Question 1

You would like to combine a risky share with a beta of 1.5 with 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 answer of You would like to combine a risky...

Question 2

Your portfolio has a beta of 1.18.The portfolio consists of 15% Treasury bills,30% in share A,and 55% in shareb.Share A has a risk-level equivalent to that of the overall market.What is the beta of share B?

Accepted Answer

The answer of Your portfolio has a beta of 1.18.The...

Question 3

The equity 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 3.5%.What is the beta?

Accepted Answer

The answer of The equity of Flavorful Teas has an...

Question 4

What is the portfolio variance if 30% is invested in share S and 70% is invested in share T?
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$Returns if
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$State Occurs
$\begin{array}{|l|l|l|l|}
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { ShareS } & \text { Share T } \
\hline \text { Boom } & 40 \% & 12 \% & 20 \% \
\hline \text { Normal } & 60 \% & 6 \% & 4 \% \
\hline
\end{array}$

Accepted Answer

The portfolio variance is calculated using the formula: $ \sigma^2 = w_S^2 \sigma_S^2 + w_T^2 \sigma_T^2 + 2w_Sw_T \sigma_{S,T} $, where $ w_S $ and $ w_T $ are the weights of shares S and T, and $ \sigma_S^2 $, $ \sigma_T^2 $, and $ \sigma_{S,T} $ are the variances and covariance. Calculating these values from the given data results in a portfolio variance of 0.004056.

Question 5

What is the standard deviation of a portfolio that is invested 40% in share Q and 60% in share R?
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$Returns if
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$State Occurs
$\begin{array}{|l|l|l|l|}
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { ShareQ } & \text { Share R } \
\hline \text { Boom } & 25 \% & 18 \% & 9 \% \
\hline \text { Normal } & 75 \% & 9 \% & 5 \% \
\hline
\end{array}$

Accepted Answer

The standard deviation of a portfolio is calculated using the weighted average of the variances and covariances of the assets. Given the probabilities and returns, the portfolio's expected return and variance can be calculated, leading to a standard deviation of approximately 2.6%.

Question 6

What is the variance of a portfolio consisting of €3,500 in share G and €6,500 in share H?
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$Returns if
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$State Occurs
$\begin{array}{|l|l|l|l|}
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { ShareG } & \text { Share H } \
\hline \text { Boom } & 15 \% & 15 \% & 9 \% \
\hline \text { Normal } & 85 \% & 3 \% & 6 \% \
\hline
\end{array}$

Accepted Answer

To find the variance of the portfolio, calculate the expected return and variance using the given probabilities and returns for each state. The weights for shares G and H are 0.35 and 0.65, respectively. Use the formula for portfolio variance considering the covariance between the shares.

Question 7

The expected return on HiLo equity is 13.69% 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 answer of The expected return on HiLo equity is...

Question 8

The equity 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) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Rearranging the formula to solve for the Market Return gives: Market Return = ((Expected Return - Risk-Free Rate) / Beta) + Risk-Free Rate. Plugging in the values: Market Return = ((11.6% - 4%) / 1.14) + 4% = 10.67%.

Question 9

What is the expected return on a portfolio comprised of €3,000 in share K and €5,000 in share L if the economy is normal?
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$Returns if
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$State Occurs
$\begin{array}{|l|l|l|l|}
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { ShareK } & \text { Share L } \
\hline \text { Boom } & 20 \% & 14 \% & 10 \% \
\hline \text { Normal } & 30 \% & 5 \% & 6 \% \
\hline
\end{array}$

Accepted Answer

The expected return is calculated by finding the weighted average of the returns of the shares in the portfolio. The weights are based on the amount invested in each share. For share K: (€3,000/€8,000) * 5% = 1.875%. For share L: (€5,000/€8,000) * 6% = 3.75%. Adding these gives 1.875% + 3.75% = 5.625%, which is approximately 5.63%.

Question 10

What is the beta of a portfolio comprised of the following securities?
$$\begin{array} { | l | l | l |} 
\hline \text { Shure } & \text { Amorugt Inverted } & \text { Serurity Bete } \
\hline \text { A } & € 2,000 & 1.20 \
\hline \mathrm { B } & €{ 3,000 } & 1.46 \
\hline \mathrm { B } & €{ 5 } , 000 & .72 \
\hline
\end{array}$$

Accepted Answer

The portfolio beta is calculated by taking the weighted average of the individual betas. The weights are the proportion of the total investment in each security. The total investment is €10,000. The portfolio beta is (2000/10000)*1.20 + (3000/10000)*1.46 + (5000/10000)*0.72 = 1.038.

Question 11

What is the standard deviation of a portfolio which is invested 20% in share A,30% in share B and 50% in share C?
$\begin{array}{|l|l|l|l|l|} 
\hline
& & \begin{array}{l}
\text { Returns if } \
\text { State } \
\text { Occurs }
\end{array}& &{} \
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { ShareA } & \text { ShareB } & \text { Share C } \
\hline \text { Boom } & 10 \% & 15 \% & 10 \% & 5 \% \
\hline \text { Normal } & 70 \% & 9 \% & 6 \% & 7 \% \
\hline \text { Recession } & 20 \% & -14 \% & 2 \% & 8 \%\
\hline
\end{array}$

Accepted Answer

The answer of What is the standard deviation of a...

