Exam 10: Estimating Risk and Return

Risk Premiums You own $14,000 of Diner's Corp stock that has a beta of 2.1. You also own $14,000 of Comm Corp (beta = 1.3) and $12,000 of Airlines Corp (beta = 0.6). Assume that the market return will be 15 percent and the risk-free rate is 6.5 percent. What is the total risk premium of the portfolio?

Stock Market Bubble If the NASDAQ stock market bubble peaked at 3,750, and two and a half years later it had fallen to 2,200, what would be the percentage decline?

Required Return Using the information in the table, compute the required return for each company using both CAPM and the constant growth model. Compare and discuss the results. Assume that the market portfolio will earn 11 percent and the risk-free rate is 2.5 percent.

You have a portfolio consisting of 20% Boeing (beta = 1.3) and 40% Hewlett-Packard (beta = 1.6) and 40% McDonald's stock (beta = 0.7). How much market risk does the portfolio have?

You hold the positions in the table below. What is the beta of your portfolio? If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent, what is the required return of the portfolio?

How might a large market risk premium impact people's desire to buy stocks?

The study of the cognitive processes and biases associated with making financial and economic decisions is known as _______________.

Similar to the Capital Market Line except risk is characterized by beta instead of standard deviation.

In theory, this is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate.

You own $9,000 of Olympic Steel stock that has a beta of 2.5. You also own $7,000 of Rent-a-Center (beta = 1.2) and $8,000 of Lincoln Educational (beta = 0.4). What is the beta of your portfolio?

Shares of stock issued to employees that have limitations on when they can be sold.

Expected Return and Risk Compute the standard deviation given these four economic states, their likelihoods, and the potential returns:

Under/Over-Valued Stock A manager believes his firm will earn a 12 percent return next year. His firm has a beta of 1.2, the expected return on the market is 8 percent, and the risk-free rate is 3 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.

Expected Return and Risk Compute the standard deviation given these four economic states, their likelihoods, and the potential returns:

Under/Over-Valued Stock A manager believes his firm will earn a 16 percent return next year. His firm has a beta of 1.5, the expected return on the market is 14 percent, and the risk-free rate is 4 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.

Compute the expected return and standard deviation given these four economic states, their likelihoods, and the potential returns:

Describe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier.

Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10 percent and the risk-free rate is 4 percent, what is Hastings' required return?

Which of the following statements is correct?

This is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium.