Question 1

Wildings,Inc.common stock has a beta of 1.2.If the expected risk free return is 4% and the expected market risk premium is 9%,what is the expected return on Wildings' stock?
A) 10.0%
B) 12.0%
C) 13.8%
D) 14.8%

Accepted Answer

The expected return on Wildings' stock can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * Market Risk Premium = 4% + 1.2 * 9% = 14.8%.

Question 2

Anchor Incorporated has a beta of 1.0.If the expected return on the market is 15%,what is the expected return on Anchor Incorporated's stock?
A) 15%
B) 14%
C) 18%
D) cannot be determined without the risk-free rate

Accepted Answer

A beta of 1.0 means that the stock's returns are expected to move in line with the market. Therefore, if the expected return on the market is 15%, the expected return on Anchor Incorporated's stock would also be 15%.

Question 3

The rate on T-bills is currently 2%.Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%.According to CAPM,determine the return on the market portfolio.
A) 27.5%
B) 19.0%
C) 14.0%
D) 12.0%

Accepted Answer

The answer of The rate on T-bills is currently 2%.Environment...

Question 4

You hold a portfolio made up of the following stocks:

If the market's expected return is 14%,and the risk-free rate of return is 5%,what is the expected return of the portfolio?
A) 17.010%
B) 16.700%
C) 15.935%
D) 14.698%

Accepted Answer

The answer of You hold a portfolio made up of...

Question 5

Decker Corp.common stock has a required return of 17.5% and a beta of 1.75.If the expected risk free return is 3%,what is the expected return for the market based on the CAPM?
A) 11.29%
B) 14.29%
C) 13.35%
D) 15.27%

Accepted Answer

The correct answer is A.The CAPM formula is:Expected return = Risk-free rate + Beta * (Expected market return - Risk-free rate)Plugging in the given values, we get:17.5% = 3% + 1.75 * (Expected market return - 3%)14.5% = 1.75 * (Expected market return - 3%)Expected market return - 3% = 8.29%Expected market return = 11.29%

Question 6

The appropriate measure for risk according to the capital asset pricing model is
A) the standard deviation of a firm's cash flows.
B) alpha.
C) the standard deviation of a firm's stock returns.
D) beta.

Accepted Answer

According to the capital asset pricing model, the appropriate measure for risk is beta, which measures the sensitivity of a firm's stock returns to the overall market returns. Beta reflects the systematic risk of an investment, which cannot be diversified away by holding a diversified portfolio of stocks. The other options (A, B, and C) are not appropriate measures for risk according to the capital asset pricing model.

Question 7

The beta of ABC Co.stock is the slope of
A) the security market line.
B) the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills.
C) the arbitrage pricing line.
D) the characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period.

Accepted Answer

The beta of a stock is determined by the characteristic line for a plot of the stock's returns against the returns of the market portfolio for the same period. This is because beta measures the stock's sensitivity to movements in the overall market, which is represented by the market portfolio.

Question 8

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk-free rate is 4%.According to CAPM,what is the required rate of return on Collectible's stock?
A) 37.5%
B) 31.5%
C) 26.5%
D) 23.5%

Accepted Answer

According to CAPM, the required rate of return for a stock is equal to the risk-free rate plus the product of the market risk premium (the difference between the expected return on the market portfolio and the risk-free rate) and the stock's beta. Mathematically, it is represented as:

Required rate of return = Risk-free rate + Beta x (Expected market return - Risk-free rate)

Plugging in the given values:

Required rate of return = 4% + 2.5 x (15% - 4%)

Required rate of return = 4% + 2.5 x 11%

Required rate of return = 4% + 27.5%

Required rate of return = 31.5%

Therefore, the correct answer is B) 31.5%.

Question 9

You determine that LMN common stock has an expected return of 24%.LMN has a Beta of 1.5.The risk-free rate is 5%,and the market expected return is 15%.Which of the following is most likely to happen?
A) You and other investors will buy up LMN stock and its price will rise.
B) You and other investors will sell LMN stock and its return will fall.
C) You and other investors will buy up LMN stock and its return will rise.
D) You and other investors will sell LMN stock and its price will fall.

Accepted Answer

According to the Capital Asset Pricing Model (CAPM), the expected return of a stock can be calculated using the formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). For LMN, the expected return using CAPM would be 5% + 1.5 * (15% - 5%) = 20%. However, the actual expected return is 24%, which is higher than the CAPM prediction. This indicates that the stock is undervalued, leading investors to buy the stock, causing its price to rise until the expected return aligns with the CAPM prediction.

Question 10

You are going to add one of the following three projects to your already well-diversified portfolio.
PROJECT 1 PROJECT 2

PROJECT 3

Assume the risk-free rate of return is 2% and the market risk premium is 8%.If you are a risk averse investor,which project should you choose?
A) Project 1
B) Project 2
C) Project 3
D) Either Project 2 or Project 3 because the higher expected return on project 3 offsets its higher risk

Accepted Answer

The answer of You are going to add one of...

Question 11

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk-free rate is 4%.What is the risk premium on the market?
A) 5%
B) 6%
C) 9.00%
D) 11%

Accepted Answer

The answer of Marble Corp.has a beta of 2.5 and...

Question 12

Based on the security market line,Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%.Robo-Tech has a standard deviation of returns of 18%.Therefore,
A) Friendly must have a standard deviation of returns of less than 18% because Friendly is less risky than Robo-Tech.
B) all rational investors will prefer Friendly over Robo-Tech.
C) for a well-diversified investor, Friendly is less risky than Robo-Tech.
D) the beta for Friendly must be greater than the beta for Robo-Tech because Friendly is the better buy for a risk-averse investor.

