CH 8

Bae Inc. is considering an investment that has an expected return of 45% and a standard deviation of 10%. What is the investment's coefficient of variation? Do not round your intermediate calculations. Round the final answer to 2 decimal places.

0.22

Tom O'Brien has a 2-stock portfolio with a total value of $100,000. $47,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio's beta? Do not round your intermediate calculations. Round your final answer to 2 decimal places.

1.10

Jill Angel holds a $200,000 portfolio consisting of the following stocks. The portfolio's beta is 0.88. Stock Investment Beta A $50,000 0.50 B $50,000 0.80 C $50,000 1.00 D $50,000 1.20 Total $200,000 If Jill replaces Stock A with another stock, E, which has a beta of 1.45, what will the portfolio's new beta be? Do not round your intermediate calculations.

1.11

Bill Dukes has $100,000 invested in a 2-stock portfolio. $62,500 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta? Do not round your intermediate calculations. Round the final answer to 2 decimal places.

1.20

Cheng Inc. is considering a capital budgeting project that has an expected return of 24% and a standard deviation of 30%. What is the project's coefficient of variation? Do not round your intermediate calculations. Round the final answer to 2 decimal places.

1.25

Assume that you hold a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20. You are in the process of buying 1,000 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 21.5% and a beta of 1.70. The total value of your current portfolio is $90,000. What will the expected return and beta on the portfolio be after the purchase of the Alpha stock? Do not round your intermediate calculations.

12.05%; 1.25

Taggart Inc.'s stock has a 50% chance of producing a 36% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate of return? Do not round your intermediate calculations.

15.40%

Mikkelson Corporation's stock had a required return of 12.50% last year, when the risk-free rate was 3% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.) Do not round your intermediate calculations.

16.50%

Carson Inc.'s manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population, not a sample.) Do not round your intermediate calculations. EconomicConditions Prob. Return Strong 30% 40.0% Normal 40% 10.0% Weak 30% -16.0% ​

21.71%

Company A has a beta of 0.70, while Company B's beta is 1.45. The required return on the stock market is 11.00%, and the risk-free rate is 2.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.) Do not round your intermediate calculations.

5.06%

Dothan Inc.'s stock has a 25% chance of producing a 16% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return? Do not round your intermediate calculations.

5.50%

Porter Inc's stock has an expected return of 12.50%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 2.00%, what is the market risk premium? Do not round your intermediate calculations.

8.40%

Cooley Company's stock has a beta of 1.28, the risk-free rate is 2.25%, and the market risk premium is 5.50%. What is the firm's required rate of return? Do not round your intermediate calculations.

9.29%

Which of the following statements is CORRECT? 3

A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.

Which of the following statements is CORRECT? 2

A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock.

Assume that the risk-free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT?

An index fund with beta = 1.0 should have a required return of 11%.

Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Coefficient of variation; beta.

You observe the following information regarding Companies X and Y: ​ —Company X has a higher expected return than Company Y. —Company X has a lower standard deviation of returns than Company Y. —Company X has a higher beta than Company Y. ​ Given this information, which of the following statements is CORRECT?

Company X has a lower coefficient of variation than Company Y.

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM - rRF, is positive. Which of the following statements is CORRECT?

If Stock A's required return is 11%, then the market risk premium is 5%.

Which of the following statements is CORRECT? 1

If you formed a portfolio that consisted of all stocks with betas less than 1.0, which is about half of all stocks, the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio, and that portfolio would have less risk than a portfolio that consisted of all stocks in the market.

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct.

In equilibrium, the expected return on Stock A will be greater than that on B.

Consider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1. ​ Stock Expected Return Standard Deviation ​ Beta A 10% 20% 1.0 B 10% 10% 1.0 C 12% 12% 1.4 Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns. Which of the following statements is CORRECT?

Portfolio ABC's expected return is 10.66667%.

Stock X has a beta of 0.7 and Stock Y has a beta of 1.3. The standard deviation of each stock's returns is 20%. The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zero. Portfolio P consists of 50% X and 50% Y. Given this information, which of the following statements is CORRECT?

Portfolio P has the same required return as the market (rM).

A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?

Stock B.

For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

The beta of the portfolio is equal to the weighted average of the betas of the individual stocks.

For markets to be in equilibrium, that is, for there to be no strong pressure for prices to depart from their current levels,

The expected rate of return must be equal to the required rate of return; that is, = .

During the coming year, the market risk premium (rM - rRF), is expected to fall, while the risk-free rate, rRF, is expected to remain the same. Given this forecast, which of the following statements is CORRECT?

The required return will fall for all stocks, but it will fall more for stocks with higher betas.

Which of the following statements is CORRECT? 4

The slope of the security market line is equal to the market risk premium.

Other things held constant, if the expected inflation rate decreases and investors also become morerisk averse, the Security Market Line would be affected as follows:

The y-axis intercept would decline, and the slope would increase.

Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%. The returns of the two stocks are independent, so the correlation coefficient between them, rXY, is zero. Which of the following statements best describes the characteristics of your 2-stock portfolio?

Your portfolio has a beta equal to 1.6, and its expected return is 15%.