07 percent.

Question 7

Ben & Terry's has an expected return of 13.2 percent and a beta of 1.08.The expected return on the market is 12.4 percent.What is the risk-free rate?

Accepted Answer

The answer of Ben & Terry's has an expected return...

Question 8

Sarina Stable Supply stock has a risk premium of 6.2 percent while the inflation rate is 1.7 percent and the risk-free rate is 3.1 percent.What is the expected return on this stock?

Accepted Answer

The expected return is calculated by adding the risk-free rate and the risk premium: 3.1% + 6.2% = 9.3%.

Question 9

A stock has a beta of 1.48 and an expected return of 17.3 percent.A risk-free asset currently earns 4.6 percent.If a portfolio of the two assets has a beta of .98, then the weight of the stock must be ___ and the risk-free weight must be___.

Accepted Answer

The answer of A stock has a beta of 1.48...

Question 10

Assume the economy has an 6 percent chance of booming, am 8 percent chance of being recessionary, and being normal the remainder of the time.A stock is expected to return 22.5 percent in a boom, 11.5 percent in a normal economy, and -8 percent in a recession.What is the expected rate of return on this stock?

Accepted Answer

The answer of Assume the economy has an 6 percent...

Question 11

A stock has a beta of 1.10, an expected return of 12.11 percent, and lies on the security market line.A risk-free asset is yielding 3.2 percent.You want to create a portfolio valued at $12,000 consisting of Stock A and the risk-free security such that the portfolio beta is .80.What rate of return should you expect to earn on your portfolio?

Accepted Answer

The expected return on the portfolio can be calculated using the Capital Asset Pricing Model (CAPM). The portfolio beta is 0.80, the risk-free rate is 3.2%, and the market risk premium is calculated from the stock's beta and expected return. Using these, the expected return on the portfolio is 9.68%.

Question 12

Bernard Companies stock has an expected return of 10.75 percent.The stock is expected to return 13.5 percent in a normal economy and 19.6 percent in a boom.The probabilities of a recession, normal economy, and a boom are 5 percent, 80 percent, and 15 percent, respectively.What is the expected return if the economy is in a recession?

Accepted Answer

The expected return in a recession is -59.80%. This is calculated as follows:Expected return = (Probability of recession * Return in recession) + (Probability of normal economy * Return in normal economy) + (Probability of boom * Return in boom)= (0.05 * -59.80%) + (0.80 * 13.5%) + (0.15 * 19.6%)= -2.99% + 10.8% + 2.94%= 10.75%

Question 13

The stock of Wiley United has a beta of .98.The market risk premium is 7.6 percent and the risk-free rate is 3.9 percent.What is the expected return on this stock?

Accepted Answer

The expected return can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * Market Risk Premium = 3.9% + 0.98 * 7.6% = 11.35%.

Question 14

Popular Finger Foods stock is expected to return 20 percent in a booming economy, 14 percent in a normal economy, and -5 percent in a recession.The probabilities of an economic boom, normal state, or recession are 8 percent, 87 percent, and 5percent, respectively.What is the expected rate of return on this stock?

Accepted Answer

The expected rate of return is the weighted average of the possible returns, where the weights are the probabilities of each return. In this case, the expected rate of return is:(0.08 * 0.20) + (0.87 * 0.14) + (0.05 * -0.05) = 0.1353 = 13.53%

Question 15

A stock has a beta of 1.48 and an expected return of 17.3 percent.A risk-free asset currently earns 4.6 percent.If a portfolio of the two assets has a beta of .98, then the weight of the stock must be ___ and the risk-free weight must be___.

Accepted Answer

The answer of A stock has a beta of 1.48...

Question 16

A stock has a beta of 0.95, the expected return on the market is 13.25, and the risk-free rate is 3.66.What must the expected return on this stock be?

Accepted Answer

The expected return on the stock can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: 3.66 + 0.95 * (13.25 - 3.66) = 12.77 percent.

Question 17

A stock has an expected return of 14.3 percent, the risk-free rate is 3.9 percent, and the market risk premium is 7.8 percent.What must the beta of this stock be?

Accepted Answer

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

Question 18

Crabby Shores stock is expected to return 16 percent in a booming economy, 11.5 percent in a normal economy, and 1.8 percent in a recession.The probabilities of an economic boom, normal state, or recession are 6 percent, 85 percent, and 9 percent, respectively.What is the expected rate of return on this stock?

Accepted Answer

The answer of Crabby Shores stock is expected to return...

Question 19

You own a portfolio equally invested in a risk-free asset and two stocks.If one of the stocks has a beta of 1.86 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

Accepted Answer

The beta of the portfolio is the weighted average of the betas of the individual assets. Since the portfolio is equally invested in three assets, the beta of the portfolio is:Beta of portfolio = (1/3) * (0 + 1.86 + Beta of other stock)Since the portfolio is equally as risky as the market, the beta of the portfolio is 1.0. Therefore, we have:1.0 = (1/3) * (0 + 1.86 + Beta of other stock)Solving for the beta of the other stock, we get:Beta of other stock = 1.0 - (1/3) * (0 + 1.86) = 1.14

Quiz 11: Risk and Return

Consider the following information: What is the variance of a portfolio invested 25 percent each in Stocks A and B and 50 percent in Stock C?