You own a portfolio with the following expected returns given the various states of the economy.What is the overall portfolio expected return? \[\begin{array} { l c c } \begin{array} { l } \text { State of } \\ \underline{\text { Economy }} \end{array} & \begin{array} { l } \text { Probability of } \\ \underline{\text { State of Economy }} \end{array} & \begin{array} { c } \text { Rate of Return } \\ \underline{\text { if State Occurs }} \end{array} \\ \text { Boom } & 15 \% & 18 \% \\ \text { Normal } & 60 \% & 11 \% \\ \text { Recession } & 25 \% & - 10 \% \end{array}\]

A) 6.3% B) 6.8% C) 7.6% D) 10.0% E) 10.8% A) 6.3% B) 6.8% C) 7.6% D) 10.0% E) 10.8%

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%? \[\begin{array} { c r c } \underline{\text { Stock }} & \underline{ \text { Beta }} & \underline{\text { Expected Return }} \\ \text { A } & .85 & 9.2 \% \\ \text { B } & 1.08 & 11.8 \% \\ \text { C } & 1.69 & 15.3 \% \\ \text { D } & .71 & 7.8 \% \\ \text { E } & 1.45 & 12.3 \% \end{array}\]

A) A B) B C) C D) D E) E A) A B) B C) C D) D E) E

GenLabs has been a hot stock the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows: $\begin{array} { l l l } \underline{\text { State of Economy }} & \underline{\text { Probability }} & \underline{ \text { GenLabs Returns } }\\ \text { Depression } & . \mathbf { 0 5 } & \mathbf { - 5 0 \% } \\ \text { Recession } & .10 & \mathbf { - 1 5 \% } \\ \text { Mild Slowdown } & .20 & \mathbf { 5 \% } \\ \text { Normal } & .30 & \mathbf { 1 5 \% } \\ \text { Broad Expansion } & .20 & \mathbf { 2 5 } \% \\ \text { Strong Expansion } & .15 & \mathbf { 4 0 \% } \end{array}$ -The variance of GenLabs returns is:

A) .0207 B) .0428 C) .0643 D) .0733 E) None of the above. A) .0207 B) .0428 C) .0643 D) .0733 E) None of the above.

What is the portfolio variance if 30% is invested in stock S and 70% is invested in stock T? \[\begin{array} { l c c c c } \text { State of } & \text { Probability of } & { \text { Returns if State Occurs } } \\ \text { Economy } & \text { State of Economy } & \text { Stock S } & \text { Stock T } \\ \text { Boom } & 40 \% & 12 \% & 20 \% \\ \text { Normal } & 60 \% & 6 \% & 4 \% \end{array}\]

A) .002220 B) .004056 C) .006224 D) .008080 E) .098000 A) .002220 B) .004056 C) .006224 D) .008080 E) .098000

What is the expected return on this portfolio? \[\begin{array} { c c c c } \underline{\text { Stock } }& \begin{array} { l } \text { Expected } \\ \underline{\text { Return } } \end{array} & \begin{array} { l } \text { Number } \\ \underline{\text { of Shares }} \end{array} & \begin{array} { l } \text { Stock } \\ \underline{\text { Price }} \end{array} \\ \text { A } & \mathbf { 8 \% } & \mathbf { 5 2 0 } & \$ 25 \\ \text { B } & 15 \% & \mathbf { 3 0 0 } & \$ 48 \\ \text { C } & 6 \% & \mathbf { 2 5 0 } & \$ 26 \end{array}\]

A) 9.50% B) 9.67% C) 9.78% D) 10.59% E) 10.87% A) 9.50% B) 9.67% C) 9.78% D) 10.59% E) 10.87%

Exam 11: Return and Risk: the Capital Asset Pricing Model

You own a portfolio with the following expected returns given the various states of the economy.What is the overall portfolio expected return? State of Probability of Rate of Return Boom 15\% 18\% Normal 60\% 11\% Recession 25\% -10\%

(Multiple Choice)

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Question 61

Standard deviation measures _____ risk.

(Multiple Choice)

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Question 62

The risk-free rate of return is 4% and the market risk premium is 8%.What is the expected rate of return on a stock with a beta of 1.28?

(Multiple Choice)

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Question 63

The market has an expected rate of return of 9.8%.The long-term government bond is expected to yield 4.5% and the U.S.Treasury bill is expected to yield 3.4%.The inflation rate is 3.1%.What is the market risk premium?

(Multiple Choice)

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Question 64

Stock A has an expected return of 20%, and stock B has an expected return of 4%.However, the risk of stock A as measured by its variance is 3 times that of stock B.If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?

(Multiple Choice)

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Question 65

You would like to combine a risky stock with a beta of 1.5 with U.S.Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in Treasury bills?

(Multiple Choice)

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Question 66

When a security is added to a portfolio the appropriate return and risk contributions are:

(Multiple Choice)

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Question 67

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%? A .85 9.2\% B 1.08 11.8\% C 1.69 15.3\% D .71 7.8\% E 1.45 12.3\%

(Multiple Choice)

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Question 68

Risk that affects at most a small number of assets is called _____ risk.

(Multiple Choice)

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Question 69

A portfolio contains two assets.The first asset comprises 40% of the portfolio and has a beta of 1.2.The other asset has a beta of 1.5.The portfolio beta is:

(Multiple Choice)

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Question 70

You are considering purchasing stock S.This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period.The overall expected rate of return on this stock will:

(Multiple Choice)

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Question 71

GenLabs has been a hot stock the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows: Depression . Recession .10 Mild Slowdown .20 Normal .30 Broad Expansion .20 \% Strong Expansion .15 -The variance of GenLabs returns is:

(Multiple Choice)

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Question 72

The market risk premium is computed by:

(Multiple Choice)

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Question 73

Which one of the following is an example of a nondiversifiable risk?

(Multiple Choice)

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Question 74

Your portfolio is comprised of 30% of stock X, 50% of stock Y, and 20% of stock Z.Stock X has a beta of .64, stock Y has a beta of 1.48, and stock Z has a beta of 1.04.What is the beta of your portfolio?

(Multiple Choice)

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Question 75

For a highly diversified equally weighted portfolio with a large number of securities, the portfolio variance is:

(Multiple Choice)

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Question 76

What is the portfolio variance if 30% is invested in stock S and 70% is invested in stock T? State of Probability of Returns if State Occurs Economy State of Economy Stock S Stock T Boom 40\% 12\% 20\% Normal 60\% 6\% 4\%

(Multiple Choice)

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Question 77

The linear relation between an asset's expected return and its beta coefficient is the:

(Multiple Choice)

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Question 78

What is the expected return on this portfolio? Expected Number Stock A \ 25 B 15\% \ 48 C 6\% \ 26

(Multiple Choice)

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Question 79

You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy.There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession.What is your expected rate of return on this stock?

(Multiple Choice)

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Question 80

Exam 11: Return and Risk: the Capital Asset Pricing Model

You own a portfolio with the following expected returns given the various states of the economy.What is the overall portfolio expected return? State of Probability of Rate of Return Boom 15\% 18\% Normal 60\% 11\% Recession 25\% -10\%

Standard deviation measures _____ risk.

The risk-free rate of return is 4% and the market risk premium is 8%.What is the expected rate of return on a stock with a beta of 1.28?

The market has an expected rate of return of 9.8%.The long-term government bond is expected to yield 4.5% and the U.S.Treasury bill is expected to yield 3.4%.The inflation rate is 3.1%.What is the market risk premium?

Stock A has an expected return of 20%, and stock B has an expected return of 4%.However, the risk of stock A as measured by its variance is 3 times that of stock B.If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?

You would like to combine a risky stock with a beta of 1.5 with U.S.Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in Treasury bills?

When a security is added to a portfolio the appropriate return and risk contributions are:

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%? A .85 9.2\% B 1.08 11.8\% C 1.69 15.3\% D .71 7.8\% E 1.45 12.3\%

Risk that affects at most a small number of assets is called _____ risk.

A portfolio contains two assets.The first asset comprises 40% of the portfolio and has a beta of 1.2.The other asset has a beta of 1.5.The portfolio beta is:

You are considering purchasing stock S.This stock has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period.The overall expected rate of return on this stock will:

GenLabs has been a hot stock the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows: Depression . Recession .10 Mild Slowdown .20 Normal .30 Broad Expansion .20 \% Strong Expansion .15 -The variance of GenLabs returns is:

The market risk premium is computed by:

Which one of the following is an example of a nondiversifiable risk?

Your portfolio is comprised of 30% of stock X, 50% of stock Y, and 20% of stock Z.Stock X has a beta of .64, stock Y has a beta of 1.48, and stock Z has a beta of 1.04.What is the beta of your portfolio?

For a highly diversified equally weighted portfolio with a large number of securities, the portfolio variance is:

What is the portfolio variance if 30% is invested in stock S and 70% is invested in stock T? State of Probability of Returns if State Occurs Economy State of Economy Stock S Stock T Boom 40\% 12\% 20\% Normal 60\% 6\% 4\%

The linear relation between an asset's expected return and its beta coefficient is the:

What is the expected return on this portfolio? Expected Number Stock A \ 25 B 15\% \ 48 C 6\% \ 26

You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy.There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession.What is your expected rate of return on this stock?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, Cost of Capital, and Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Securities to the Public

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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