FIN CH 11: PART 2

69. You own the following portfolio of stocks. What is the portfolio weight of stock C? A. 39.85 percent B. 42.86 percent C. 44.41 percent D. 48.09 percent E. 52.65 percent

A

72. What is the expected return on this portfolio? A. 11.48 percent B. 11.92 percent C. 13.03 percent D. 13.42 percent E. 13.97 percent

B

76. What is the variance of the returns on a portfolio comprised of $5,400 of stock G and $6,600 of stock H? A. .000709 B. .000848 C. .001097 D. .001254 E. .001468

C

91. Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium is 8.8 percent? A. A B. B C. C D. D E. E

C

98. You own a portfolio that has $2,000 invested in Stock A and $1,400 invested in Stock B. The expected returns on these stocks are 14 percent and 9 percent, respectively. What is the expected return on the portfolio? A. 11.06 percent B. 11.50 percent C. 11.94 percent D. 12.13 percent E. 12.41 percent

C

52. The market risk premium is computed by: A. adding the risk-free rate of return to the inflation rate. B. adding the risk-free rate of return to the market rate of return. C. subtracting the risk-free rate of return from the inflation rate. D. subtracting the risk-free rate of return from the market rate of return. E. multiplying the risk-free rate of return by a beta of 1.0.

D

54. The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly. A. real return B. actual return C. nominal return D. risk premium E. expected return

D

58. You want your portfolio beta to be 0.95. Currently, your portfolio consists of $4,000 invested in stock A with a beta of 1.47 and $3,000 in stock B with a beta of 0.54. You have another $9,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in the risk-free asset? A. $4,316.08 B. $4,425.29 C. $4,902.29 D. $4,574.71 E. $4,683.92

D

70. You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return? A. 6.49 percent B. 8.64 percent C. 8.87 percent D. 9.05 percent E. 9.23 percent

D

99. You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 8 percent. Your goal is to create a portfolio with an expected return of 12.4 percent. All money must be invested. How much will you invest in stock X? A. $800 B. $1,200 C. $4,600 D. $8,800 E. $9,200

D

73. What is the expected return on a portfolio that is equally weighted between stocks K and L given the following information? A. 11.13 percent B. 11.86 percent C. 12.25 percent D. 13.32 percent E. 14.40 percent Q

A

57. Which one of the following should earn the most risk premium based on CAPM? A. diversified portfolio with returns similar to the overall market B. stock with a beta of 1.38 C. stock with a beta of 0.74 D. U.S. Treasury bill E. portfolio with a beta of 1.01

B

102. Your portfolio is invested 26 percent each in Stocks A and C, and 48 percent in Stock B. What is the standard deviation of your portfolio given the following information? A. 12.38 percent B. 12.64 percent C. 12.72 percent D. 12.89 percent E. 13.73 percent

E

77. What is the standard deviation of the returns on a portfolio that is invested 52 percent in stock Q and 48 percent in stock R? A. 1.66 percent B. 2.47 percent C. 2.63 percent D. 3.28 percent E. 3.41 percent

A

62. You are comparing stock A to stock B. Given the following information, what is the difference in the expected returns of these two securities? A. -0.85 percent B. 1.95 percent C. 2.05 percent D. 13.45 percent E. 13.55 percent

B

100. What is the expected return and standard deviation for the following stock? A. 15.49 percent; 14.28 percent B. 15.49 percent; 14.67 percent C. 17.00 percent; 15.24 percent D. 17.00 percent; 15.74 percent E. 17.00 percent'; 16.01 percent

C

103. You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.9 and the total portfolio is equally as risky as the market. What is the beta of the second stock? A. 0.75 B. 0.80 C. 0.94 D. 1.00 E. 1.10

E

92. Which one of the following stocks is correctly priced if the risk-free rate of return is 3.2 percent and the market rate of return is 11.76 percent? A. A B. B C. C D. D E. E

E

105. A stock has a beta of 1.2 and an expected return of 17 percent. A risk-free asset currently earns 5.1 percent. The beta of a portfolio comprised of these two assets is 0.85. What percentage of the portfolio is invested in the stock? A. 71 percent B. 77 percent C. 84 percent D. 89 percent E. 92 percent

