Chapter 8 Practice Quiz
Based on the historical returns shown below, what is the stock's expected return for 2017? year return 2012 19% 2013 -29% 2014 -13% 2015 32% 2016 23%
Expected return = (19 - 29 -13 + 32 + 23)/5 = 6.4
You manage a $7 million portfolio has a beta of 0.85 and an expected return of 10.1% per year. You intend to invest an additional $3 million in the portfolio so that the expected return increases to 11.0% per year. If the risk-free interest rate is 5.1% per year, what does the beta of the new investment need to be?
10.1 = 5.1 + 0.85(MRP). Market risk premium = 5.88 11.0 = (7/10)(10.1) + (3/10)X. New investment expected return = 13.1 13.1 = 5.1 + Beta(5.88). New investment beta = 1.36
What does a stock's standard deviation of expected return measure?
A stock's standard deviation of expected return measures total risk.
Based on the economic scenarios shown below, what is the stock's annual expected return? scenario probability return boom 15% 35% normal 35% 20% recession 35% -10% depression 15% -20%
Expected return = (.15)(35) + (.35)(20) + (.35)(-10) + (.15)(-20) = 5.8
The risk-free interest rate is 3.7% per year, the market risk premium is 5.6% per year, and a stock's beta is 0.84. What is the stock's annual expected return?
Expected return = Risk-free rate + beta(market risk premium) = 3.7 + 0.84(5.6) = 8.4
The risk-free interest rate is 4.3% per year, the market risk premium is 6.4% per year, and a stock's beta is 1.2. What is the stock's annual expected return?
Expected return = Risk-free rate + beta(market risk premium) = 4.3 + 1.2(6.4) = 12.0
You manage a $12 million portfolio has a beta of 0.92 and an expected return of 11.2% per year. You intend to invest an additional $5 million in the portfolio so that the expected return increases to 12.5% per year. If the risk-free interest rate is 5.1% per year, what is the annual market risk premium?
Market risk premium = (11.2 - 5.1)/0.92 = 6.63
Based on the investment portfolio information shown below, what is the portfolio's beta? stock investment beta M 250,000 1.2 N 400,000 0.9 Q 350,000 1.7
Portfolio beta = [(250,000)(1.2) + (400,000)(0.9) + ((350,000)(1.7)]/(1,000,000) = 1.26
The beta of the stock market is ____ and the beta of the risk-free asset is ____?
The beta of the stock market is 1 and the beta of the risk-free asset is 0.
Which of the following stocks has the highest market risk? A) A stock with a beta of 1.2 and a standard deviation of expected return of 17% per year B) A stock with a beta of 0.7 and a standard deviation of expected return of 14% per year C) A stock with a beta of 0.9 and a standard deviation of expected return of 22% per year D) A stock with a beta of 1.3 and a standard deviation of expected return of 26% per year E) A stock with a beta of 1.5 and a standard deviation of expected return of 12% per year
The stock with the highest beta has the highest market risk.
The risk-free interest rate is 3.7% per year, a stock's expected return is 10.9% per year, and the stock's beta is 1.4. What is the annual market risk premium?
10.9 = 3.7 + 1.4(MRP) Market risk premium = 5.14
The risk-free interest rate is 3.7% per year, the market risk premium is 5.7% per year, and a stock's expected return is 10.9% per year. What is the stock's beta?
10.9 = 3.7 + Beta(5.7) Beta = 1.26
You manage a $76 million portfolio has a beta of 1.08 and an expected return of 9.8% per year. You intend to invest an additional $24 million in the portfolio so that the expected return increases to 11.0% per year. If the risk-free interest rate is 5.6% per year, what does the expected return of the new investment need to be?
11.0 = (76/100)(9.8) + (24/100)X New investment expected return = 14.8
The risk-free interest rate is 4.7% per year, a stock's expected return is 15.3% per year, and the stock's beta is 1.7. What is the annual market risk premium?
15.3 = 4.7 + 1.7(MRP) Market risk premium = 6.24
You manage a $34 million portfolio has a beta of 0.89 and an expected return of 9.7% per year. You intend to invest an additional $10 million in the portfolio so that the expected return increases to 11.1% per year. If the risk-free interest rate is 5.2% per year, what does the beta of the new investment need to be?
