Suppose you observe the following situation: \[\begin{array} { l c c } { \text { State of } } & \text { Probability of } & \text { Rate of Return } \\ \text { Econony } & \text { State of Economy } & \text { if State Occurs } \\ & &\begin{array}{ll}\text { Stock A } & \text { Stock B }\end{array}\\ \text { Boom } & .21& \begin{array}{ll}.189& \quad \quad .097\end{array} \\ \text { Normal} & .74& \begin{array}{ll}.158& \quad \quad .076\end{array} \\ \text {Recession } & .05 & \begin{array}{ll}-.246 & \quad \quad.42\end{array} \\ \end{array}\] Assume the capital asset pricing model holds and Stock A's beta is greater than Stock B's beta by .84. What is the expected market risk premium?

A) 8.28 percent B) 9.05 percent C) 10.06 percent D) 7.94 percent E) 7.81 percent A) 8.28 percent B) 9.05 percent C) 10.06 percent D) 7.94 percent E) 7.81 percent

Your portfolio is invested 25 percent each in Stocks A and C, and 50 percent in Stock B. What is the standard deviation of your portfolio given the following information? \[\begin{array} { l c c c r } \text { State of } &\text { Probability of }& { \text { Rate of Return } } \\ \text { Economy } & \text { State of Economy } & { \text { if State Occurs } } \\ & & \begin{array}{ll} \text { Stock A } & \text { Stock B } & \text { Stock C } \end{array} \\ \text { Boom } &.07 &\begin{array}{ccc} .28\quad\quad & .14 \quad\quad& .11\quad\quad \end{array} \\ \text { Good } & .55 &\begin{array}{ccc} .19\quad\quad & .12\quad\quad & .05 \quad\quad\end{array} \\ \text { Poor } & .36& \begin{array}{ccc} -.21\quad\quad & .07 \quad\quad& .06\quad\quad \end{array}\\ \text { Bust } & .02 & \begin{array}{ccc} -.65\quad\quad & 03 \quad\quad& -.02 \quad \end{array}\\ \end{array}\]

A) 6.52 percent B) 9.64 percent C) 12.72 percent D) 10.89 percent E) 7.39 percent A) 6.52 percent B) 9.64 percent C) 12.72 percent D) 10.89 percent E) 7.39 percent

You own the following portfolio of stocks. What is the portfolio weight of Stock C? $\begin{array}{cccr} &\text { Number }&\text { Price }\\ \text { Stock } & \text { of Shares } & {\text { per Share }} \\ \text { A } & 650 & \$ 15.82 \\ \text { B } & 320 & \$ 11.09 \\ \text { C } & 400 & \$ 39.80 \\ \text { D } & 100 & \$ 760 \end{array}$

A) 52.18 percent B) 53.86 percent C) 53.41 percent D) 51.09 percent E) 52.65 percent A) 52.18 percent B) 53.86 percent C) 53.41 percent D) 51.09 percent E) 52.65 percent

What is the beta of the following portfolio? \[\begin{array} { c l c } & \text { Amount } & \text { Security } \\ \text { Stock } & \text { Invested } & \text { Beta } \\ \text { A } & \$ 14,200 & 1.39 \\ \text { B } & \$ 23,900 & .98 \\ \text { C } & \$ 8,400 & 1.52 \end{array}\]

A) 1.12 B) 1.01 C) 1.05 D) 1.20 E) 1.23 A) 1.12 B) 1.01 C) 1.05 D) 1.20 E) 1.23

Exam 13: Return, Risk, and the Security Market Line

The market has an expected rate of return of 12.6 percent. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.7 percent. The inflation rate is 3.2 percent. What is the market risk premium?

Free

(Multiple Choice)

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Question 1

Correct Answer:

Verified

B

The rate of return on the common stock of Lancaster Woolens is expected to be 18 percent in a boom economy, 8 percent in a normal economy, and only 2 percent in a recessionary economy. The probabilities of these economic states are 12 percent for a boom and 10 percent for a recession. What is the variance of the returns on this common stock?

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(Multiple Choice)

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Question 2

Correct Answer:

Verified

C

Which one of the following is most directly affected by the level of systematic risk in a security?

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(Multiple Choice)

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Question 3

Correct Answer:

Verified

C

Suppose you observe the following situation: State of Probability of Rate of Return Econony State of Economy if State Occurs Stock A Stock B Boom .21 .189 .097 Normal .74 .158 .076 Recession .05 -.246 .42 Assume the capital asset pricing model holds and Stock A's beta is greater than Stock B's beta by .84. What is the expected market risk premium?

