Exam 9: Analysis of Risk and Return

Users of the CAPM should be aware of some of the problems in its practical application. These problems include which of the following?

Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now: Price Rate of Return Probability \ 16 -20\% 0.25 \ 20 0\% 0.30 \ 24 +20\% 0.25 \ 28 +40\% 0.20 Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the standard deviation of possible rates of return on Phoenix stock (to the nearest tenth of a percent).

What kind of probability distribution shows all possible outcomes for a given event?

The maturity premium reflects a preference by many lenders for ____.

The term structure of interest rates is related to the ____ risk premium.

The security returns from multinational companies tend to have ____ systematic risk than those of domestic companies.

Given the following information on securities E and F, calculate the expected return and standard deviation of returns on a portfolio consisting of 40% invested in E and 60% invested in F. Security E Security F Expected Return 12\% 15\% Standard Deviation of Returns 10\% 20\% Correlation coefficient of returns -0.50

The possibility that actual returns will deviate from expected returns is known as ____.

Investors can obtain high returns in their investments if they ____.

Values of the ____ can range from +1.0 to -1.0.

Don has $3,000 invested in AT&T with an expected return of 11.6%; $10,000 in IBM with an expected return of 12.8%; and $6,000 in GM with an expected return of 12.2%. What is Don's expected return on his portfolio?

The ____ is an absolute measure of risk, and the ____ is a relative measure of risk.

HDTV has planned on diversifying into the VR field. As a result, HDTV's beta would rise to 1.6 from 1.2 and the expected future long-term growth rate in the firm's earnings would increase from 12% to 16%. The expected market return, k_m, is 14%; the risk-free rate, r_f, is 7%; and the current dividend, D_o, is $0.50. Should HDTV go into the VR field?

Empirical studies of the Capital Asset Pricing Model have produced ____ results.

Determine the beta of a portfolio consisting of equal investments in the following common stocks: Security Beta Apple Computer 1.15 Coca-Cola 1.05 Harley-Davidson 1.50 Homestake Mining 0.50

All of the following factors have their primary impact on unsystematic risk EXCEPT ____.

An increase in uncertainty regarding the future economic outlook has the effect of ____.

An investor who believes the economy is slowing down wishes to reduce the risk of her portfolio. She currently owns 12 securities, each with a market value of $3,000. The current beta of the portfolio is 1.21, and the beta of the riskiest security is 1.62. What will the portfolio beta be if the riskiest security is replaced with a security of equal market value but a beta of 0.80?