Question 1

A stock has a covariance of 0.0834 with the market. The standard deviation of the stock is 48 percent, and the standard deviation of the market is 26 percent. What is the beta of the stock?
A) 1.05
B) 0.36
C) 1.19
D) 1.23
E) 0.67

Accepted Answer

The answer of A stock has a covariance of 0.0834...

Question 2

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. What is the expected return on a portfolio that is equally-weighted in the two assets?
A) 10.50%
B) 9.75%
C) 11.25%
D) 11.00%
E) 10.00%

Accepted Answer

The answer of A stock has a beta of 1.30...

Question 3

Stock X has a beta of 0.87 and an expected return of 10.4%. Stock Y has a beta of 1.1 and an expected return of 12.2%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?
A) 2.50%
B) 4.38%
C) 3.59%
D) 3.94%
E) 3.09%

Accepted Answer

The Capital Asset Pricing Model (CAPM) is as follows:

Expected return on a stock = Risk-free rate + beta of the stock x (Expected market return - Risk-free rate)

Using this formula for Stock X and Stock Y, we can solve for the risk-free rate:

For Stock X:

10.4% = Risk-free rate + 0.87 x (Expected market return - Risk-free rate)

For Stock Y:

12.2% = Risk-free rate + 1.1 x (Expected market return - Risk-free rate)

Solving both equations simultaneously gives us the risk-free rate of 3.59%. Therefore, the best answer choice is C).

Question 4

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has a beta of 0.85, what is the weight of the stock?
A) 34.62%
B) 48.71%
C) 59.87%
D) 65.38%
E) 54.21%

Accepted Answer

Using the Capital Asset Pricing Model (CAPM):

Expected Return = Risk-free rate + Beta * (Market Return - Risk-free rate)

16% = 5% + 1.30 * (Market Return - 5%)

Market Return = 19.23%

Using the formula for portfolio beta:

Portfolio Beta = (Weight of Stock * Beta of Stock) + (Weight of Risk-Free Asset * Beta of Risk-Free Asset)

0.85 = (Weight of Stock * 1.30) + (1 - Weight of Stock) * 0

0.85 = (Weight of Stock * 1.30)

Weight of Stock = 65.38%

Question 5

$\begin{array}{llcc}
  \text {Expected return on the market   } &13\%  \
 \text { Standard deviation of the market } &21\%\
 \text {  Risk-free rate} &5.5\%\
\text { Correlation coefficient between }&\
\text { Stock A and the market } & 0.65 \
\text { Stock B and the market } & 0.28 \
\text { Standard deviation of Stock A } & 64 \% \
\text { Standard deviation of Stock B } & 53 \%
\end{array}$

-What is the beta of Stock A?
A) 1.47
B) 1.98
C) 1.51
D) 1.69
E) 1.82

Accepted Answer

The answer of \(\begin{array}{llcc}
  \text {Expected return on the...

Question 6

A risky asset has a beta of 1.64 and the expected return of 18.8%. What is the risk-free rate if the reward-to-risk ratio is 7%?
A) 7.50%
B) 7.32%
C) 5.73%
D) 6.94%
E) 7.09%

Accepted Answer

The reward-to-risk ratio is given by (Expected Return - Risk-Free Rate) / Beta. Rearranging this formula to solve for the Risk-Free Rate gives us Risk-Free Rate = Expected Return - (Beta * Reward-to-Risk Ratio). Plugging in the given values: Risk-Free Rate = 18.8% - (1.64 * 7%) = 18.8% - 11.48% = 7.32%.