(Multiple Choice)

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Question 4

The ________ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

(Multiple Choice)

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Question 5

The expected return on a portfolio considers which of the following factors? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy

(Multiple Choice)

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Question 6

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?

(Multiple Choice)

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Question 7

A stock has a beta of 1.17 and an expected return of 15.4 percent. A risk-free asset currently earns 4.7 percent. The beta of a portfolio comprised of these two assets is .76. What percentage of the portfolio is invested in the stock?

(Multiple Choice)

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Question 8

Which one of the following is the best example of a diversifiable risk?

(Multiple Choice)

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Question 9

Which one of the following statements related to risk is correct?

(Multiple Choice)

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Question 10

Your portfolio is invested 25 percent each in Stocks A and C, and 50 percent in Stock B. What is the standard deviation of your portfolio given the following information? State of Probability of Rate of Return Economy State of Economy if State Occurs Stock A Stock B Stock C Boom .07 .28 .14 .11 Good .55 .19 .12 .05 Poor .36 -.21 .07 .06 Bust .02 -.65 03 -.02

(Multiple Choice)

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Question 11

You own the following portfolio of stocks. What is the portfolio weight of Stock C? Number Price Stock of Shares per Share A 650 \ 15.82 B 320 \ 11.09 C 400 \ 39.80 D 100 \ 760

(Multiple Choice)

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Question 12

Which one of the following statements is correct concerning unsystematic risk?

(Multiple Choice)

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Question 13

If the economy is normal, Charleston Freight stock is expected to return 14.3 percent. If the economy falls into a recession, the stock's return is projected at a negative 8.7 percent. The probability of a normal economy is 80 percent. What is the variance of the returns on this stock?

(Multiple Choice)

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Question 14

Which one of the following risks is irrelevant to a well-diversified investor?

(Multiple Choice)

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Question 15

Suzie owns five different bonds and twelve different stocks. Which one of the following terms most applies to her investments?

(Multiple Choice)

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Question 16

What is the beta of the following portfolio? Amount Security Stock Invested Beta A \ 14,200 1.39 B \ 23,900 .98 C \ 8,400 1.52

(Multiple Choice)

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Question 17

Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:

(Multiple Choice)

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Question 18

Which one of the following should earn the highest risk premium based on CAPM?

(Multiple Choice)

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Question 19

Suppose the common stock of United Industries has a beta of 1.28 and an expected return of 15.47 percent. The risk-free rate of return is 3.7 percent while the inflation rate is 4.2 percent. What is the expected market risk premium?

(Multiple Choice)

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Question 20

Exam 13: Return, Risk, and the Security Market Line

The market has an expected rate of return of 12.6 percent. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.7 percent. The inflation rate is 3.2 percent. What is the market risk premium?

Which one of the following is most directly affected by the level of systematic risk in a security?

The ________ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?

A stock has a beta of 1.17 and an expected return of 15.4 percent. A risk-free asset currently earns 4.7 percent. The beta of a portfolio comprised of these two assets is .76. What percentage of the portfolio is invested in the stock?

Which one of the following is the best example of a diversifiable risk?

Which one of the following statements related to risk is correct?

You own the following portfolio of stocks. What is the portfolio weight of Stock C? Number Price Stock of Shares per Share A 650 \ 15.82 B 320 \ 11.09 C 400 \ 39.80 D 100 \ 760

Which one of the following statements is correct concerning unsystematic risk?

If the economy is normal, Charleston Freight stock is expected to return 14.3 percent. If the economy falls into a recession, the stock's return is projected at a negative 8.7 percent. The probability of a normal economy is 80 percent. What is the variance of the returns on this stock?

Which one of the following risks is irrelevant to a well-diversified investor?

Suzie owns five different bonds and twelve different stocks. Which one of the following terms most applies to her investments?

What is the beta of the following portfolio? Amount Security Stock Invested Beta A \ 14,200 1.39 B \ 23,900 .98 C \ 8,400 1.52

Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:

Which one of the following should earn the highest risk premium based on CAPM?

Suppose the common stock of United Industries has a beta of 1.28 and an expected return of 15.47 percent. The risk-free rate of return is 3.7 percent while the inflation rate is 4.2 percent. What is the expected market risk premium?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

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