FIN - 300 Final Exam UKY - Ch. 9

The rate of return on the common stock of Lancaster Woolens is expected to be 18 percent in a boom economy, 8 percent in a normal economy, and only 2 percent in a recessionary economy. The probabilities of these economic states are 12 percent for a boom and 10 percent for a recession. What is the variance of the returns on this common stock?

.001524

If the economy is normal, Charleston Freight stock is expected to return 14.3 percent. If the economy falls into a recession, the stock's return is projected at a negative 8.7 percent. The probability of a normal economy is 80 percent. What is the variance of the returns on this stock?

.008464

You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.46 and the total portfolio is equally as risky as the market. What is the beta of the second stock?

1.54

The market has an expected rate of return of 12.6 percent. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.7 percent. The inflation rate is 3.2 percent. What is the market risk premium?

9.9 percent

Which one of the following is the best example of a diversifiable risk?

A firm's sales decrease

Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.

I and III only

Which one of the following is an example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously

Which one of the following is a risk that applies to most securities?

Systematic

You have $21,600 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14.3 percent and Stock Y with an expected return of 8.1 percent. Your goal is to create a portfolio with an expected return of 12.5 percent. All money must be invested. How much will you invest in Stock X?

$15,329

You want your portfolio beta to be .95. Currently, your portfolio consists of $4,000 invested in Stock A with a beta of 1.26 and $7,000 in Stock B with a beta of .94. You have another $8,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in the risk-free asset?

$4,305

The common stock of Jensen Shipping has an expected return of 15.4 percent. The return on the market is 11.2 percent, the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6 percent. What is the beta of this stock?

1.55

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 if State Occurs Stock A Stock B Normal: .75 | .13 | .16 Recession: .25 | −.05 | −.21

1.75 percent

Suppose you observe the following situation: Security Beta Expected Return A 1.16 .1137 B .92 .0984 Assume these securities are correctly priced. Based on the CAPM, what is the return on the market?

10.35 percent

State of Economy | Probability of State of Economy | Rate of Return if State Occurs Stock A | Stock B | Stock C Boom .25 .19 .13 .07 Normal .72 .15 | .05 | .13 Bust .03 −.29 | −.14 | .22

10.96 percent

Thayer Farms stock has a beta of 1.38. The risk-free rate of return is 3.87 percent, the inflation rate is 3.93 percent, and the market risk premium is 9.03 percent. What is the expected rate of return on this stock?

16.33 percent

What is the expected return on a portfolio that is invested 22 percent in Stock A, 36 percent in Stock B, and the remainder in Stock C? State of Economy | Probability of State of Economy | Rate of Return if State Occurs Stock A | Stock B | Stock C Boom .05 | .18 | .11 | .13 Normal .92 | .09 | .08 | .06 Bust .03 | −.07 | .05 | −.14

7.29 percent

Jerilu Markets has a beta of 1.09. The risk-free rate of return is 3.18 percent and the market rate of return is 11.27 percent. What is the risk premium on this stock?

8.82 percent

Which one of the following stocks is correctly priced if the risk-free rate of return is 2.84 percent and the market rate of return is 10.63 percent? Stock Beta Expected Return A .93 .0892 B 1.18 .1203 C 1.47 .1540 D 1.02 .1006 E 1.26 .1187

B

Which one of the following is an example of unsystematic risk?

National decrease in consumer spending on entertainment

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?

Reward-to-risk ratio

The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. Which one of the following statements is true given this information?

The actual expected stock return indicates the stock is currently overpriced.

Which one of the following statements related to unexpected returns is correct?

Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

Which one of the following risks is irrelevant to a well-diversified investor?

Unsystematic risk

A stock with an actual return that lies above the security market line has:

a higher return than expected for the level of risk assumed.

Unsystematic risk:

can be effectively eliminated by portfolio diversification.

The standard deviation of a portfolio:

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

Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:

cost of capital.

The reward-to-risk ratio for Stock A is less than the reward-to-risk ratio of Stock B. Stock A has a beta of .82 and Stock B has a beta of 1.29. This information implies that:

either Stock A is overpriced or Stock B is underpriced or both.

Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock:

is underpriced.

The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.

risk premium

The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:

risk premium.

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

the risk-free rate.