Question 1

Stock A is a risky asset that has a beta of 1.4 and an expected return of 13.2 percent.Stock B is also a risky asset and has a beta of 1.25.The risk-free rate is 5.5 percent.Assuming both stocks are correctly priced,what is the expected return on stock B?
A) 11.90 percent
B) 12.11 percent
C) 12.29 percent
D) 12.38 percent
E) 12.46 percent

Accepted Answer

11ea6d0e_c3e3_b053_b3c7_8dfa76c0a125_TB1223_00

Question 2

A stock has a beta of 1.58 and an expected return of 16.2 percent.The risk-free rate is 3.8 percent.What is the market risk premium?
A) 7.85 percent
B) 10.01 percent
C) 11.72 percent
D) 12.50 percent
E) 13.40 percent

Accepted Answer

16.2 = 3.8 + 1.58(MRP); MRP = 7.85 percent

Question 3

A stock has a standard deviation of 21.0 percent and a covariance with the market of .0110.The market has a standard deviation of 12.0 percent.What is the beta of this stock?
A) 0.294
B) 0.572
C) 0.764
D) 0.973
E) 1.075

Accepted Answer

11ea6d0e_c3e4_c1ce_b3c7_9b48db46c4a5_TB1223_00 β = 0.4365 × (0.21 / 0.12) = 0.764

Question 4

Farm Tractors,Inc.,stock has a beta of 1.12 and an expected return of 12.8 percent.The risk-free rate is 3.84 percent.What is the market rate of return?
A) 6.67 percent
B) 8.90 percent
C) 9.08 percent
D) 11.84 percent
E) 12.63 percent

Accepted Answer

12.8 = 3.84 + 1.12(E(R_M) − 3.84); E(R_M) = 11.84 percent

Question 5

Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent.The risk-free rate is 2.6 percent and the market risk premium is 6 percent.This stock is ________ because the CAPM return for the stock is ________ percent.
A) undervalued; 7.34
B) undervalued; 7.49
C) undervalued; 7.64
D) overvalued; 7.34
E) overvalued; 7.49

Accepted Answer

E (R_A) = 2.6 + 0.84(6.0) = 7.64 percent The stock is undervalued because its expected return of 7.8 percent exceeds the CAPM return of 7.64 percent.

Question 6

Uptown Markets stock has a standard deviation of 16.8 percent and a covariance with the market of 0.02.The market has a standard deviation of 13.7 percent.What is the correlation of this stock with the market?
A) 0.74
B) 0.78
C) 0.87
D) 0.89
E) 0.91

Accepted Answer

11ea6d0e_c3e4_9abb_b3c7_8b3852f31b91_TB1223_00

Question 7

The market has an expected return of 11.3 percent and a risky asset with a beta of 1.18 has an expected return of 13 percent.Based on this information,what is the pure time value of money?
A) 1.86 percent
B) 1.90 percent
C) 2.38 percent
D) 2.51 percent
E) 2.90 percent

Accepted Answer

13 = r_f + 1.18(11.3 − r_f); r_f = 1.86 percent

Question 8

The risk-free rate is 4.1 percent,the market rate is 13.2 percent,and the expected return on a stock is 15.84 percent.What is the beta of the stock?
A) 0.52
B) 0.81
C) 1.13
D) 1.19
E) 1.29

Accepted Answer

15.84 = 4.1 + β (13.2 − 4.1); β = 1.29

Question 9

Stock X has a beta of 0.88 and an expected return of 10.8 percent.Stock Y has a beta of 1.15 and an expected return of 13.1 percent.What is the risk-free rate of return assuming that both stock X and stock Y are correctly priced?
A) 1.10 percent
B) 1.20 percent
C) 2.06 percent
D) 3.30 percent
E) 3.50 percent

Accepted Answer

[10.80 − r_f]/0.88 = [13.1 − r_f]/1.15; r_f = 3.30%

Question 10

Home Interior's stock has an expected return of 13.25 percent and a beta of 1.4.The market return is 10.75 percent and the risk-free rate is 4.5 percent.This stock is ________ because the CAPM return for the stock is ________ percent.
A) greatly overvalued; 16.50
B) slightly overvalued; 14.91
C) priced correctly; 13.25
D) slightly undervalued; 12.91
E) greatly undervalued; 16.50

Accepted Answer

E (R_A) = 4.5 + 1.4(10.75 − 4.5) = 13.25 percent The stock is priced correctly because its expected return of 13.25 percent is equal to the CAPM return of 13.25 percent.

