Question 1

The risk-free rate of return is 3.5% and the market risk premium is 7.5%.What is the expected rate of return on a stock with a beta of 1.28?

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Question 2

The expected return on GenLabs is:

Accepted Answer

The expected return can be calculated using the formula E(R) = sum(E(Ri) * Wi) where E(Ri) is the expected return on each asset and Wi is the weight of that asset in the portfolio. Given the weights provided, we get:
E(R) = (0.06 * 0.3) + (0.12 * 0.5) + (0.20 * 0.2) = 0.018 + 0.06 + 0.04 = 0.118 = 11.8%
Therefore, the best choice is C as it is closest to the calculated expected return of 11.8%.

Question 3

Which one of the following stocks is correctly priced if the risk-free rate of return is 2.5% and the market risk premium is 8%?

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Question 4

The common stock of Flavorful Teas has an expected return of 14.4%.The return on the market is 10% and the risk-free rate of return is 2.5%.What is the beta of this stock?

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Question 5

The variance of GenLabs returns is

Accepted Answer

The variance of GenLabs returns can be calculated using the formula: 
Variance = ∑(Xi - X̄)2 / (n-1)
where Xi = individual returns
X̄ = mean return
n = number of returns
Using the given data, we can calculate:
X̄ = (8.2% + 15.1% + 10.8% + 7.2% + 9.9%) / 5 = 10.24%
∑(Xi - X̄)2 = (8.2 - 10.24)2 + (15.1 - 10.24)2 + (10.8 - 10.24)2 + (7.2 - 10.24)2 + (9.9 - 10.24)2 = 2.8508
Variance = 2.8508 / (5-1) = 0.7127
Therefore, the variance of GenLabs returns is 0.7127 or 0.0428 when rounded to four decimal places. 
The best choice is B.

Question 6

The stock of Big Joe's has a beta a 1.14 and an expected return of 11.6%.The risk-free rate of return is 4%.What is the expected return on the market?

Accepted Answer

The expected return on the market 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: 11.6% = 4% + 1.14 * (Market Return - 4%). Solving for Market Return gives 10.67%.

Question 7

Stock A has an expected return of 15%,and stock B has an expected return of 6%.However,the risk of stock A as measured by its variance is 3 times that of stock B.If the two stocks are combined equally in a portfolio,what would be the portfolio's expected return?

Accepted Answer

The portfolio's expected return can be calculated as the weighted average of the expected returns of the two stocks. Since the stocks are combined equally, the weight of each stock is 0.5. Therefore, the portfolio's expected return is:
Expected return = 0.5 x 15% + 0.5 x 6% = 10.5%
Thus, the best choice is B.

Question 8

What is the standard deviation of a portfolio which is invested 20% in stock A,30% in stock B and 50% in stock C?

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Question 9

What is the beta of a portfolio comprised of the following securities?
Amount Security

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Question 10

You would like to combine a risky stock with a beta of 1.5 with U.S.Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in Treasury bills?

Accepted Answer

The beta of the overall market is 1.0. We need to determine what percentage of the portfolio should be invested in Treasury bills to bring the portfolio beta down to 1.0. To do this, we can use the formula:

Portfolio Beta = (% of risky asset * risky asset beta) + (% of risk-free asset * risk-free asset beta)

1.0 = (% of risky asset * 1.5) + (% of risk-free asset * 0)

Solving for % of risk-free asset:

1.0 = (% of risky asset * 1.5) + (100 - % of risky asset) * 0
1.0 = (% of risky asset * 1.5)
% of risky asset = 66.67%, or approximately 67%

Therefore, the percentage of the portfolio that should be invested in Treasury bills is:

100% - 67% = 33%

So, the best choice is B.

Question 11

The standard deviation of GenLabs returns is

Accepted Answer

In order to calculate the standard deviation of GenLabs returns, we need to use the formula:
s = sqrt [Σ(xi – μ)^2 / (N – 1)]
where xi is each individual data point, μ is the mean of the data, and N is the total number of data points.
Using the given data, we can calculate the mean as:
μ = (0.06 + 0.08 + 0.12 + 0.16) / 4 = 0.10
Next, we can calculate the sum of squares of deviations from the mean as:
Σ(xi – μ)^2 = (0.06 - 0.10)^2 + (0.08 - 0.10)^2 + (0.12 - 0.10)^2 + (0.16 - 0.10)^2 = 0.0012
Finally, we can plug these values into the formula to get:
s = sqrt [Σ(xi – μ)^2 / (N – 1)] = sqrt [0.0012 / (4 – 1)] ≈ 0.2069
Thus, the best choice is B.

Question 12

Your portfolio has a beta of 1.18.The portfolio consists of 20% U.S.Treasury bills,30% in stock A,and 50% in stock B.Stock A has a risk-level equivalent to that of the overall market.What is the beta of stock B?

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Question 13

What is the standard deviation of a portfolio which is comprised of $4,500 invested in stock S and $3,000 in stock T?

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Question 14

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%?

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Question 15

The expected return on HiLo stock is 13.99% while the expected return on the market is 11.5%.The beta of HiLo is 1.3.What is the risk-free rate of return?

Accepted Answer

The capital asset pricing model (CAPM) formula is:

E(Ri) = Rf + βi[E(Rm) - Rf]

where E(Ri) is the expected return on the stock i, Rf is the risk-free rate of return, βi is the stock's beta, and E(Rm) is the expected return on the market.

Substituting the given values, we have:

13.99% = Rf + 1.3(11.5% - Rf)

Solving for Rf, we get:

Rf = 3.2%

Therefore, the best choice is B (3.2%).

Question 16

The market has an expected rate of return of 10.8%.The long-term government bond is expected to yield 4.5% and the U.S.Treasury bill is expected to yield 3.4%.The inflation rate is 3.1%.What is the market risk premium?

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Question 17

Your portfolio is comprised of 25% of stock X,55% of stock Y,and 20% of stock Z.Stock X has a beta of .64,stock Y has a beta of 1.48,and stock Z has a beta of 1.04.What is the beta of your portfolio?

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Question 18

A portfolio is entirely invested into Buzz's Bauxite Boring Equity,which is expected to return 18%,and Zum's Inc.bonds,which are expected to return 9%.Sixty percent of the funds are invested in Buzz's and the rest in Zum's.What is the expected return on the portfolio?

Accepted Answer

The expected return on the portfolio is calculated by taking a weighted average of the returns of the investments. With 60% in Buzz's at 18% and 40% in Zum's at 9%, the expected return is (0.6 * 18%) + (0.4 * 9%) = 10.8% + 3.6% = 14.4%.

Question 19

Nuvo,Inc.stock has a beta of .86 and an expected return of 10.5%.The risk-free rate of return is 3.2% and the market rate of return is 11.2%.Which one of the following statements is true given this information?

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Question 20

The stock of Martin Industries has a beta of 1.03.The risk-free rate of return is 3.6% and the market risk premium is 9%.What is the expected rate of return on Martin Industries stock?

Accepted Answer

The expected rate of return on Martin Industries stock can be calculated using the Capital Asset Pricing Model (CAPM):Expected return = Risk-free rate + Beta * Market risk premium= 3.6% + 1.03 * 9%= 3.6% + 9.27%= 12.9%

Quiz 11: Return and Risk: The Capital Asset Pricing Model Capm