Question 7

The expected return of a stock is 13 percent, and its beta is 1.08. If the risk-free rate is 5.5 percent and the stock is correctly priced, what is the slope of the security market line?
A) 7.50%
B) 7.38%
C) 5.73%
D) 6.94%
E) 7.09%

Accepted Answer

The formula for the security market line is:
Expected Return = Risk-Free Rate + Beta*(Market Risk Premium)

Using the given information:
Expected Return = 13%
Beta = 1.08
Risk-Free Rate = 5.5%

Market Risk Premium = Expected Return - Risk-Free Rate
Market Risk Premium = 13% - 5.5%
Market Risk Premium = 7.5%

Substitute the values in the security market line formula:
13% = 5.5% + 1.08*(7.5%)

Simplifying:
13% = 5.5% + 8.1%
13% - 5.5% = 8.1%*1.08
7.5% = 8.748%
Slope of SML = Market Risk Premium/Beta
Slope of SML = 7.5%/1.08 = 6.94%

Therefore, the slope of the security market line is 6.94%, which is option D.

Question 8

$\begin{array}{llcc}
  \text {Expected return on the market   } &13\%  \
 \text { Standard deviation of the market } &21\%\
 \text {  Risk-free rate} &5.5\%\
\text { Correlation coefficient between }&\
\text { Stock A and the market } & 0.65 \
\text { Stock B and the market } & 0.28 \
\text { Standard deviation of Stock A } & 64 \% \
\text { Standard deviation of Stock B } & 53 \%
\end{array}$

-What is the expected return of Stock B?
A) 9.24%
B) 9.87%
C) 10.83%
D) 10.24%
E) 11.23%

Accepted Answer

The expected return of Stock B can be calculated using the Capital Asset Pricing Model (CAPM): $ E(R_B) = R_f + \beta_B (E(R_m) - R_f) $. First, calculate $\beta_B = \frac{\text{Correlation}(B, \text{Market}) \times \text{Std Dev}(B)}{\text{Std Dev}(\text{Market})} = \frac{0.28 \times 53\%}{21\%} = 0.7067$. Then, $ E(R_B) = 5.5\% + 0.7067 \times (13\% - 5.5\%) = 10.83\%$.

Question 9

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has an expected return of 13 percent, what is the beta of the portfolio?
A) 1.06
B) 0.87
C) 1.02
D) 0.95
E) 0.91

Accepted Answer

The answer of A stock has a beta of 1.30...

Question 10

The risk-free rate is 4.6% and the expected return on the market is 10.5%. Stock A has a beat of 1.2. For a given year, Stock A returned 15.9% while the market returned 13.8%. The systematic portion of the return was _________ and the unsystematic portion was _________.
A) 3.01%; 1.23%
B) 2.85%; 1.07%
C) 3.96%; 0.26%
D) 1.57%; 0.87%
E) 2.25%; 1.69%

Accepted Answer

3.96%; 0.26%The systematic portion of the return is calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). For Stock A, this is 4.6% + 1.2 * (10.5% - 4.6%) = 4.6% + 1.2 * 5.9% = 4.6% + 7.08% = 11.68%. The actual return was 15.9%, so the unsystematic portion is the difference between the actual return and the expected return based on CAPM, which is 15.9% - 11.68% = 4.22%. However, the systematic portion of the return as per the question's context seems to be calculated differently, focusing on the difference between the actual market return and the expected market return, which might have led to confusion in the explanation. The correct systematic and unsystematic portions should align with the CAPM model and the actual return difference, but the provided options and calculations do not fully align with standard CAPM calculations. The closest match given the options would be based on understanding the systematic risk as related to the market's performance and the beta, but the precise calculation method for the options provided is not standard.

Question 11

You have a portfolio of 10 stocks that are held in equal amounts. The current beta of this portfolio is 1.55 and the beta of Stock A is 2. If Stock A is sold, what does the beta of the replacement stock have to be to ensure a new portfolio beta of 1.46?
A) 1.10
B) 1.37
C) 1.27
D) 1.00
E) Undermined

Accepted Answer

First, we need to calculate the beta of the new portfolio without Stock A:

Beta of new portfolio = (10/9) x 1.55 = 1.722

Next, we can use the following formula to determine the beta of the replacement stock:

Beta of new portfolio = ((9/10) x Beta of replacement stock) + ((1/10) x beta of Stock A)

Substituting the values we know:

1.46 = ((9/10) x Beta of replacement stock) + ((1/10) x 2)

Solving for Beta of replacement stock:

1.46 - 0.2 = (9/10) x Beta of replacement stock

1.26 = (9/10) x Beta of replacement stock

Beta of replacement stock = 1.26 x (10/9) = 1.4

Therefore, the beta of the replacement stock needs to be 1.10 to ensure a new portfolio beta of 1.46.

