Chapter 13 Finance

Appalachian company's beta is 1.09. The risk-free rate of return is 2.75 percent and the market rate of return is 9.60 percent. What tis the risk premium on this stock?

1.09(0.096-0.0275) = 7.47 percent

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?

Beta

Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?

Capital asset pricing model

What is the standard deviation of the returns on a stock given the following information. State of Economy/ Probability if State of Econ? /ROR if State occurs Boom / 30% / 15% Normal / 65% / 12% Recession / 5% / 6%

E(R) = (0.30 x 0.15) + (0.65 x 0.12) + (0.05 x 0.06) = 0.126 Var = 0.30 (0.15-0.126)^2 +0.65(0.12-0.126)^2 + 0.05(0.06-0.126)^2 = 0.000414

You are comparing stock A to Stock B. Given the following information, what is the difference in the expected returns of these two securities? State of Economy/ Probability of State of Economy/ Rate of return Stock A/ Stock B Normal 45% 12% / 17% Recession 55% -22% / -31%

E(R)a = (0.45 x 0.12) + (0.55 x -0.22) = -6.70% E(R)b = (.45 x 0.17) + (0.55 x -0.31) = -9.40% Difference = -6.70 - (-9.40) = 2.70%

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?

Expected Return

What is the expected return on this portfolio? Stock/Expected Return/ Number of shares/ Stock price A / 12%/300/$28 B/ 7%/ 500/ $10 C /15%/ 600/ $19

Value = (300 x 28) + (500 x 10) + (600 x 19) =$24,800 E(R) = (8,400/24,800 x 0.12) + (5,000/24,800 x0.07) + (11,400/24,800 x 0.15) = 12.37 Percent

What is the beta of the following portfolio? Stock/Amount Invested/Security Beta A/$6,700/1.41 B/$3,000/1.23 C/$8500/ 0.79

Value(Portfolio) = 6.700 + 8,500 + 3,000 = 18,200 Beta Portfolio = (6,700/18,200 x 1.41) + (3,000/18,200 x 1,23) + ( 8,500/18,200 x 0.79) = 1.09

The standard deviation of a portfolio:

can be less than the standard deviation of the least risky security in the portfolio.

Standard Deviation measures what type of risk?

total