Question 11

The stock of Healthy Eating,Inc.,has a beta of 0.88.The risk-free rate is 3.8 percent and the market return is 9.6 percent.What is the expected return on Healthy Eating's stock?
A) 6.25 percent
B) 6.07 percent
C) 8.90 percent
D) 11.15 percent
E) 11.47 percent

Accepted Answer

E(R) = 3.80 + 0.88(9.60 − 3.80) = 8.90 percent

Question 12

Dinner Foods stock has a beta of 1.45 and an expected return of 13.43 percent.Edwards' Meals stock has a beta of .95 and an expected return of 10.27 percent.Assume that both stocks are correctly priced.Given this,the risk-free rate is ________ percent and the market rate of return is ________ percent.
A) 4.02; 11.53
B) 4.09; 12.35
C) 4.10; 11.53
D) 4.27; 10.59
E) 4.41; 10.25

Accepted Answer

[13.34 − r_f]/1.45 = [10.27 − r_f]/0.95; r_f = 4.266% ≈ 4.27% [13.3 − 4.27]/1.45 = [R_m − 4.27]/1.00; R_m = 10.586% ≈ 10.59%

Question 13

A risky security has a variance of .036190 and a covariance with the market of .0222.The variance of the market is .01975.What is the correlation of the risky security to the market?
A) 0.51
B) 0.65
C) 0.72
D) 0.83
E) 0.85

Accepted Answer

11ea6d0e_c3e4_9aba_b3c7_11f6c06ac7ad_TB1223_00

Question 14

A stock has an expected return of 15.10 percent and a beta of 1.30.What is the risk-free rate if the market rate is 13.1 percent?
A) 6.43 percent
B) 6.92 percent
C) 7.01 percent
D) 7.30 percent
E) 7.90 percent

Accepted Answer

15.10 = r_f + 1.30 (13.1 − r_f); r_f = 6.43 percent

Question 15

What is the covariance of security A to the market given the following information?

A) 23.14
B) 29.88
C) 48.83
D) 99.18
E) 114.01

Accepted Answer

11ea6d0e_c3e4_73a9_b3c7_3f8227ea439e_TB1223_00 Average return_Security = 26/4 = 6.5 Average return_Market = 27/4 = 6.75 Covariance = 146.5/(4 − 1) = 48.83

Question 16

What is the covariance of security A to the market given the following information?

A) 505.0
B) 514.1
C) 517.5
D) 523.5
E) 540.6

Accepted Answer

11ea6d0e_c3e4_4c97_b3c7_97f709e67ed3_TB1223_00 Covariance = 1010/(3 − 1) = 505

Question 17

What is the covariance of security A to the market given the following information?

A) 75.0
B) 80.1
C) 83.8
D) 87.0
E) 91.1

Accepted Answer

11ea6d0e_c3e4_4c95_b3c7_491e1265c2fd_TB1223_00 Average return_Security = 21/3 = 7.0 Average return_Market = 15/3 = 5.0 Covariance = 150/(3 − 1) = 75.0

Question 18

The common stock of Blasco Books has a standard deviation of 16.4 percent as compared to the market standard deviation of 12.7 percent.The covariance of this stock with the market is .0217.What is the beta of Blasco Books' stock?
A) 0.96
B) 1.05
C) 1.07
D) 1.35
E) 1.42

Accepted Answer

11ea6d0e_c3e4_c1cd_b3c7_273a8fb7589f_TB1223_00 β = 1.04187 × (0.164 / 0.127) = 1.35

