Fin HW 5

What is the beta of the following portfolio? Stock Amount Invested Security Beta A $ 14,200 1.39 B $ 23,900 .98 C $ 8,400 1.52

1.20

The common stock of Jensen Shipping has an expected return of 16.2 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?

1.66

The common stock of Air Express had annual returns of 11.7 percent, 8.8 percent, 16.7 percent, and −7.9 percent over the last four years, respectively. What is the standard deviation of these returns?

10.66 percent

What is the expected return of an equally weighted portfolio comprised of the following three stocks? 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

What is the expected return on a portfolio comprised of $9,750 of Stock X and $4,520 of Stock Y if the economy enjoys a boom period? State of Economy Probability of State of Economy Rate of Return if State Occurs Stock X Stock Y Boom .25 .108 .156 Normal .65 .087 .097 Recession .10 .024 − .069

12.32 percent

Consider the following information on three stocks: A portfolio is invested 45 percent each in Stock A and Stock B and 10 percent in Stock C. What is the expected risk premium on the portfolio if the expected T-bill rate is 4.1 percent?

12.74 percent

Suppose a stock had an initial price of $73 per share, paid a dividend of $1.42 per share during the year, and had an ending share price of $81. What was the capital gains yield?

12.90 percent

What is the expected return on this portfolio? Stock Expected Return Number of Shares Price per Share A .11 200 $ 18.60 B .06 400 $ 12.85 C .17 300 $ 43.90

13.42 percent

You own 850 shares of Western Feed Mills stock valued at $53.15 per share. What is the dividend yield if your total annual dividend income is $1,256?

2.78 percent

You have $1,000,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 18 percent and Stock Y with an expected return of 10 percent. Your goal is to create a portfolio with an expected return of 13 percent. All money must be invested. How much will you invest in Stock X?

375,000

Today, you sold 540 shares of stock and realized a total return of 6.3 percent. You purchased the shares one year ago at a price of $24 a share and have received a total of $117 in dividends. What is your capital gains yield on this investment?

5.40 percent

Over the past four years a stock had returns of 10%, -8%, 23%, and 0%, respectively. What was the geometric average return on this stock?

5.63%

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 10 percent, 13 percent, 19 percent, −4 percent, and 15 percent. Suppose the T-bill rate was 3.1 percent. Based on this information, what was the risk premium?

7.5 percent

What is the expected return and standard deviation for the following stock? State of Economy Probability of State of Economy Rate of Return if State Occurs Boom .06 −.06 Normal .74 .07 Recession .20 .18

8.42 percent; 5.74 percent

A stock has a beta of 1.50 and an expected return of 15.4 percent. A risk-free asset currently earns 3.7 percent. The beta of a portfolio comprised of these two assets is .90. What percentage of the portfolio is invested in the stock?

80%

What is the variance of the returns on a portfolio that is invested 40 percent in Stock S and 60 percent in Stock T? State of Economy Probability of State of Economy Rate of Return if State Occurs Stock S Stock T Boom .06 .22 .18 Normal .92 .15 .14 Bust .02 −.26 −.09

A. 0.00073

Which one of the following statements best defines the efficient market hypothesis?

All securities in an efficient market are zero net present value investments.

Which of the following statements are true based on the historical record for 1926-2016?

Bonds are generally a safer, or less risky, investment than are stocks.

Which of the following are examples of diversifiable risk? I. An earthquake damages an entire town II. The federal government imposes a $100 fee on all business entities III. Employment taxes increase nationally IV. All toymakers are required to improve their safety standards

I and IV only

Which of the following statements are correct concerning diversifiable risks? I. Diversifiable risks can be essentially eliminated by investing in 30 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk.

I, II 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 correctly describes the dividend yield?

Next year's annual dividend divided by today's stock price

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

Portfolio weight

Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return?

Risk premium

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

Stock B

The rate of return on which type of security is normally used as the risk-free rate of return?

Treasury bills

A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12 percent. What type of risk does this news flash best represent?

Unsystematic

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

Weak

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.

If a stock portfolio is well diversified, then the portfolio variance:

may be less than the variance of the least risky stock in the portfolio.

Total risk is measured by ________ and systematic risk is measured by ________.

standard deviation; beta

Inside information has the least value when financial markets are:

strong form efficient.

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information.

A stock had returns of 14 percent, 13 percent, −10 percent, and 7 percent for the past four years. What is the 95 percent probability range of returns for this stock?

−16.2 percent to 28.2 percent