Finance 300- chapter 11

BJB stock has an expected return of 17.82 percent. The risk-free rate is 4.6 percent and the market risk premium is 8.2 percent. What is the stock's beta?

1.61

Which statement is correct?

A security with a beta of 1.54 will plot on the security market line if it is correctly priced.

The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.1 and an expected return of 13.1 percent. Stock B has a beta of .86 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not?

No, Stock A is overpriced and Stock B is underpriced.

The security market line is a linear function that is graphed by plotting data points based on the relationship between the:

expected return and beta

The security market line is defined as a positively sloped straight line that displays the relationship between the:

expected return and beta of either a security or a portfolio

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:

market risk

The slope of the security market line represents the:

market risk premium

The addition of a risky security to a fully diversified portfolio:

may or may not affect the portfolio beta.

Systematic risk is:

measured by beta.

If a security plots to the right and below the security market line, then the security has ________ systematic risk than the market and is ________.

more; overpriced

Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio:

of each security must equal the slope of the security market line.

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?

portfolio weight

The expected return on a security is not affected by the:

security's unique risks.

For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta:

that is > 0 but < 1.

The beta of a risky portfolio cannot be less than ________ nor greater than ________.

the lowest individual beta in the portfolio; the highest individual beta in the portfolio

Consider a portfolio comprised of four risky securities. Assume the economy has three economic states with varying probabilities of occurrence. Which one of the following will guarantee that the portfolio variance will equal zero?

the portfolio expected rate of return must be the same for each economic state.

A $36,000 portfolio is invested in a risk-free security and two stocks. The beta of Stock A is 1.29 while the beta of Stock B is .90. One-half of the portfolio is invested in the risk-free security. How much is invested in Stock A if the beta of the portfolio is .58?

$12,000

You own a $36,800 portfolio that is invested in Stocks A and B. The portfolio beta is equal to the market beta. Stock A has an expected return of 22.6 percent and has a beta of 1.48. Stock B has a beta of .72. What is the value of your investment in Stock A?

$13,558

Bernard Companies stock has an expected return of 10.75 percent. The stock is expected to return 13.5 percent in a normal economy and 19.6 percent in a boom. The probabilities of a recession, normal economy, and a boom are 5 percent, 80 percent, and 15 percent, respectively. What is the expected return if the economy is in a recession?

-59.80 percent

Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else held constant?

A decrease in the risk-free rate given a security beta of 1.06

Which one of the following portfolios will have a beta of zero?

A portfolio comprised solely of U. S. Treasury bills

Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

diversification

Which statement is correct?

An underpriced security will plot above the security market line.

Which one of these is the best example of systematic risk?

Decrease in gross domestic product

Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?

Expected return

Which one of the following statements is correct?

If a risky security is correctly priced, its expected risk premium will be positive.

Which one of the following is the vertical intercept of the security market line?

Risk-free rate

The risk premium for an individual security is based on which one of the following types of risk?

Systematic

Portfolio diversification eliminates:

unsystematic risk.

A portfolio is:

a group of assets held by an investor

Which one of the following is the best example of unsystematic risk?

a warehouse fire

what is the beta of the following portfolio? Stock. value beta W 32,960 .76 X 15,780 1.31 Y. 8,645 1.49 Z. 19,920 .00

.76

You want to create a $72,000 portfolio comprised of two stocks plus a risk-free security. Stock A has an expected return of 13.6 percent and Stock B has an expected return of 14.7 percent. You want to own $25,000 of Stock B. The risk-free rate is 3.6 percent and the expected return on the market is 12.1 percent. If you want the portfolio to have an expected return equal to that of the market, how much should you invest in the risk-free security?

$13,550

A portfolio has an expected return of 13.4 percent. This portfolio contains two stocks and one risk-free security. The expected return on Stock X is 12.2 percent and on Stock Y it is 19.3 percent. The risk-free rate is 4.1 percent. The portfolio value is $48,000 of which $10,000 is the risk-free security. How much is invested in Stock X?

$18,478.87

Currently, you own a portfolio comprised of the following three securities. How much of the riskiest security should you sell and replace with risk-free securities if you want your portfolio beta to equal 90 percent of the market beta? stock value. beta D. 13,640 1.13 E 15,980 1.48 F 23,260 .86

$7,753.51

You would like to invest $24,000 and have a portfolio expected return of 11.5 percent. You are considering two securities, A and B. Stock A has an expected return of 18.6 percent and B has an expected return of 7.4 percent. Approximately how much should you invest in Stock A if you invest the balance in Stock B?

$8,786

Given the following information, what is the variance of the returns on a portfolio that is invested 40 percent in both Stocks A and B, and 20 percent in Stock C? Rate of Return if State Occurs: State of Economy Probability of State Occurring Stock A (%) Stock B (%) Stock C (%) Boom .08 15.8 9.4 21.2 Normal .92 10.6 6.8 10.4

.000205

Malone Imports stock should return 12 percent in a boom, 10 percent in a normal economy, and 2 percent in a recession. The probabilities of a boom, normal economy, and recession are 5 percent, 85 percent, and 10 percent, respectively. What is the variance of the returns on this stock?

.000611

Consider the following information: Rate of Return if State Occurs: State of Economy Probability of State Occurring Stock A (%) Stock B (%) Stock C (%) Growth .25 11.8 19.6 23.7 Stagnant .75 10.4 12.9 10.3

.001427

The common stock of The Dominic Companies should return 29 percent in a boom, 12 percent in a normal economy, and −15 percent in a recession. The probabilities of a boom, normal economy, and recession are 12 percent, 86 percent, and 2 percent, respectively. What is the variance of the returns on this stock?

.004701

Blue Bell stock is expected to return 8.4 percent in a boom, 8.9 percent in a normal economy, and 9.2 percent in a recession. The probabilities of a boom, normal economy, and a recession are 6 percent, 92 percent, and 2 percent, respectively. What is the standard deviation of the returns on this stock?

.13 percent

A stock has a beta of 1.48 and an expected return of 17.3 percent. A risk-free asset currently earns 4.6 percent. If a portfolio of the two assets has a beta of .98, then the weight of the stock must be ________ and the risk-free weight must be ________.

.66; .34

You currently own a portfolio valued at $76,000 that is equally as risky as the market. Given the information below, what is the beta of Stock C? stock value beta A 13,800 1.21 B 48,600 1.08 C 8,400 ? risk-free ? ?

.81

A stock has an expected return of 14.3 percent, the risk-free rate is 3.9 percent, and the market risk premium is 7.8 percent. What must the beta of this stock be?

1.33

what is the beta of the following portfolio? Stock. value beta M. $18,400 .97 N 6,320 1.04 O. 32,900 1.23 P. 11,850. .88

1.08

You currently own a portfolio valued at $52,000 that has a beta of 1.16. You have another $10,000 to invest and would like to invest it in a manner such that the portfolio beta decreases to 1.15. What does the beta of the new investment have to be?

1.098

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.86 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

1.14

Currently, the risk-free rate is 3.2 percent. Stock A has an expected return of 11.4 percent and a beta of 1.11. Stock B has an expected return of 13.7 percent. The stocks have equal reward-to-risk ratios. What is the beta of Stock B?

1.42

You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. One stock has a beta of 1.39. What does the beta of the second stock have to be if you want the portfolio to be equally as risky as the overall market?

1.61

Given the following information, what is the standard deviation of the returns on a portfolio that is invested 40 percent in Stock A, 35 percent in Stock B, and the remainder in Stock C? Rate of Return if State Occurs: State of Economy Probability of State Occurring Stock A (%) Stock B (%) