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

The rate of return on the common stock of Flowers by Flo is expected to be 15 percent in a boom economy,7 percent in a normal economy,and only 3 percent in a recessionary economy.The probabilities of these economic states are 20 percent for a boom,70 percent for a normal economy,and 10 percent for a recession.What is the variance of the returns on this stock?

A stock has an expected return of 14.21 percent.The return on the market is 11.8 percent and the risk-free rate of return is 3.2 percent.What is the beta of this stock?

The variance of Stock A is .015376,the variance of Stock B is .028561,and the covariance between the two is .0024.What is the correlation coefficient?

You have a portfolio of two risky stocks that has no diversification benefit.The lack of any diversification benefit must be due to the fact that:

The risk premium for an individual security is computed by:

Which one of the following statements is correct concerning the standard deviation of a portfolio?

A security that is fairly priced will have a return that lies _____ the security market line.

Stock Q will return 18 percent in a boom and 9 percent in a normal economy.Stock R will return 9 percent in a boom and 5 percent in a normal economy.There is a 75 percent probability the economy will be normal.What is the standard deviation of a portfolio that is invested 40 percent in stock Q and 60 percent in stock R?

A portfolio is comprised of 30 percent of stock X,55 percent of stock Y,and 15 percent of stock Z.Stock X has a beta of .87,stock Y has a beta of 1.48,and stock Z has a beta of 1.04.What is the portfolio beta?

What is the first step an investor takes when making an investment decision according to the separation principle?

The market has an expected rate of return of 12.8 percent.The long-term government bond is expected to yield 4.5 percent and the U.S.Treasury bill is expected to yield 3.4 percent.The inflation rate is 3.1 percent.What is the market risk premium?

The standard deviation of a portfolio will tend to increase when:

KNF stock is quite cyclical.In a boom economy,the stock is expected to return 30 percent in comparison to 12 percent in a normal economy and a negative 17 percent in a recessionary period.The probability of a recession is 25%.There is a 15% chance of a boom economy.What is the standard deviation of the returns this stock?

You want your portfolio beta to be 1.3.Currently,the portfolio consists of $100 invested in stock A with a beta of 1.5 and $300 in stock B with a beta of .8.You have another $400 to invest and want to divide it between an asset with a beta of 1.7 and a risk-free asset.How much should you invest in the risk-free asset?

The stock of Martin Industries has a beta of 1.02.The risk-free rate of return is 3.7 percent and the market risk premium is 6.85 percent.What is the expected rate of return on Martin Industries stock?

Well-diversified portfolios have negligible:

Stock A has a beta of .92 and an expected return of 9.04 percent.Stock B has a beta of 1.04 and an expected return of 9.51 percent.Stock C has a beta of 1.36 and an expected return of 11.68 percent.The risk-free rate is 3 percent and the market risk premium is 6.5 percent.Which of these stocks are underpriced?

A portfolio is expected to return 15 percent in a booming economy,12 percent in a normal economy,and lose 9 percent if the economy falls into a recession.The probability of a boom is 25 percent while the probability of a recession is 15 percent.What is the overall portfolio expected return?

The intercept point of the security market line is the rate of return that corresponds to:

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