A

66. The returns on the common stock of New Image Products are quite cyclical. In a boom economy, the stock is expected to return 32 percent in comparison to 14 percent in a normal economy and a negative 28 percent in a recessionary period. The probability of a recession is 25 percent while the probability of a boom is 10 percent. What is the standard deviation of the returns on this stock? A. 19.94 percent B. 21.56 percent C. 25.83 percent D. 32.08 percent E. 39.77 percent

A

81. Your portfolio is comprised of 40 percent of stock X, 15 percent of stock Y, and 45 percent of stock Z. Stock X has a beta of 1.16, stock Y has a beta of 1.47, and stock Z has a beta of 0.42. What is the beta of your portfolio? A. 0.87 B. 1.09 C. 1.13 D. 1.18 E. 1.21

A

101. What is the expected return of an equally weighted portfolio comprised of the following three stocks? A. 16.33 percent B. 18.60 percent C. 19.67 percent D. 20.48 percent E. 21.33 percent

B

104. A stock has an expected return of 11 percent, the risk-free rate is 6.1 percent, and the market risk premium is 4 percent. What is the stock's beta? A. 1.18 B. 1.23 C. 1.29 D. 1.32 E. 1.35

B

53. The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the: A. market risk premium. B. risk premium. C. systematic return. D. total return. E. real rate of return.

B

56. According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the: A. amount of total risk assumed and the market risk premium. B. market risk premium and the amount of systematic risk inherent in the security. C. risk free rate, the market rate of return, and the standard deviation of the security. D. beta of the security and the market rate of return. E. standard deviation of the security and the risk-free rate of return.

B

64. If the economy is normal, Charleston Freight stock is expected to return 15.7 percent. If the economy falls into a recession, the stock's return is projected at a negative 11.6 percent. The probability of a normal economy is 80 percent while the probability of a recession is 20 percent. What is the variance of the returns on this stock? A. 0.010346 B. 0.011925 C. 0.013420 D. 0.013927 E. 0.014315

B

67. What is the standard deviation of the returns on a stock given the following information? A. 1.57 percent B. 2.03 percent C. 2.89 percent D. 3.42 percent E. 4.01 percent

B

68. You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected return of 8.7 percent. Stock A has an expected return of 11.4 percent while stock B is expected to return 6.4 percent. What is the portfolio weight of stock A? A. 39 percent B. 46 percent C. 54 percent D. 61 percent E. 67 percent

B

75. What is the variance of the returns on a portfolio that is invested 60 percent in stock S and 40 percent in stock T? A. .000017 B. .000023 C. .000118 D. .000136 E. .000161

B

78. What is the standard deviation of the returns on a $30,000 portfolio which consists of stocks S and T? Stock S is valued at $12,000. A. 1.07 percent B. 1.22 percent C. 1.36 percent D. 1.49 percent E. 1.63 percent

B

84. The market has an expected rate of return of 10.7 percent. The long-term government bond is expected to yield 5.8 percent and the U.S. Treasury bill is expected to yield 3.9 percent. The inflation rate is 3.6 percent. What is the market risk premium? A. 6.0 percent B. 6.8 percent C. 7.5 percent D. 8.5 percent E. 9.3 percent

B

85. The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent. What is the expected rate of return on a stock with a beta of 1.21? A. 10.92 percent B. 11.40 percent C. 12.22 percent D. 12.47 percent E. 12.79 percent

B

87. The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent. The risk-free rate of return is 3.7 percent. What is the expected market risk premium? A. 7.02 percent B. 7.90 percent C. 10.63 percent D. 11.22 percent E. 11.60 percent

B

107. Suppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, what is the return on the market? A. 13.99 percent B. 14.42 percent C. 14.67 percent D. 14.78 percent E. 15.01 percent

C

55. The capital asset pricing model (CAPM) assumes which of the following? I. a risk-free asset has no systematic risk. II. beta is a reliable estimate of total risk. III. the reward-to-risk ratio is constant. IV. the market rate of return can be approximated. A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

C

60. You recently purchased a stock that is expected to earn 22 percent in a booming economy, 9 percent in a normal economy, and lose 33 percent in a recessionary economy. There is a 5 percent probability of a boom and a 75 percent chance of a normal economy. What is your expected rate of return on this stock? A. -3.40 percent B. -2.25 percent C. 1.25 percent D. 2.60 percent E. 3.50 percent

C

61. The common stock of Manchester & Moore is expected to earn 13 percent in a recession, 6 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 5 percent while the probability of a recession is 45 percent. What is the expected rate of return on this stock? A. 8.52 percent B. 8.74 percent C. 8.65 percent D. 9.05 percent E. 9.28 percent

