Question 1

A risky security has a variance of .035109 and a covariance with the market of .0222. The variance of the market is .019538. What is the correlation of the risky security to the market?

Accepted Answer

The answer of A risky security has a variance of...

Question 2

Dinner Foods stock has a beta of 1.55 and an expected return of 15.43 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.

Accepted Answer

The answer of Dinner Foods stock has a beta of...

Question 3

Stock X has a beta of .87 and an expected return of 9.8 percent. Stock Y has a beta of 1.2 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?

Accepted Answer

The Capital Asset Pricing Model (CAPM) states that the expected return on a stock is equal to the risk-free rate plus a risk premium. The risk premium is equal to the beta of the stock multiplied by the market risk premium. The market risk premium is the difference between the expected return on the market and the risk-free rate.In this case, we are given the expected return on two stocks, X and Y, and their betas. We can use the CAPM to solve for the risk-free rate.For stock X, we have:Expected return = Risk-free rate + Beta * Market risk premium9.8% = Risk-free rate + 0.87 * Market risk premiumFor stock Y, we have:Expected return = Risk-free rate + Beta * Market risk premium13.1% = Risk-free rate + 1.2 * Market risk premiumSubtracting the first equation from the second equation, we get:3.3% = 0.33 * Market risk premiumMarket risk premium = 10%Substituting this value back into the first equation, we get:9.8% = Risk-free rate + 0.87 * 10%Risk-free rate = 1.1%Therefore, the risk-free rate of return is 1.1%.

Question 4

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

Accepted Answer

The answer of What is the covariance of security A...

Question 5

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

Accepted Answer

The answer of What is the covariance of security A...

Question 6

The common stock of Industrial Technologies has an expected return of 15.6 percent. The market return is 11.2 percent and the risk-free return is 4.6 percent. What is the stock's beta?

Accepted Answer

The expected return of a stock is calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Rearranging to solve for Beta gives: Beta = (Expected Return - Risk-Free Rate) / (Market Return - Risk-Free Rate). Substituting the given values: Beta = (15.6% - 4.6%) / (11.2% - 4.6%) = 1.67.

Question 7

A stock has an expected return of 14.59 percent and a beta of 1.35. What is the risk-free rate if the market rate is 12.7 percent?

Accepted Answer

14.59 = r_f + 1.35 (12.7 - r_f); r_f = 7.3 percent

Question 8

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?

Accepted Answer

The formula for beta is:
β = Cov(Ri,Rm) / Var(Rm)
where Cov(Ri,Rm) is the covariance between the return of stock i and the return of the market, and Var(Rm) is the variance of the market returns.

Given:
Standard deviation of Blasco Books' stock = 16.4%
Market standard deviation = 12.7%
Covariance of Blasco Books' stock with the market = 0.0217

Using the formula for beta:
β = 0.0217 / (0.127^2) = 1.35

Therefore, the beta of Blasco Books' stock is 1.35, which is closest to choice (D) 1.35.

Question 9

The risk-free rate is 5.1 percent, the market rate is 13.3 percent, and the expected return on a stock is 15.84 percent. What is the beta of the stock?

Accepted Answer

The beta of the stock can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Rate - Risk-Free Rate). Plugging in the values: 15.84% = 5.1% + Beta * (13.3% - 5.1%). Solving for Beta gives approximately 1.31.

Question 10

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?

Accepted Answer

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

Question 11

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.

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 12

A stock has a standard deviation of 22.4 percent and a covariance with the market of .0169. The market has a standard deviation of 13.2 percent. What is the beta of this stock?

Accepted Answer

The beta of a stock is a measure of its volatility relative to the market. It is calculated by dividing the covariance of the stock with the market by the variance of the market. In this case, the covariance of the stock with the market is .0169 and the variance of the market is (13.2%)^2 = .017424. Therefore, the beta of the stock is .0169/.017424 = .97.

Question 13

The market has an expected return of 11.4 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?

Accepted Answer

13 = r_f + 1.18(11.4 - r_f); r_f = 2.51 percent

Question 14

Farm Tractors, Inc., stock has a beta of 1.02 and an expected return of 12.8 percent. The risk-free rate is 3.9 percent. What is the market rate of return?

Accepted Answer

The answer of Farm Tractors, Inc., stock has a beta...

Question 15

Home Interior's stock has an expected return of 12.89 percent and a beta of 1.28. The market return is 10.7 percent and the risk-free rate is 2.8 percent. This stock is _____ because the CAPM return for the stock is _____ percent.

Accepted Answer

The answer of Home Interior's stock has an expected return...

Question 16

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

Accepted Answer

The answer of What is the covariance of security A...

Question 17

The stock of Healthy Eating, Inc., has a beta of .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?

Accepted Answer

E(R) = 3.80 + .88(9.60 - 3.80) = 8.90 percent

Question 18

Western Exports stock has a standard deviation of 15.6 percent and a covariance with the market of .0124. The market has a standard deviation of 13.7 percent. What is the correlation of this stock with the market?

Accepted Answer

The correlation coefficient is calculated as the covariance of the two assets divided by the product of their standard deviations. In this case, the correlation coefficient is .0124 / (0.156 * 0.137) = .58.

Question 19

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?

Accepted Answer

11ea6d0e_c3e3_b053_b3c7_8dfa76c0a125_TB1223_00

Question 20

Uptown Markets stock has a standard deviation of 16.8 percent and a covariance with the market of .0178. The market has a standard deviation of 13.6 percent. What is the correlation of this stock with the market?

Accepted Answer

The correlation coefficient can be calculated using the formula:
correlation = covariance / (standard deviation of the stock * standard deviation of the market)

Substituting the given values, we get:
correlation = 0.0178 / (0.168 * 0.136) = 0.78

Therefore, the correlation of Uptown Markets stock with the market is 0.78, and the best choice is B.

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

A risky security has a variance of .035109 and a covariance with the market of .0222. The variance of the market is .019538. What is the correlation of the risky security to the market?

Dinner Foods stock has a beta of 1.55 and an expected return of 15.43 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.

Stock X has a beta of .87 and an expected return of 9.8 percent. Stock Y has a beta of 1.2 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?

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 Industrial Technologies has an expected return of 15.6 percent. The market return is 11.2 percent and the risk-free return is 4.6 percent. What is the stock's beta?

A stock has an expected return of 14.59 percent and a beta of 1.35. What is the risk-free rate if the market rate is 12.7 percent?

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?

The risk-free rate is 5.1 percent, the market rate is 13.3 percent, and the expected return on a stock is 15.84 percent. What is the beta of the stock?

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?

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 stock has a standard deviation of 22.4 percent and a covariance with the market of .0169. The market has a standard deviation of 13.2 percent. What is the beta of this stock?

The market has an expected return of 11.4 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?

Farm Tractors, Inc., stock has a beta of 1.02 and an expected return of 12.8 percent. The risk-free rate is 3.9 percent. What is the market rate of return?

Home Interior's stock has an expected return of 12.89 percent and a beta of 1.28. The market return is 10.7 percent and the risk-free rate is 2.8 percent. This stock is _ because the CAPM return for the stock is _ percent.

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

The stock of Healthy Eating, Inc., has a beta of .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?

Western Exports stock has a standard deviation of 15.6 percent and a covariance with the market of .0124. The market has a standard deviation of 13.7 percent. What is the correlation of this stock with the market?

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?

Uptown Markets stock has a standard deviation of 16.8 percent and a covariance with the market of .0178. The market has a standard deviation of 13.6 percent. What is the correlation of this stock with the market?