Question 1

The rate of return on the S&P 500 is 16.2%.Epsilon has a beta of 1.85.If the T-bond rate is 5.9%,what should investors expect as a rate of return on Epsilon's stock?
A)16.2%
B)22.1%
C)18.5%
D)25.0%

Accepted Answer

The expected rate of return on Epsilon's stock 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: 5.9% + 1.85 * (16.2% - 5.9%) = 25.0%.

Question 2

The required rate of return for Firm A is:
A)4%.
B)8%.
C)12%.
D)16%.
E)Cannot be determined with information given.

Accepted Answer

The required rate of return is the minimum return that an investor expects to receive for investing in a particular security. In this case, we are given the dividend per share and the current market price of Firm A's stock. By using the dividend discount model, we can calculate the required rate of return as follows:

Required Rate of Return = (Dividend per Share / Current Market Price per Share) + Expected Growth Rate

= ($2.50 / $25.00) + 0.08

= 0.18 or 18%

Since the expected growth rate is not given, we can assume it to be zero (i.e., no growth). Therefore, the required rate of return is 12% (option C).

Question 3

U.S.Treasury bonds currently yield 6%.Consolidated Industries stock has a beta of 1.5.The rate of return on the S&P 500 is presently 18%.What is the rate of return that Consolidated Industries stockholders require?
A)6%
B)24%
C)18%
D)27%

Accepted Answer

The answer of U.S.Treasury bonds currently yield 6%.Consolidated Industries stock...

Question 4

The market risk premium is measured by:
A)beta.
B)market return less risk-free rate.
C)T-bill rate.
D)standard deviation.

Accepted Answer

The market risk premium is the additional return that an investor expects to earn for holding a risky asset over the risk-free rate. Therefore, the market risk premium is measured by subtracting the risk-free rate from the market return. Option B is the correct choice because it directly subtracts the risk-free rate from the market return. Option A is incorrect because beta measures the volatility of an asset relative to the overall market. Option C is incorrect because the T-bill rate is the risk-free rate, which is used in the calculation of the market risk premium. Option D is incorrect because standard deviation measures the volatility of an asset's returns, not the market risk premium.

Question 5

You are going to invest all of your funds in one of three projects with the following distribution of possible returns: 
Project 3
Standard Deviation 12% 
If you are a risk-averse investor,which one should you choose?
A)Project 1
B)Project 2
C)Project 3

Accepted Answer

The answer of You are going to invest all of...

Question 6

Bell Weather,Inc.has a beta of 1.25.The return on the market portfolio is 12.5%,and the risk-free rate is 5%.According to CAPM,what is the required return on this stock?
A)20.62%
B)9.37%
C)14.37%
D)15.62%

Accepted Answer

Using the CAPM formula: Required Return = Risk-Free Rate + Beta*(Market Return - Risk-Free Rate)
= 5% + 1.25*(12.5% - 5%)
= 14.37%

Question 7

The rate on six-month T-bills is currently 5%.Andvark Company stock has a beta of 1.69 and a required rate of return of 15.4%.According to CAPM,determine the return on the market portfolio.
A)11.15%
B)6.15%
C)17.07%
D)14.11%

Accepted Answer

The Capital Asset Pricing Model (CAPM) formula is: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values: 15.4% = 5% + 1.69 * (Market Return - 5%). Solving for Market Return gives approximately 11.15%.

Question 8

You are thinking about purchasing 1,000 shares of stock in the following firms: 
If you purchase the number of shares specified,then the beta of your portfolio will be:
A)1.16.
B)1.35.
C)1.00.
D).85.
E)Cannot be determined with information given.

Accepted Answer

The answer of You are thinking about purchasing 1,000 shares...

Question 9

If investors expected inflation to increase in the future,what would happen to the security market line (SML)?
A)The slope of the SML would rise.
B)The SML would shift downward,but the slope would remain the same.
C)The slope of the SML would fall.
D)The SML would shift up,but the slope would remain the same.

Accepted Answer

If investors expect inflation to increase, the risk-free rate, which is part of the SML, would increase, causing the entire SML to shift upward while maintaining the same slope.

Question 10

What would happen if investors became more risk averse?
A)The slope of the SML would rise.
B)The SML would shift downward but the slope would remain the same.
C)The slope of the SML would fall.
D)The SML would shift downward and the slope of the SML would fall.

Accepted Answer

If investors become more risk-averse, they would require a higher risk premium for taking on additional risk, which would increase the slope of the Security Market Line (SML).

Question 11

Use the following information to answer the following question(s).
 
-Firm A's risk premium is:
A)2%.
B)4%.
C)6%.
D)8%.
E)10%.

Accepted Answer

The answer of Use the following information to answer the...

Question 12

Use the following information to answer the following question(s).
 
-Firm B's risk premium is:
A)2.66%.
B)4.8%.
C)6.3%.
D)8.1%.

Accepted Answer

To find Firm B's risk premium, we need to subtract the risk-free rate from the expected return. We have been given the expected return as 10.8% and the risk-free rate as 6%. Therefore, the risk premium is 10.8% - 6% = 4.8%.

Question 13

The risk-free rate is currently 6.5%.Acid Battery Company stockholders require a rate of return of 27.5%,and the stock has a beta of 2.1.What is the current market risk premium?
A)6.90%
B)21.00%
C)13.65%
D)10.00%

Accepted Answer

The answer of The risk-free rate is currently 6.5%.Acid Battery...

Question 14

Calculate the current beta for Mercury,Inc.The rate on 30-year U.S.Treasury bonds is currently 8%.The market risk premium is 5%.Mercury returned 18% to its stockholders in the latest year.
A)1.00
B)1.75
C)1.25
D)2.00
E)1.50

Accepted Answer

The answer of Calculate the current beta for Mercury,Inc.The rate...

