Question 1

Based on the capital asset pricing model,which one of the following must increase the expected return on an individual security,all else constant?

Accepted Answer

According to the capital asset pricing model (CAPM), the expected return on an individual security is equal to the risk-free rate plus the security's beta times the market risk premium. Therefore, an increase in the risk-free rate (option E) will increase the expected return on the individual security, all else constant. Options A, B, C, and D describe changes that could affect the expected return, but each one would actually decrease the expected return on the security.

Question 2

You own a $46,000 portfolio comprised of four stocks.The values of Stocks A,B,and C are $5,600,$16,700,and $11,400,respectively.What is the portfolio weight of Stock D?

Accepted Answer

Value_D = $46,000 - $6,600 - $16,700 - $11,400 = $11,300Weight_D = $11,300/$46,000 = 24.57 percent

Question 3

The capital asset pricing model:

Accepted Answer

The capital asset pricing model (CAPM) considers the time value of money by incorporating the risk-free rate in its formula.

Question 4

Sugar and Spice stock is expected to produce the following returns given the various states of the economy.What is the expected return on this stock?

Accepted Answer

Expected return = (0.05 × 0.05) + (0.70 × 0.09) + (0.25 × 0.14) = 10.05 percent

Question 5

Fiddler's Music Stores' stock has a risk premium of 9.6 percent while the inflation rate is 4.1 percent and the risk-free rate is 3.9 percent.What is the expected return on this stock?

Accepted Answer

Expected return = 0.039 + 0.096 = 13.5 percent

Question 6

Given the following information,what is the variance of the returns on this stock?

Accepted Answer

Expected return = (0.18 × 0.29) + (0.77 × 0.14) + (0.05 × -0.45) = 0.1375Variance = 0.18(0.29 - 0.1375)² + 0.77(0.14 - 0.1375)² + 0.05(-0.45 - 0.1375)² = 0.021449

Question 7

The expected return on a security depends on which of the following?
I.Risk-free rate of return
II.Amount of the security's unique risk
III Market rate of return
IV.Standard deviation of returns

Accepted Answer

The expected return on a security is typically influenced by the risk-free rate of return and the market rate of return, as these are components of the Capital Asset Pricing Model (CAPM). Unique risk and standard deviation are not directly used in calculating expected return in CAPM.

Question 8

Beasley Enterprises stock has an expected return of 11.5 percent.Given the information below,what is the expected return if the economy is in a recession?

Accepted Answer

E(R) = 0.115 = (0.18 × x) + (0.65 × 0.13) + (0.17 × 0.24)x = -5.72 percent

Question 9

World United stock currently plots on the security market line and has a beta of 1.04.Which one of the following will increase that stock's rate of return without affecting the risk level of the stock,all else constant?

Accepted Answer

The answer of World United stock currently plots on the...

Question 10

You own a portfolio of two stocks,A and B.Stock A is valued at $6,500 and has an expected return of 11.2 percent.Stock B has an expected return of 8.1 percent.What is the expected return on the portfolio if the portfolio value is $9,500?

Accepted Answer

Value_B = $9,500 - $6,500 = $3,000Expected return = [($6,500/$9,500) × 0.112] + [($3,000/$9,500) × 0.081] = 10.22 percent

Question 11

Given the following information,what is the variance of the returns on this stock?

Accepted Answer

Expected return = (0.30 × 0.18) + (0.65 × 0.11) + (0.05 × -0.06) = 0.1225Variance = 0.30(0.18 - 0.1225)² + 0.65(0.11 - 0.1225)² + 0.05(-0.06 - 0.1225)² = 0.002759

Question 12

You own a portfolio that is invested 38 percent in Stock A,43 percent in Stock B,and the remainder in Stock C.The expected returns on these stocks are 10.9 percent,15.4 percent,and 9.1 percent,respectively.What is the expected return on the portfolio?

Accepted Answer

Expected return = [0.38 × 0.109] + [0.43 × 0.154] + [(1 - 0.38 - 0.43) × 0.091] = 12.49 percent

Question 13

Julie wants to create a $5,000 portfolio.She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return.However,she wants her portfolio to have no more risk than the overall market.Which one of the following portfolios is most apt to meet all of her objectives?

Accepted Answer

The answer of Julie wants to create a $5,000 portfolio.She...

Question 14

Given the following information,what is the standard deviation of the returns on this stock?

