Exam 9: Analysis of Risk and Return

In order to completely eliminate the risk (i.e., a portfolio standard deviation of zero) in a two-asset portfolio, the correlation coefficient between the securities must be ____.

The ____ theory of the yield curve takes into account the supply and demand interactions between buyers and lenders of securities.

Richtex Brick has a current dividend of $1.70, and the market value of its common stock is $28. The expected market return is 13%, and the risk-free rate is 9%. If Richtex stock is half as volatile as the market, and the market is in equilibrium, what rate of growth is expected for Richtex's dividends assuming a constant growth valuation model is appropriate for Richtex?

According to the ____, long-term interest rates are a function of expected short-term interest rates.

Security A's expected return is 10%, while the expected return of B is 14%. The standard deviation of A's returns is 5%, and it is 9% for B. An investor plans to invest equal amounts in A and B. Which of the following statements is true about this portfolio consisting of stock A and stock B?

Dana has a portfolio of 8 securities, each with a market value of $5,000. The current beta of the portfolio is 1.28, and the beta of the riskiest security is 1.75. Dana wishes to reduce her portfolio beta to 1.15 by selling the riskiest security and replacing it with another security with a lower beta. What must be the beta of the replacement security?

The most relevant risk that must be considered for any widely traded individual security is its ____.

Kermit Industries' current common stock dividend is $1.35 per share, and the dividend is expected to grow at 6% per year into the foreseeable future. Currently the risk-free rate is 4.5% and the estimated market risk premium is 8.5%. Merrill Lynch has estimated KI's beta to be 1.10. Compute the expected price for KI's common stock.

Compute the risk premium for the stock of Omega Tools if the risk-free rate is 6%, the expected market return is 12%, and Omega's stock has a beta of 0.8.

The ____ is a statistical measure of the mean or average value of the possible outcomes.

Gates Industries' current common stock dividend (year 0) is $2.50 per share and is expected to continue growing at a rate of 5% per year for the foreseeable future. Currently the risk-free rate is 7.5% and the estimated market risk premium (i.e., k_m - r_f) is 8.3%. Value Line has estimated Gates Industries' beta to be 1.10. Determine the expected price for Gates Industries, common stock.

List types of events that influence systematic (nondiversifiable) risk.

Correlation is a statistical measure of the relationship between a series of numbers representing data. Which of the following statements about correlation is (are) correct? I. Perfectly negatively correlated describes two negatively correlated stocks that have a correlation coefficient of -1. II. Perfectly positively correlated describes two positively correlated stocks that have a correlation coefficient of 0.

Assume that the rate of return on Calengry common stock over the coming year is normally distributed with an expected value of 16% and a standard deviation of 20%. What is the probability of earning a negative rate of return? (Note: Table V is required to work this problem.)

All of the following statements about risk are correct EXCEPT ____.

The risk-free rate of return is 5.51%, based on an expected inflation premium of 2.54%. The expected return on the market is 12.8%. What is the required rate of return for Envoy common stock which has a beta of 1.35?

Twin City Knitting (TCK) pays a current dividend of $2.20, and dividends are expected to grow at a rate of 7% annually in the foreseeable future. The beta of TCK is 1.2. If the risk-free rate is 9.2% and the market risk premium is 6%, at what price would you expect TCK's common stock to sell?

Christy is considering investing in the common stock of One Liberty and Heico. The following data are available for these two securities: One Liberty Heico Expected return 0.12 0.16 Standard deviation of returns 0.08 0.20 If she invests 30% of her funds in Heico and 70% in One Liberty, and if the correlation of returns between these securities is +0.65, what is the portfolio's expected return and standard deviation?

The ____ the standard deviation, the ____ the investment.

The expected value of one roll of a standard six-sided die is ____.