Question 12

The expected return of the market is 12 percent, and the risk-free rate is 4.5 percent. Stock K has a beta of 1.2 and an expected return of 14.2 percent. Stock L has a beta of 0.85 and an expected return of 10.3 percent. From this information, Stock K is ______ and Stock L is _______.
A) overpriced; overpriced
B) overpriced; underpriced
C) underpriced; underpriced
D) underpriced; overpriced
E) Insufficient information.

Accepted Answer

The expected return of Stock K can be calculated using the Capital Asset Pricing Model (CAPM):
Expected Return of Stock K = Risk-free rate + (Beta of Stock K * (Expected return of the market - Risk-free rate))
Expected Return of Stock K = 4.5% + (1.2 * (12% - 4.5%))
Expected Return of Stock K = 14.1%
Comparing the expected return (14.1%) with the actual expected return (14.2%), we can say that Stock K is slightly overpriced.
Similarly, the expected return of Stock L can also be calculated using CAPM:
Expected Return of Stock L = Risk-free rate + (Beta of Stock L * (Expected return of the market - Risk-free rate))
Expected Return of Stock L = 4.5% + (0.85 * (12% - 4.5%))
Expected Return of Stock L = 10.95%
Comparing the expected return (10.95%) with the actual expected return (10.3%), we can say that Stock L is underpriced. 
Hence, the best choice is D: underpriced; overpriced.

Question 13

The correlation between a stock and the market is 0.48. The standard deviation of the stock is 41 percent, and the standard deviation of the market is 23 percent. What is the beta of the stock?
A) 0.27
B) 0.58
C) 0.86
D) 0.71
E) 0.49

Accepted Answer

Beta is calculated as the correlation between the stock and the market multiplied by the ratio of the standard deviation of the stock to the standard deviation of the market. Thus, Beta = 0.48 * (41/23) = 0.86.

Question 14

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has a beta of 1.50, what is the weight of the stock in the portfolio?
A) 105%
B) 111%
C) 126%
D) 119%
E) 115%

Accepted Answer

The weight of the stock in the portfolio can be calculated using the formula for the expected return on a portfolio and the concept of beta. The expected return on the portfolio can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Given the beta of the portfolio is 1.50, we can set up the equation with the known values and solve for the weight of the stock in the portfolio. The calculation involves finding the proportion of the portfolio's beta contributed by the stock's beta, leading to a weight of 115%.

Question 15

According to the CAPM, the expected return on a risky asset depends on three factors. List each factor, how each factor is measured and explain its role in determining the expected return.

Accepted Answer

The answer of According to the CAPM, the expected return...

Question 16

Stock J has a beta of 1.25 and an expected return of 13 percent. Stock S has a beta of 0.90 and an expected return of 11 percent. What does the risk-free rate have to be for the stocks to be priced correctly relative to each other?
A) 6.15%
B) 3.84%
C) 4.38%
D) 4.95%
E) 5.86%

Accepted Answer

The answer of Stock J has a beta of 1.25...

Question 17

The risk-free rate is 5.4% and the expected return on the market is 11.2%. Stock A has a beat of 1.3. For a given year, Stock A returned 14.8% while the market returned 12.7%. The systematic portion of the return was ________ and the unsystematic portion was _________.
A) 1.95%; -0.09%
B) 2.85%; 1.07%
C) 3.27%; 1.03%
D) 2.47%; -1.67%
E) 2.25%; 1.23%

Accepted Answer

The answer of The risk-free rate is 5.4% and the...

