FIN 5243 - HW 4

Suppose you put half of your money in Monster Beverage and half in IBM. What would the beta of this combination be if Monster Beverage has a beta of 1.52 and Pepsi has a beta of .55?

1.04

If risk-free investments are currently 6% and our expected return from Stock V was 14%. What is the risk premium on this investment?

8%

Of the options listed below, which is the best example of a diversifiable risk?

A firm's sales decrease

The security market line is a positively sloped straight line that displays the relationship between expected return and ____________.

Beta

Which of the following statements is true of a portfolio's standard deviation?

It can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

The Capital Asset Pricing Model (CAPM) shows that the expected return for a particular asset depends on all of the following, except:

The return on a risk-less asset

Risk-free assets have a beta of 0 and the market portfolio has a beta of 1.

True

The ________ is the excess return earned by a risky asset over the return earned by a risk-free asset.

risk premium

The security market line intercepts the vertical axis at the:

risk-free rate.

An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of ________ risk.

unsystematic

You decide to invest $20,500 in Bank of America and $14,500 in Twitter. What is the portfolio's beta? Bank of America beta: 1.27 Twitter beta: 1.96

1.553

A stock has an expected return of 10 percent, its beta is 0.85, and the risk-free rate is 5.5 percent. What must the expected return on the market be?

10.79%

You own a portfolio that has $2,400 invested in Stock A and $3,200 invested in Stock B. If the expected returns on these stocks are 8 percent and 15 percent, respectively, what is the expected return on the portfolio?

12%

Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Recession .11 −.02 Normal .55 .15 Boom .34 .29 Calculate the expected return.

17.89%

Of the options listed below, which is the best measure of systematic risk?

Beta

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

I and III only

Which of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification.

________ measures total risk, and ________ measures systematic risk.

Standard deviation; beta

Portfolio Beta is the ______________ average of the Betas of the investments included in the portfolio.

Weighted

A ________ is the market's measure of systematic risk.

beta of 1

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant.

unsystematic risk

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 economy has been very volatile lately. There is a 40% chance of recession and a 60% chance of a boom. Stock A would have a return of −15% if there was a recession but, a 40% return in a boom economy. What is the expected return for Stock A?

18%

A stock has a beta of 1.7, the expected return on the market is 16 percent, and the risk-free rate is 5.6 percent. What must the expected return on this stock be?

23.28%

When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the:

market value of the investment in each stock.