Question 12

The market has an expected rate of return of 9.8%.The long-term government bond is expected to yield 4.5% and Treasury bills are expected to yield 3.4%.The inflation rate is 3.1%.What is the market risk premium?

Accepted Answer

The answer of The market has an expected rate of...

Question 13

Your portfolio is comprised of 30% of share X,50% of share Y,and 20% of share Z.Share X has a beta of .64,share Y has a beta of 1.48,and share Z has a beta of 1.04.What is the beta of your portfolio?

Accepted Answer

The answer of Your portfolio is comprised of 30% of...

Question 14

Which one of the following shares is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%?
$\begin{array}{l}
\begin{array}{|l|l|l|}
\hline
Share &Beta &\text { Expected Return }\
\hline \mathrm{A} & .85 & 9.2 \% \
\hline \mathrm{B} & 1.08 & 11.8 \% \
\hline \mathrm{C} & 1.68 & 15.3 \% \
\hline \mathrm{D} & .71 & 7.8 \% \
\hline \mathrm{E} & 1.45 & 12.3 \% \
\hline
\end{array}
\end{array}$

Accepted Answer

The answer of Which one of the following shares is...

Question 15

What is the expected return on this portfolio?
$\begin{array}{|l|l|l|l|}
\hline \text { Share } & \text { Expected Return } & \text { Number of Shares } & \text { SharePrice } \
\hline \text { A } & 8 \% & 520 & € 25 \
\hline \text { B } & 15 \% & 300 & € 48 \
\hline \text { C } & 6 \% & 250 & € 26 \
\hline
\end{array}$

Accepted Answer

The answer of What is the expected return on this...

Question 16

Which one of the following shares is correctly priced if the risk-free rate of return is 2.5% and the market risk premium is 8%?
$\begin{array}{l}
\begin{array}{|l|l|l|}
\hline
Share &Beta &\text { Expected Retum }\
\hline \mathrm{A} & .68 & 8.2 \% \
\hline \mathrm{B} & 1.42 & 13.9 \% \
\hline \mathrm{C} & 1.23 & 11.8 \% \
\hline \mathrm{D} & 1.31 & 12.6 \% \
\hline \mathrm{E} & .94 & 9.7 \% \
\hline
\end{array}
\end{array}$

Accepted Answer

The expected return for a share can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * Market Risk Premium. For Share B: Expected Return = 2.5% + 1.42 * 8% = 13.86%, which is approximately equal to the given expected return of 13.9%.

Question 17

The equity of Martin Industries has a beta of 1.43.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 share?

Accepted Answer

The answer of The equity of Martin Industries has a...

Question 18

What is the standard deviation of a portfolio which is comprised of €4,500 invested in share S and €3,000 in share T?
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$Returns if
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$State Occurs
$\begin{array}{|l|l|l|l|}
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { ShareS } & \text { Share T } \
\hline \text { Boom } & 10 \% & 12 \% & 4 \% \
\hline \text { Normal } & 65 \% & 9 \% & 6 \% \
\hline \text { Recession } & 25 \% & 2 \% & 9 \% \
\hline
\end{array}$

Accepted Answer

The answer of What is the standard deviation of a...

Question 19

The risk-free rate of return is 4% and the market risk premium is 8%.What is the expected rate of return on a share with a beta of 1.28?

Accepted Answer

The expected rate of return = Risk-free rate + Beta * market risk premium
= 4% + 1.28 * 8%
= 4% + 10.24%
= 14.24% 
Therefore, the correct answer is D).

Question 20

What is the expected return on a portfolio comprised of €4,000 in share M and €6,000 in share N if the economy enjoys a boom period?
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$Returns if
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$State Occurs
$\begin{array}{|l|l|l|l|}
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { ShareM } & \text { Share N } \
\hline \text { Boom } & 10 \% & 18 \% & 10 \% \
\hline \text { Normal } & 75 \% & 7 \% & 8 \% \
\hline \text { Recession } & 15 \% & -20 \% & 6 \% \
\hline
\end{array}$

Accepted Answer

The expected return during a boom is calculated by weighting the returns of each share by their proportion in the portfolio. Share M contributes 40% (4000/10000) and Share N contributes 60% (6000/10000). Thus, the expected return is (0.4 * 18%) + (0.6 * 10%) = 7.2% + 6% = 13.2%.

Quiz 10: Return and Risk: The Capital Asset Pricing Model Capm

You would like to combine a risky share with a beta of 1.5 with 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?

Your portfolio has a beta of 1.18.The portfolio consists of 15% Treasury bills,30% in share A,and 55% in shareb.Share A has a risk-level equivalent to that of the overall market.What is the beta of share B?

The equity 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 3.5%.What is the beta?

The expected return on HiLo equity is 13.69% 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?

The equity 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?

The market has an expected rate of return of 9.8%.The long-term government bond is expected to yield 4.5% and Treasury bills are expected to yield 3.4%.The inflation rate is 3.1%.What is the market risk premium?

Your portfolio is comprised of 30% of share X,50% of share Y,and 20% of share Z.Share X has a beta of .64,share Y has a beta of 1.48,and share Z has a beta of 1.04.What is the beta of your portfolio?

The equity of Martin Industries has a beta of 1.43.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 share?

The risk-free rate of return is 4% and the market risk premium is 8%.What is the expected rate of return on a share with a beta of 1.28?