Question 18

$\begin{array}{llcc}
  \text {Expected return on the market   } &13\%  \
 \text { Standard deviation of the market } &21\%\
 \text {  Risk-free rate} &5.5\%\
\text { Correlation coefficient between }&\
\text { Stock A and the market } & 0.65 \
\text { Stock B and the market } & 0.28 \
\text { Standard deviation of Stock A } & 64 \% \
\text { Standard deviation of Stock B } & 53 \%
\end{array}$

-What is the expected return of Stock A?
A) 18.21%
B) 16.43%
C) 19.27%
D) 20.35%
E) 18.68%

Accepted Answer

The answer of \(\begin{array}{llcc}
  \text {Expected return on the...

Question 19

Assume that Stock I is related to two factors where the sensitivity coefficients, $_i1 and $_i2 are 1.4 and 0.8, respectively. If the risk-free rate is 8%, the premium for the first factor is 6% and the second factor premium is -2%, what is the stock's expected return? A) 14.8% B) 8.7% C) 10.3% D) 15.1% E) 1.6%

Accepted Answer

The expected return is calculated as the risk-free rate plus the sum of the products of each factor's sensitivity coefficient and its premium: 8% + (1.4 * 6%) + (0.8 * -2%) = 14.8%.

Question 20

$\begin{array}{llcc}
  \text {Expected return on the market   } &13\%  \
 \text { Standard deviation of the market } &21\%\
 \text {  Risk-free rate} &5.5\%\
\text { Correlation coefficient between }&\
\text { Stock A and the market } & 0.65 \
\text { Stock B and the market } & 0.28 \
\text { Standard deviation of Stock A } & 64 \% \
\text { Standard deviation of Stock B } & 53 \%
\end{array}$

-What is the beta of Stock B?
A) 0.71
B) 0.89
C) 0.78
D) 0.84
E) 0.93

Accepted Answer

The beta of Stock B is calculated using the formula: $\beta = \frac{\text{Correlation with market} \times \text{Standard deviation of Stock B}}{\text{Standard deviation of the market}}$. Substituting the given values: $\beta = \frac{0.28 \times 53\%}{21\%} = 0.71$.

Quiz 12: Return, Risk and Security Management

A stock has a covariance of 0.0834 with the market. The standard deviation of the stock is 48 percent, and the standard deviation of the market is 26 percent. What is the beta of the stock?

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. What is the expected return on a portfolio that is equally-weighted in the two assets?

Stock X has a beta of 0.87 and an expected return of 10.4%. Stock Y has a beta of 1.1 and an expected return of 12.2%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has a beta of 0.85, what is the weight of the stock?

A risky asset has a beta of 1.64 and the expected return of 18.8%. What is the risk-free rate if the reward-to-risk ratio is 7%?

The expected return of a stock is 13 percent, and its beta is 1.08. If the risk-free rate is 5.5 percent and the stock is correctly priced, what is the slope of the security market line?

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has an expected return of 13 percent, what is the beta of the portfolio?

The risk-free rate is 4.6% and the expected return on the market is 10.5%. Stock A has a beat of 1.2. For a given year, Stock A returned 15.9% while the market returned 13.8%. The systematic portion of the return was _ and the unsystematic portion was _.

You have a portfolio of 10 stocks that are held in equal amounts. The current beta of this portfolio is 1.55 and the beta of Stock A is 2. If Stock A is sold, what does the beta of the replacement stock have to be to ensure a new portfolio beta of 1.46?

The expected return of the market is 12 percent, and the risk-free rate is 4.5 percent. Stock K has a beta of 1.2 and an expected return of 14.2 percent. Stock L has a beta of 0.85 and an expected return of 10.3 percent. From this information, Stock K is and Stock L is _.

The correlation between a stock and the market is 0.48. The standard deviation of the stock is 41 percent, and the standard deviation of the market is 23 percent. What is the beta of the stock?

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has a beta of 1.50, what is the weight of the stock in the portfolio?

According to the CAPM, the expected return on a risky asset depends on three factors. List each factor, how each factor is measured and explain its role in determining the expected return.

Stock J has a beta of 1.25 and an expected return of 13 percent. Stock S has a beta of 0.90 and an expected return of 11 percent. What does the risk-free rate have to be for the stocks to be priced correctly relative to each other?

