Accounting

You bought a share of 7.5 percent preferred stock for $91.60 last year. The market price for your stock is now $89.10. What is your total return to date on this investment?

(current price - base price + dividend yield) / base price = (89.10 - 91.60 + 7.50) / 91.60 = 5.4585 which approx to 5.46%

Stock Y has a beta of 1.28 and an expected return of 13.7 percent. Stock Z has a beta of 1.02 and an expected return of 11.4 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

4.08 percent (.137 -Rf)/1.28 = (.114 -Rf)/1.02 Rf = .0238, or 2.38 percent

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

All available information

Based on the period 1926-2014, what rate of return should you expect to earn over the long-term if you are unwilling to bear risk?

Between 3 and 4 percent

What term defines the practice of investing in a variety of diverse assets as a means of reducing risk?

Diversification

The Bermuda Triangle Store pays a constant dividend. Last year, the dividend yield was 4.0 percent when the stock was selling for $16 a share. What must the stock price be today if the market currently requires a 4.3 percent dividend yield on this stock?

Dividend yield = Dividend paid / stock price dividend paid = 0.04 X $ 16 dividend paid = 0.64 stock price = 0.64 / 0.043 stock price = $14.88

A stock has a beta of 1.32, the expected return on the market is 12.72, and the risk-free rate is 4.05. What must the expected return on this stock be?

E(R) = .0405 + 1.32(.1272 -.0405) = .1549, or 15.49 percent

Beasley Enterprises stock has an expected return of 8.86 percent. The stock is expected to return 12.5 percent in a normal economy and 16 percent in a boom. The probabilities of a recession, normal economy, and a boom are 11 percent, 88 percent, and 1 percent, respectively. What is the expected return if the economy is in a recession?

E(R) = .0886 = (.11 ×x) + (.88 ×.125) + (.01 ×.16) x = -.2091, or -20.91 percent

S&S stock is expected to return 17.5 percent in a booming economy, 12.4 percent in a normal economy, and 1.2 percent in a recession. The probabilities of an economic boom, normal state, or recession are 2 percent, 90 percent, and 8 percent, respectively. What is the expected rate of return on this stock?

Expected return = (.02 ×.175) + (.90 ×.124) + (.08 ×.012) = .1161, or 11.61 percent

PL Lumber stock is expected to return 22 percent in a booming economy, 15 percent in a normal economy, and lose 2 percent in a recession. The probabilities of an economic boom, normal state, or recession are 5 percent, 92 percent, and 3 percent, respectively. What is the expected rate of return on this stock?

Expected return = (.05 ×.22) + (.92 ×.15) + [.03 ×(-.02)] = .01484, or 14.84 percent

Short-Lived Internet Company's stock has returns of 23, 18, 5, -11, and 3 percent over the past five years. What is the stock's mean return?

Mean (average) return=(23%+18%+5%-11%+3%)/5=(38%)/5=7.6%

A bond has an average return of 11.2 percent and a standard deviation of 14.6 percent. What range of returns would you expect to see 68 percent of the time on this security?

Return range: E(R) +/- z-score x Std. Dev Z-score for 68% return = 1.0 return range = 11.2% +/- 14.6% = -3.4% to 25.8%

What could cause the total return on an investment to be a negative rate?

Stock price that declines over the investment period

If the stock has a standard deviation of 13.41% (it does), what range of returns would you expect to see 95% of the time?

Stock returns mostly follow a normal distribution. This means that ~68 percent of stock returns are within ± one standard deviation from the mean & ~95 percent are within ± two standard deviations from the mean. This problem is asking us to calculate what ± two std. deviations from the mean is. We have the two variables we need: Average return=x ̅=7.6% Standard deviation=σ=13.41% Now, we need to calculate the upper and lower limits of the returns. Lower limit: x ̅-2σ=7.6-2(13.41)=7.6-26.82=-19.22 Upper limit: x ̅+2σ=7.6+2(13.41)=7.6+26.82=34.42 Therefore, 95% of the expected returns should lie between -19.22% and 34.42%.

