Business Finance Ch 11 Quiz - Connect

Suppose you observe the following situation: State ofEconomyProbabilityof State Return if State Occurs Stock AStock B Boom.17−.05 −.06 Normal.72.18 .17 Bust.11.46 .31 a. Calculate the expected return on each stock. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b.Assuming the capital asset pricing model holds and Stock A's beta is greater than Stock B's beta by .31, what is the expected market risk premium? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

(a) Expected Return = Risk-free Rate + Beta of Stock A * Market Risk Premium Stock A: Expected Return = 0.17 * (-0.05) + 0.72 * 0.18 + 0.11 * 0.46 Expected Return = 0.1717 Expected Return = 17.17% Stock B: Expected Return = 0.17 * (-0.06) + 0.72 * 0.17 + 0.11 * 0.31 Expected Return = 0.1463 Expected Return = 14.63% (b) 0.0254 = Market Risk Premium * (Beta of Stock A - Beta of Stock B) 0.0254 = Market Risk Premium * 0.31 Market Risk Premium = 0.0819 Market Risk Premium = 8.19%

Consider the following information: Probability of StateRate of Return if State OccursEconomyof EconomyStock AStock B Recession.20 .035 -.30 Normal.60 .115 .20 Boom.20 .190 .43 a. Calculate the expected return for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

(a) Expected return of A = 11.40% Expected return of B = 14.60% (b) Standard deviation of A = 4.90% Standard deviation of A = 24.01% Work Shown: https://gyazo.com/3c2a6e071fccca591c739d124d74cc6c

A stock has an expected return of 15.6 percent, the risk-free rate is 6.2 percent, and the market risk premium is 7.7 percent. What must the beta of this stock be? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

Expected Return = Risk Free Rate + Beta* ( Expected Market Return - Risk Free Rate) market risk premium = Expected Market Return - Risk Free Rate 0.156 = 0.062+ b (0.077) b = 1.221

Consider the following information: State ofEconomyProbability of Stateof EconomyRate of Returnif State Occurs Recession.19 -.09 Normal.45 .11 Boom.36 .30 Calculate the expected return. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected return = 0.19 * (-9%) + 0.45 * 11% + 0.36 * 20% Expected return = 14.04%

ou own a portfolio that is 19 percent invested in Stock X, 34 percent in Stock Y, and 47 percent in Stock Z. The expected returns on these three stocks are 10 percent, 13 percent, and 15 percent, respectively. What is the expected return on the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected return = Stock A x Stock B Product stock X = 0.19 x 10 Product stock X = 1.9 Product stock y = 0.34 x 13 Product stock y = 4.42 Product stock z = 0.47 x 15 Product stock z = 7.05 Excepted = 1.9 + 4.42 + 7.05 Excepted = 13.37

A stock has an expected return of 11.3 percent, its beta is .88, and the risk-free rate is 5.65 percent. What must the expected return on the market be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

expected return=risk-free rate+Beta(market rate-risk-free rate) 0.113=0.0565+0.88(market rate-0.0565) market rate=(0.113-0.0565)/0.88+0.0565 Market rate =12.07%

You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Information about the possible investments is given below: AssetInvestmentBeta Stock A$149,000 .94 Stock B$131,000 1.39 Stock C 1.54 Risk-free asset How much will you invest in Stock C? How much will you invest in the risk-free asset? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

(a) Proportion in A = 149000/500000 = 0.298 Proportion in B = 131000/500000 = 0.262 Proportion in C = X Proportion in risk free asset = 1-X-0.298-262 = 0.44-X 0.298*0.94 + 0.262*1.39 + X*1.54 + (0.44-X)* 0 = 1 0.6443 + 1.54X = 1 X = 0.231 Stock C = 0.231*500000 Stock C = $115,500 (b) Investment in risk free asset = 500,000 - 149,000 - 131,000 - 115,500 Investment in risk free asset = $104,500

Consider the following information: Rate of Return if State OccursState ofProbability of StateEconomyof EconomyStock AStock BStock C Boom.68 .11 .05 .36 Bust.32 .25 .31 -.16 a.What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b.What is the variance of a portfolio invested 23 percent each in A and B and 54 percent in C? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161.)

(a) Expected return = [weighted return of Boom * probability] + [weighted return of Bust * probability] Expected return =[(0.11 + 0.05 + 0.36) /3 * 0.68] + [(0.25 + 0.31 - 0.16) / 3 * 0.32] Expected return =0.117844 + 0.042656 Expected return =16.05% (b) Expected return of Boom = [0.11 * 23%] + [0.05 * 23%] + [0.36 * 54%] Expected return of Boom = 23.12% Expected return of Bust = [0.25 * 23%] + [0.31 * 23%] + [-0.16 * 54%] Expected return of Bust =4.24% Variance = 0.68 [23.12% -17.0784%]^2 + 0.32 [4.24% -17.0784%]^2 Variance =0.68 * 0.00365009 + 0.32 * 0.01648245 Variance =0.00776

Stock Y has a beta of 1.50 and an expected return of 13.0 percent. Stock Z has a beta of .95 and an expected return of 10.3 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Stock Y risk Premium=Beta*Market Risk Premium Stock Y expected Return=13% Stock Y Beta=1.5 (13-Rf)=1.5*(Rm-Rf) 13=Rf+1.5*(Rm-Rf) Stock Z Beta=0.95 Expected Return=10.3% 10.3=Rf+0.95*(Rm-Rf) 2.7=1.5(Rm-Rf)-0.95(Rm-Rf) (Rm-Rf)*(1.5-0.95)=2.7 (Rm-Rf)*0.55=2.7 Rm-Rf=2.7/0.55=4.909091 Rm=Rf+4.909091 13=Rf+1.5*(Rm-Rf) 13=Rf+1.5*4.909091 13=Rf+7.363636 Rf=13-7.363636=5.636364 Risk Free Rate=5.636364%

What are the portfolio weights for a portfolio that has 165 shares of Stock A that sell for $90 per share and 140 shares of Stock B that sell for $106 per share? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.)

Value of Stock A in portfolio = 165 * 90 Value of Stock A in portfolio = 14,850 Value of Stock B in portfolio = 140 * 106 Value of Stock B in portfolio = 14,840 total value of portfolio = 14,850 + 14,840 total value of portfolio = 29,690 Weight of A = 14,850 / 29,690 = 50.02% Weight of B = 14,840 / 29,690 = 49.98%