9.7 = 5.2 + 0.89(MRP). Market risk premium = 5.06 11.1 = (34/44)(9.7) + (10/44)X. New investment expected return = 15.9 15.9 = 5.2 + Beta(5.06). New investment beta = 2.11
Based on the economic scenarios shown below, what is the standard deviation of the stock's expected return? scenario probability return boom 20% 23% normal 40% 12% recession 40% -15%
Expected return = (.2)(23) + (.4)(12) + (.4)(-15) = 3.4 Variance = (.2)(23 - 3.4)2 + (.4)(12 - 3.4)2 + (.4)(-15 - 3.4)2 = 241.84 Standard deviation = 241.840.5 = 15.6
Based on the product demand scenarios shown below, what is the standard deviation of the stock's expected return? scenario probability return high 20% 32% normal 55% 14% low 25% -16%
Expected return = (.20)(32) + (.55)(14) + (.25)(-16) = 10.1 Variance = (.20)(32 - 10.1)2 + (.55)(14 - 10.1)2 + (.25)(-16 - 10.1)2 = 274.59 Standard deviation = 274.590.5 = 16.6
Based on the weather scenarios shown below, what is the standard deviation of the stock's expected return? scenario probability return cold 30% -12% normal 40% 14% hot 30% 22%
Expected return = (.3)(-12) + (.4)(14) + (.3)(22) = 8.6 Variance = (.3)(-12 - 8.6)2 + (.4)(14 - 8.6)2 + (.3)(22 - 8.6)2 = 192.84 Standard deviation = 192.840.5 = 13.9
Based on the economic scenarios shown below, what is the stock's annual expected return? scenario probability return boom 30% 25% normal 50% 10% recession 20% -15%
Expected return = (.3)(25) + (.5)(10) + (.2)(-15) = 9.5
Based on the weather scenarios shown below, what is the stock's annual expected return? scenario probability return cold 30% 14% normal 55% 11% hot 15% -8%
Expected return = (.30)(14) + (.55)(11) + (.15)(-8) = 9.1
Based on the historical returns shown below, what is the standard deviation of the stock's expected return for 2017? year return 2013 11% 2014 14% 2015 10% 2016 -16%
Expected return = (11 + 14 + 10 - 16)/4 = 4.75 Variance = [(11 - 4.75)2 + (14 - 4.75)2 + (10 - 4.75)2 + (-16 - 4.75)2]/3 = 194.25 Standard deviation = 194.250.5 = 13.9
Based on the historical returns shown below, what is the stock's annual expected return for 2017? year return 2013 12% 2014 -14% 2015 32% 2016 7%
Expected return = (12 - 14 + 32 + 7)/4 = 9.3
Based on the historical returns shown below, what is the standard deviation of the stock's expected return for 2017? year return 2013 12% 2014 -24% 2015 17% 2016 4%
Expected return = (12 - 24 + 17 + 4)/4 = 2.25 Variance = [(12 - 2.25)2 + (-24 - 2.25)2 + (17 - 2.25)2 + (4 - 2.25)2]/3 = 334.92 Standard deviation = 334.920.5 = 18.3
Based on the historical returns shown below, what is the stock's expected return for 2017? year return 2012 18% 2013 12% 2014 -23% 2015 11% 2016 10%
Expected return = (18 + 12 - 23 + 11 + 10)/5 = 5.6
You manage a $22 million portfolio has a beta of 1.23 and an expected return of 14.1% per year. You intend to invest an additional $13 million in the portfolio so that the expected return increases to 14.5% per year. If the risk-free interest rate is 4.2% per year, what is the annual market risk premium?
Market risk premium = (14.1 - 4.2)/1.23 = 8.05
Based on the investment portfolio information shown below, what is the portfolio's beta? stock investment beta D 465,000 0.7 E 685,000 0.5 F 520,000 1.2
Portfolio beta = [(465,000)(0.7) + (685,000)(0.5) + (520,000)(1.2)]/(1,670,000) = 0.77
Based on the investment portfolio information shown below, what is the portfolio's expected return? stock investment return A 250,000 9.4 B 500,000 8.9 C 300,000 7.7 D 400,000 8.4
Portfolio expected return = [(250,000(9.4) + (500,000)(8.9) + (300,000)(7.7) + (400,000)(8.4)] /1,450,000 = 8.6
