Exam 8: Analysis of Risk and Return

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

List types of events that influence systematic (non-diversifiable) risk.

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.)

The beta of Sanafil is 1.2. Sanafil is evaluating a merger with Matra, a firm that has a beta of 0.95. Sanafil's stock sells for $40 per share and there are 10 million shares outstanding. Matra's stock sells for $60, but there are only 2 million shares outstanding. If these two firms merge, what will be the merged firm's beta?

In the ____, the expected return on a security is equal to the risk-free rate plus a single risk premium that is equal to the product of the expected rate of return on the market portfolio less the risk-free rate times the sensitivity of the security's returns to the market return.

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

The ____ is a relative measure of variability because it measures the risk per unit of expected return.

A college student owns two securities: Apple and Coca- Cola. Apple has an expected return of 15 percent with a standard deviation of those returns being 11 percent. Coca-Cola has an expected return of 12 percent, and a standard deviation of 7 percent. The correlation of returns between Apple and Coca-Cola is 0.81. If the portfolio consist of $6,000 in Coca-Cola and $4,000 in Apple, what is the expected standard deviation of portfolio returns?

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

The term structure of interest rates is the pattern of interest rate yields for debt securities that are similar in all respects except for differences in

Which of the following statements is/are correct? I. Unsystematic risk can be eliminated through diversification. II. Unsystematic risk is the relevant portion of an asset's risk attributable to market factors that affect all firms, like inflation, political events, etc.

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

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.

All of the following are primary sources of systematic risk except

Total risk of a security can be viewed as consisting of two parts. Which of the following apply? I. verifiable risk II. non-verifiable risk

All of the following factors have their primary impact on unsystematic risk except

The primary difference between the standard deviation and the coefficient of variation as measures of risk is:

The business risk of a firm refers to the

The ability of an investor to buy and sell a company's securities quickly and without a significant loss of value is known as the

Micromatic is considering expanding into a new product area. Micromatic's current beta is 1.2 and its beta is expected to increase to 1.45 after the expansion. The long-term growth rate of the firm's earnings is expected to increase from 6.5 percent to 10 percent. Micromatic's current dividend is $1.70 per share, the current risk-free rate is 9.1 percent, and the expected market return is 12.9 percent. Should Micromatic undertake the planned expansion?