Question 19

Western Exports stock has a standard deviation of 15.6 percent and a covariance with the market of 0.0150.The market has a standard deviation of 13.7 percent.What is the correlation of this stock with the market?
A) 0.58
B) 0.61
C) 0.68
D) 0.70
E) 0.77

Accepted Answer

11ea6d0e_c3e4_9abc_b3c7_2d144826f6d2_TB1223_00

Question 20

The common stock of Industrial Technologies has an expected return of 12.4 percent.The market return is 9.2 percent and the risk-free return is 3.87 percent.What is the stock's beta?
A) 0.42
B) 1.00
C) 1.32
D) 1.42
E) 1.60

Accepted Answer

12.4 = 3.87 + β (9.2 − 3.87); β = 1.60

Quiz 12: Return,Risk,and the Security Market Line

Stock A is a risky asset that has a beta of 1.4 and an expected return of 13.2 percent.Stock B is also a risky asset and has a beta of 1.25.The risk-free rate is 5.5 percent.Assuming both stocks are correctly priced,what is the expected return on stock B?

A stock has a beta of 1.58 and an expected return of 16.2 percent.The risk-free rate is 3.8 percent.What is the market risk premium?

A stock has a standard deviation of 21.0 percent and a covariance with the market of .0110.The market has a standard deviation of 12.0 percent.What is the beta of this stock?

Farm Tractors,Inc.,stock has a beta of 1.12 and an expected return of 12.8 percent.The risk-free rate is 3.84 percent.What is the market rate of return?

Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent.The risk-free rate is 2.6 percent and the market risk premium is 6 percent.This stock is because the CAPM return for the stock is percent.

Uptown Markets stock has a standard deviation of 16.8 percent and a covariance with the market of 0.02.The market has a standard deviation of 13.7 percent.What is the correlation of this stock with the market?

The market has an expected return of 11.3 percent and a risky asset with a beta of 1.18 has an expected return of 13 percent.Based on this information,what is the pure time value of money?

The risk-free rate is 4.1 percent,the market rate is 13.2 percent,and the expected return on a stock is 15.84 percent.What is the beta of the stock?

Stock X has a beta of 0.88 and an expected return of 10.8 percent.Stock Y has a beta of 1.15 and an expected return of 13.1 percent.What is the risk-free rate of return assuming that both stock X and stock Y are correctly priced?

Home Interior's stock has an expected return of 13.25 percent and a beta of 1.4.The market return is 10.75 percent and the risk-free rate is 4.5 percent.This stock is because the CAPM return for the stock is percent.

The stock of Healthy Eating,Inc.,has a beta of 0.88.The risk-free rate is 3.8 percent and the market return is 9.6 percent.What is the expected return on Healthy Eating's stock?

Dinner Foods stock has a beta of 1.45 and an expected return of 13.43 percent.Edwards' Meals stock has a beta of .95 and an expected return of 10.27 percent.Assume that both stocks are correctly priced.Given this,the risk-free rate is percent and the market rate of return is percent.

A risky security has a variance of .036190 and a covariance with the market of .0222.The variance of the market is .01975.What is the correlation of the risky security to the market?

A stock has an expected return of 15.10 percent and a beta of 1.30.What is the risk-free rate if the market rate is 13.1 percent?

What is the covariance of security A to the market given the following information?

What is the covariance of security A to the market given the following information?

What is the covariance of security A to the market given the following information?

The common stock of Blasco Books has a standard deviation of 16.4 percent as compared to the market standard deviation of 12.7 percent.The covariance of this stock with the market is .0217.What is the beta of Blasco Books' stock?

Western Exports stock has a standard deviation of 15.6 percent and a covariance with the market of 0.0150.The market has a standard deviation of 13.7 percent.What is the correlation of this stock with the market?

The common stock of Industrial Technologies has an expected return of 12.4 percent.The market return is 9.2 percent and the risk-free return is 3.87 percent.What is the stock's beta?