Accepted Answer

Expected return = (0.20 × 0.21) + (0.70 × 0.13) + (0.10 × -0.09) = 0.124Variance = 0.20(0.21 - 0.124)² + 0.70(0.13 - 0.124)² + 0.10(-0.09 - 0.124)² = 0.006084Standard deviation = √0.006084 = 7.80 percent

Question 15

Based on the capital asset pricing model,investors are compensated based on which of the following?
I.Market risk premium
II.Portfolio standard deviation
III.Portfolio beta
IV.Risk-free rate

Accepted Answer

According to the capital asset pricing model, investors are compensated based on market risk premium (I), portfolio beta (III), and risk-free rate (IV). Portfolio standard deviation (II) is not a factor in determining compensation according to CAPM. Therefore, the correct answer is D, which includes options I, III, and IV.

Question 16

Noah's Landing stock is expected to produce the following returns given the various states of the economy.What is the expected return on this stock?

Accepted Answer

Expected return = (0.3 × -0.27) + (0.65 × 0.16) + (0.05 × 0.35) = 4.05 percent

Question 17

What is the expected return on a security given the following information?

Accepted Answer

Expected return = (0.14 × 0.18) + (0.75 × 0.11) + (0.11 × -0.05) = 10.22 percent

Question 18

Given the following information,what is the standard deviation of the returns on this stock?

Accepted Answer

Expected return = (0.04 × 0.26) + (0.74 × 0.17) + (0.22 × -0.44) = 0.0394Variance = 0.04(0.26 - 0.0394)² + 0.74(0.17 - 0.0394)² + 0.22 (-0.44 - 0.0394)² = 0.065130Standard deviation = √0.065130 = 25.52 percent

Question 19

You own a portfolio that is invested as follows: $11,400 of Stock A,$8,800 of Stock B,$14,900 of Stock C,and $3,200 of Stock D.What is the portfolio weight of Stock C?

Accepted Answer

Weight_C = $14,900/($11,400 + $8,800 + $14,900 + $3,200) = 38.90 percent

Question 20

Southern Wear stock has an expected return of 14.6 percent.Given the information below,what is the expected return on this stock if the economy is normal? Round your answer to the nearest whole percentage.

Accepted Answer

E(R) = 0.146 = (0.15 × -0.05) + (0.80 × x) + (0.05 × 0.20)x = 17.94 percent

Quiz 11: Risk and Return

Based on the capital asset pricing model,which one of the following must increase the expected return on an individual security,all else constant?

You own a $46,000 portfolio comprised of four stocks.The values of Stocks A,B,and C are $5,600,$16,700,and $11,400,respectively.What is the portfolio weight of Stock D?

The capital asset pricing model:

Sugar and Spice stock is expected to produce the following returns given the various states of the economy.What is the expected return on this stock?

Fiddler's Music Stores' stock has a risk premium of 9.6 percent while the inflation rate is 4.1 percent and the risk-free rate is 3.9 percent.What is the expected return on this stock?

Given the following information,what is the variance of the returns on this stock?

The expected return on a security depends on which of the following? I.Risk-free rate of return II.Amount of the security's unique risk III Market rate of return IV.Standard deviation of returns

Beasley Enterprises stock has an expected return of 11.5 percent.Given the information below,what is the expected return if the economy is in a recession?

World United stock currently plots on the security market line and has a beta of 1.04.Which one of the following will increase that stock's rate of return without affecting the risk level of the stock,all else constant?

You own a portfolio of two stocks,A and B.Stock A is valued at $6,500 and has an expected return of 11.2 percent.Stock B has an expected return of 8.1 percent.What is the expected return on the portfolio if the portfolio value is $9,500?

Given the following information,what is the variance of the returns on this stock?

You own a portfolio that is invested 38 percent in Stock A,43 percent in Stock B,and the remainder in Stock C.The expected returns on these stocks are 10.9 percent,15.4 percent,and 9.1 percent,respectively.What is the expected return on the portfolio?

Given the following information,what is the standard deviation of the returns on this stock?

Based on the capital asset pricing model,investors are compensated based on which of the following? I.Market risk premium II.Portfolio standard deviation III.Portfolio beta IV.Risk-free rate

Noah's Landing stock is expected to produce the following returns given the various states of the economy.What is the expected return on this stock?

What is the expected return on a security given the following information?

Given the following information,what is the standard deviation of the returns on this stock?

You own a portfolio that is invested as follows: $11,400 of Stock A,$8,800 of Stock B,$14,900 of Stock C,and $3,200 of Stock D.What is the portfolio weight of Stock C?

Southern Wear stock has an expected return of 14.6 percent.Given the information below,what is the expected return on this stock if the economy is normal? Round your answer to the nearest whole percentage.