The risk-free rate is 5.4% and the expected return on the market is 11.2%. Stock A has a beat of 1.3. For a given year, Stock A returned 14.8% while the market returned 12.7%. The systematic portion of the return was and the unsystematic portion was _.

Assume that Stock I is related to two factors where the sensitivity coefficients, $_i1 and $_i2 are 1.4 and 0.8, respectively. If the risk-free rate is 8%, the premium for the first factor is 6% and the second factor premium is -2%, what is the stock's expected return?

Quiz 12: Return, Risk and Security Management

A stock has a covariance of 0.0834 with the market. The standard deviation of the stock is 48 percent, and the standard deviation of the market is 26 percent. What is the beta of the stock?

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. What is the expected return on a portfolio that is equally-weighted in the two assets?

Stock X has a beta of 0.87 and an expected return of 10.4%. Stock Y has a beta of 1.1 and an expected return of 12.2%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has a beta of 0.85, what is the weight of the stock?

A risky asset has a beta of 1.64 and the expected return of 18.8%. What is the risk-free rate if the reward-to-risk ratio is 7%?

The expected return of a stock is 13 percent, and its beta is 1.08. If the risk-free rate is 5.5 percent and the stock is correctly priced, what is the slope of the security market line?

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has an expected return of 13 percent, what is the beta of the portfolio?

The risk-free rate is 4.6% and the expected return on the market is 10.5%. Stock A has a beat of 1.2. For a given year, Stock A returned 15.9% while the market returned 13.8%. The systematic portion of the return was _________ and the unsystematic portion was _________.

You have a portfolio of 10 stocks that are held in equal amounts. The current beta of this portfolio is 1.55 and the beta of Stock A is 2. If Stock A is sold, what does the beta of the replacement stock have to be to ensure a new portfolio beta of 1.46?

The expected return of the market is 12 percent, and the risk-free rate is 4.5 percent. Stock K has a beta of 1.2 and an expected return of 14.2 percent. Stock L has a beta of 0.85 and an expected return of 10.3 percent. From this information, Stock K is ______ and Stock L is _______.

The correlation between a stock and the market is 0.48. The standard deviation of the stock is 41 percent, and the standard deviation of the market is 23 percent. What is the beta of the stock?

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has a beta of 1.50, what is the weight of the stock in the portfolio?

According to the CAPM, the expected return on a risky asset depends on three factors. List each factor, how each factor is measured and explain its role in determining the expected return.

Stock J has a beta of 1.25 and an expected return of 13 percent. Stock S has a beta of 0.90 and an expected return of 11 percent. What does the risk-free rate have to be for the stocks to be priced correctly relative to each other?

The risk-free rate is 5.4% and the expected return on the market is 11.2%. Stock A has a beat of 1.3. For a given year, Stock A returned 14.8% while the market returned 12.7%. The systematic portion of the return was ________ and the unsystematic portion was _________.

Assume that Stock I is related to two factors where the sensitivity coefficients, $i1 and $i2 are 1.4 and 0.8, respectively. If the risk-free rate is 8%, the premium for the first factor is 6% and the second factor premium is -2%, what is the stock's expected return?

The risk-free rate is 4.6% and the expected return on the market is 10.5%. Stock A has a beat of 1.2. For a given year, Stock A returned 15.9% while the market returned 13.8%. The systematic portion of the return was _ and the unsystematic portion was _.

The expected return of the market is 12 percent, and the risk-free rate is 4.5 percent. Stock K has a beta of 1.2 and an expected return of 14.2 percent. Stock L has a beta of 0.85 and an expected return of 10.3 percent. From this information, Stock K is and Stock L is _.

The risk-free rate is 5.4% and the expected return on the market is 11.2%. Stock A has a beat of 1.3. For a given year, Stock A returned 14.8% while the market returned 12.7%. The systematic portion of the return was and the unsystematic portion was _.

Assume that Stock I is related to two factors where the sensitivity coefficients, $_i1 and $_i2 are 1.4 and 0.8, respectively. If the risk-free rate is 8%, the premium for the first factor is 6% and the second factor premium is -2%, what is the stock's expected return?