Accepted Answer

The security market line implies that the expected return for a given stock is related to its beta, which measures its systematic risk. Since Robo-Tech has a higher required return than Friendly, it must have a higher beta. Therefore, Friendly is less risky than Robo-Tech and is a better choice for a well-diversified investor. The standard deviation of returns is not necessarily the only factor to consider when assessing a stock's riskiness.

Question 13

Surf and Spray Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the risk-free rate of return is 4.2%,the expected return on the market portfolio is
A) 21%.
B) 19.2%.
C) 13.4%.
D) 10.2%.

Accepted Answer

The answer of Surf and Spray Inc.has a beta equal...

Question 14

Which of the following is the slope of the security market line?
A) beta
B) one
C) It varies, and it is steeper for riskier securities.
D) the market risk premium

Accepted Answer

The slope of the security market line (SML) is the market risk premium, which represents the additional return expected from holding a risky market portfolio instead of risk-free assets.

Question 15

The return on the market portfolio is currently 12%.Mobile Phone Corporation stockholders require a rate of return of 30% and the stock has a beta of 3.2.According to CAPM,determine the risk-free rate.
A) 9.80%
B) 6.50%
C) 4.64%
D) 3.82%

Accepted Answer

The answer of The return on the market portfolio is...

Question 16

Surf and Spray Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the market risk premium is 7.5%,the risk-free rate of return is
A) 4.1%.
B) 3.4%.
C) 2.0%.
D) 1.5%.

Accepted Answer

The answer of Surf and Spray Inc.has a beta equal...

Question 17

Green Company stock has a beta of 2 and a required return of 23%,while Gold Company stock has a beta of 1.0 and a required return of 14%.The standard deviation of returns for Green Company is 10% more than the standard deviation for Gold Company.The expected return on the market portfolio according to the CAPM is
A) 9%.
B) 10%.
C) 12%.
D) 14%.

Accepted Answer

The answer of Green Company stock has a beta of...

Question 18

White Company stock has a beta of 2 and a required return of 23%,while Black Company stock has a beta of 1.0 and a required return of 14%.The standard deviation of returns for White Company is 10% more than the standard deviation for Black Company.The risk-free rate of return according to the CAPM is
A) 4%.
B) 5%.
C) 6%.
D) impossible to determine with the information given.

Accepted Answer

The CAPM formula is: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). For Black Company, 14% = Risk-Free Rate + 1 * (Market Return - Risk-Free Rate). For White Company, 23% = Risk-Free Rate + 2 * (Market Return - Risk-Free Rate). Solving these equations simultaneously gives a Risk-Free Rate of 5%.

Question 19

Wendy purchased 800 shares of Robotics stock at $3 per share on 1/1/09.Wendy sold the shares on 12/31/09 for $3.45.Robotics stock has a beta of 1.3,the risk-free rate of return is 3%,and the market risk premium is 8%.The required return on Robotics stock is
A) 13.4%.
B) 16.5%.
C) 17.6%.
D) 21.1%.

Accepted Answer

The required return on Robotics stock can be calculated using the Capital Asset Pricing Model (CAPM), which is given by the formula: Required Return = Risk-Free Rate + Beta * (Market Risk Premium). Plugging in the given values: Required Return = 3% + 1.3 * (8%) = 3% + 10.4% = 13.4%.

Question 20

You hold a portfolio with the following securities:

What is the expected return for the market,according to the CAPM?
A) 14.0%
B) 13.8%
C) 12.0%
D) 10.0%

Accepted Answer

The answer of You hold a portfolio with the following...

Quiz 6: The Meaning and Measurement of Risk and Return

Wildings,Inc.common stock has a beta of 1.2.If the expected risk free return is 4% and the expected market risk premium is 9%,what is the expected return on Wildings' stock?

Anchor Incorporated has a beta of 1.0.If the expected return on the market is 15%,what is the expected return on Anchor Incorporated's stock?

The rate on T-bills is currently 2%.Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%.According to CAPM,determine the return on the market portfolio.

You hold a portfolio made up of the following stocks: If the market's expected return is 14%,and the risk-free rate of return is 5%,what is the expected return of the portfolio?

Decker Corp.common stock has a required return of 17.5% and a beta of 1.75.If the expected risk free return is 3%,what is the expected return for the market based on the CAPM?

The appropriate measure for risk according to the capital asset pricing model is

The beta of ABC Co.stock is the slope of

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk-free rate is 4%.According to CAPM,what is the required rate of return on Collectible's stock?

You determine that LMN common stock has an expected return of 24%.LMN has a Beta of 1.5.The risk-free rate is 5%,and the market expected return is 15%.Which of the following is most likely to happen?

You are going to add one of the following three projects to your already well-diversified portfolio. PROJECT 1 PROJECT 2 PROJECT 3 Assume the risk-free rate of return is 2% and the market risk premium is 8%.If you are a risk averse investor,which project should you choose?

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk-free rate is 4%.What is the risk premium on the market?

Based on the security market line,Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%.Robo-Tech has a standard deviation of returns of 18%.Therefore,

Surf and Spray Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the risk-free rate of return is 4.2%,the expected return on the market portfolio is

Which of the following is the slope of the security market line?

The return on the market portfolio is currently 12%.Mobile Phone Corporation stockholders require a rate of return of 30% and the stock has a beta of 3.2.According to CAPM,determine the risk-free rate.

Surf and Spray Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the market risk premium is 7.5%,the risk-free rate of return is

Wendy purchased 800 shares of Robotics stock at $3 per share on 1/1/09.Wendy sold the shares on 12/31/09 for $3.45.Robotics stock has a beta of 1.3,the risk-free rate of return is 3%,and the market risk premium is 8%.The required return on Robotics stock is

You hold a portfolio with the following securities: What is the expected return for the market,according to the CAPM?