Question 15

The return on the market portfolio is currently 13%.Battmobile Corporation stockholders require a rate of return of 21%,and the stock has a beta of 3.5.According to CAPM,determine the risk-free rate.
A)7%
B)14.7%
C)9.8%
D)24.2%

Accepted Answer

According to the CAPM formula: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: 21% = Risk-Free Rate + 3.5 * (13% - Risk-Free Rate). Solving for the Risk-Free Rate gives 9.8%.

Question 16

Amalgamated Aluminum stock has a beta of 1.2.Today's market risk premium is 13%.Amalgamated Aluminum stockholders require a rate of return of 22%.What is the present risk-free rate?
A)6.40%
B)22.00%
C)4.60%
D)15.60%

Accepted Answer

The correct answer is A because the present risk-free rate is calculated as the required rate of return minus the beta times the market risk premium. In this case, the required rate of return is 22%, the beta is 1.2, and the market risk premium is 13%. So, the present risk-free rate is 22% - (1.2 * 13%) = 6.40%.

Question 17

Use the following information to answer the following question(s).
 
-The market risk premium is:
A)2%.
B)4%.
C)6%.
D)8%.

Accepted Answer

The answer of Use the following information to answer the...

Question 18

Which of the following statements is true?
A)An average stock has a beta of 1.0.
B)A stock having a beta of greater than 1.0 is a higher-than-average-risk stock.
C)A stock having a beta of less than 1.0 is a lower-than-average-risk stock.
D)All of the above.
E)None of the above.

Accepted Answer

A) An average stock has a beta of 1.0, meaning that its price movements are similar to that of the overall market.
B) A stock with a beta greater than 1.0 is considered riskier than the market as a whole, as it is expected to have greater price fluctuations.
C) A stock with a beta less than 1.0 is considered less risky than the market as a whole, as it is expected to have smaller price fluctuations.
Therefore, all of the statements are true.

Question 19

Marjen stock has a required return of 20%.The expected market return is 15%,and the beta of Marjen's stock is 1.5.Calculate the risk-free rate.
A)4%
B)5%
C)6%
D)7%

Accepted Answer

Using the Capital Asset Pricing Model (CAPM):
Required Return = Risk-free Rate + Beta*(Market Return - Risk-free Rate)
20% = Rf + 1.5*(15% - Rf)
20% = 1.5*15% - 0.5*Rf
Rf = (1.5*15% - 20%)/-0.5
Rf = 5%. 
Therefore, the risk-free rate is 5%, which is option B.

Question 20

Hefty stock has a beta of 1.2.If the risk-free rate is 7% and the market risk premium is 6.5%,what is the required rate of return on Hefty?
A)14.8%
B)14.4%
C)12.4%
D)13.5%

Accepted Answer

The required rate of return on Hefty can be calculated using the Capital Asset Pricing Model (CAPM):

Required rate of return = risk-free rate + beta x (market risk premium)

= 7% + 1.2 x 6.5%

= 7% + 7.8%

= 14.8%

Therefore, the best choice is A) 14.8%.

Quiz 8: Risk and Return-Capital Market Theory

The rate of return on the S&P 500 is 16.2%.Epsilon has a beta of 1.85.If the T-bond rate is 5.9%,what should investors expect as a rate of return on Epsilon's stock?

The required rate of return for Firm A is:

U.S.Treasury bonds currently yield 6%.Consolidated Industries stock has a beta of 1.5.The rate of return on the S&P 500 is presently 18%.What is the rate of return that Consolidated Industries stockholders require?

The market risk premium is measured by:

You are going to invest all of your funds in one of three projects with the following distribution of possible returns: Project 3 Standard Deviation 12% If you are a risk-averse investor,which one should you choose?

Bell Weather,Inc.has a beta of 1.25.The return on the market portfolio is 12.5%,and the risk-free rate is 5%.According to CAPM,what is the required return on this stock?

The rate on six-month T-bills is currently 5%.Andvark Company stock has a beta of 1.69 and a required rate of return of 15.4%.According to CAPM,determine the return on the market portfolio.

You are thinking about purchasing 1,000 shares of stock in the following firms: If you purchase the number of shares specified,then the beta of your portfolio will be:

If investors expected inflation to increase in the future,what would happen to the security market line (SML) ?

What would happen if investors became more risk averse?

Use the following information to answer the following question(s) . -Firm A's risk premium is:

Use the following information to answer the following question(s) . -Firm B's risk premium is:

The risk-free rate is currently 6.5%.Acid Battery Company stockholders require a rate of return of 27.5%,and the stock has a beta of 2.1.What is the current market risk premium?

Calculate the current beta for Mercury,Inc.The rate on 30-year U.S.Treasury bonds is currently 8%.The market risk premium is 5%.Mercury returned 18% to its stockholders in the latest year.

The return on the market portfolio is currently 13%.Battmobile Corporation stockholders require a rate of return of 21%,and the stock has a beta of 3.5.According to CAPM,determine the risk-free rate.

Amalgamated Aluminum stock has a beta of 1.2.Today's market risk premium is 13%.Amalgamated Aluminum stockholders require a rate of return of 22%.What is the present risk-free rate?

Use the following information to answer the following question(s) . -The market risk premium is:

Which of the following statements is true?

Marjen stock has a required return of 20%.The expected market return is 15%,and the beta of Marjen's stock is 1.5.Calculate the risk-free rate.

Hefty stock has a beta of 1.2.If the risk-free rate is 7% and the market risk premium is 6.5%,what is the required rate of return on Hefty?