C

63. Jerilu Markets has a beta of 1.09. The risk-free rate of return is 2.75 percent and the market rate of return is 9.80 percent. What is the risk premium on this stock? A. 6.47 percent B. 7.03 percent C. 7.68 percent D. 8.99 percent E. 9.80 percent

C

65. The rate of return on the common stock of Lancaster Woolens is expected to be 21 percent in a boom economy, 11 percent in a normal economy, and only 3 percent in a recessionary economy. The probabilities of these economic states are 10 percent for a boom, 70 percent for a normal economy, and 20 percent for a recession. What is the variance of the returns on this common stock? A. 0.002150 B. 0.002606 C. 0.002244 D. 0.002359 E. 0.002421

C

59. You have a $12,000 portfolio which is invested in stocks A and B, and a risk-free asset. $5,000 is invested in stock A. Stock A has a beta of 1.76 and stock B has a beta of 0.89. How much needs to be invested in stock B if you want a portfolio beta of 1.10? A. $3,750.00 B. $4,333.33 C. $4,706.20 D. $4,943.82 E. $5,419.27

D

71. What is the expected return on a portfolio which is invested 25 percent in stock A, 55 percent in stock B, and the remainder in stock C? A. -1.06 percent B. 2.38 percent C. 2.99 percent D. 5.93 percent E. 6.10 percent

D

79. What is the standard deviation of the returns on a portfolio that is invested in stocks A, B, and C? Twenty five percent of the portfolio is invested in stock A and 40 percent is invested in stock C. A. 6.31 percent B. 6.49 percent C. 7.40 percent D. 7.83 percent E. 8.72 percent

D

80. What is the beta of the following portfolio? A. 1.04 B. 1.07 C. 1.13 D. 1.16 E. 1.23

D

83. You would like to combine a risky stock with a beta of 1.68 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in the risky stock? A. 32 percent B. 40 percent C. 54 percent D. 60 percent E. 68 percent

D

89. Thayer Farms stock has a beta of 1.12. The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent. What is the expected rate of return on this stock? A. 8.35 percent B. 9.01 percent C. 10.23 percent D. 13.21 percent E. 13.73 percent

D

106. Consider the following information on three stocks: A portfolio is invested 35 percent each in Stock A and Stock B and 30 percent in Stock C. What is the expected risk premium on the portfolio if the expected T-bill rate is 3.8 percent? A. 11.47 percent B. 12.38 percent C. 16.67 percent D. 24.29 percent E. 29.99 percent

E

108. Consider the following information on Stocks I and II: The market risk premium is 8 percent, and the risk-free rate is 3.6 percent. The beta of stock I is _____ and the beta of stock II is _____. A. 2.08; 2.47 B. 2.08; 2.76 C. 3.21; 3.84 D. 4.47; 3.89 E. 4.47; 4.26

E

74. What is the expected return on a portfolio comprised of $6,200 of stock M and $4,500 of stock N if the economy enjoys a boom period? A. 10.93 percent B. 11.16 percent C. 12.55 percent D. 13.78 percent E. 15.43 percent

E

82. Your portfolio has a beta of 1.12. The portfolio consists of 20 percent U.S. Treasury bills, 50 percent stock A, and 30 percent stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B? A. 1.47 B. 1.52 C. 1.69 D. 1.84 E. 2.07

E

86. The common stock of Jensen Shipping has an expected return of 16.3 percent. The return on the market is 10.8 percent and the risk-free rate of return is 3.8 percent. What is the beta of this stock? A. .92 B. 1.23 C. 1.33 D. 1.67 E. 1.79

E

88. The expected return on JK stock is 15.78 percent while the expected return on the market is 11.34 percent. The stock's beta is 1.62. What is the risk-free rate of return? A. 3.22 percent B. 3.59 percent C. 3.63 percent D. 3.79 percent E. 4.18 percent

E

90. The common stock of Alpha Manufacturers has a beta of 1.47 and an actual expected return of 15.26 percent. The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 percent. Which one of the following statements is true given this information? A. The actual expected stock return will graph above the Security Market Line. B. The stock is underpriced. C. To be correctly priced according to CAPM, the stock should have an expected return of 21.95 percent. D. The stock has less systematic risk than the overall market. E. The actual expected stock return indicates the stock is currently overpriced.

E