A company's risk premium is:

The excess return on a company's stock over the risk-free rate

Which one of the following statements is correct? *The risk-free rate of return has a risk premium of 1.0. *The reward for bearing risk is called the standard deviation. *Risks and expected return are inversely related. *The higher the expected rate of return, the wider the distribution of returns. *Risk premiums are inversely related to the standard deviation of returns.

The higher the expected rate of return, the wider the distribution of returns.

Last week, the U.S. Conference Board Consumer Confidence Index was released. It is an indicator designed to measure consumer's optimism about the U.S. economy from observing their spending and saving activities. The index indicated that consumer confidence declined from 96.5 in March to 94.2 in April, a moderate decline. The stock market did not seem to mind the news as prices did not change. An equity analyst who was asked about the stock market's lack of reaction to the news shrugged and said, "I guess the market expected this announcement and it's already priced into the current stock prices." According to the analyst, why did stock prices not move? Is the stock market being efficient or not?

The stock prices did not move because the actual results of the Consumer Confidence Index matched the market's expectation of those results. This is what the analyst meant by the announcement already being "priced into" the current stock prices. If the market projects an economic variable (like the Consumer Confidence Index), then this information should impact the market's projections for future cash flows, systematic and unsystematic risk, etc. for companies. Market efficiency means that the current stock price will be based on these predictions, because market efficiency means that the market is informationally efficient, not that it is correct in its predictions. If the market's prediction (prior to the announcement) is actually correct, then when the Consumer Confidence index's results become known, it only confirms the market's numbers. There is no new information for the market to use to adjust the current price of the stock, so the price will not move.

Last year, you bought $2,205.00 of 6% preferred stock with a face value of $100. This year, you sold all 25 shares of your stock for $101.43 per share. Hint 1: Remember that preferred stock is like a bond - it calculates its dividend payment in the same way a bond does. Hint 2: Make a timeline to keep track of the cash flows! What is your total percent return?

Total (percent) return=(Total $ return)/(Amount invested) Total (percent) return=($480.75)/($2,205)=21.8%

Last year, you bought $2,205.00 of 6% preferred stock with a face value of $100. This year, you sold all 25 shares of your stock for $101.43 per share. Hint 1: Remember that preferred stock is like a bond - it calculates its dividend payment in the same way a bond does. Hint 2: Make a timeline to keep track of the cash flows! What is your total dollar return?

Total return=Income+capital gain Step one: Income: Here, the income is the dividend on the preferred stock. It will pay 6% on the face value (not current value) of the stock. Dividend payment=Coupon rate* Face value Dividend payment=6%*$2,500 Dividend payment=$150 Step two: Capital gain: Capital gain=P_1-P_0 We have: P_0=$2,205 P_1=? P_1=# of shares*price per share P_1=25 shares*($101.43)/share=$2,535.75 Now, we can find the capital gain: Capital gain=P_1-P_0 Capital gain=$2,535.75-$2,205=$330.75 Step three: Now, calculate total return: Total return=Income+capital gain Total return=$150+$330.75=$480.75

What rate of return has a risk premium of 0%?

U.S. Treasury bills

What best exemplifies unsystematic risk?

Unexpected increase in the variable costs for a firm

A portfolio is:

a group of assets held by an investor.

Semistrong form market efficiency states that the value of a security is based on:

all publicly available information.

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the:

beta coefficient.

Over the period of 1926-2014:

long-term government bonds underperformed long-term corporate bonds. & the risk premium on stocks exceeded the risk premium on bonds.

The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk.

lower; lower

The systematic risk principle states that the expected return on a risky asset depends only on the asset's ___ risk.

market

Unsystematic risk can be defined by all of the following except: *unrewarded risk. *diversifiable risk. *market risk. *unique risk. *asset-specific risk.

market risk.

If the financial markets are efficient then:

stock prices should respond only to unexpected news and events.

One year ago, you purchased 600 shares of a stock. This morning you sold those shares and realized a total return of 3.1 percent. Given this information, you know for sure the:

sum of the dividend yield and the capital gains yield is 3.1 percent.

Standard deviation measures _____ risk while beta measures _____ risk.

total; systematic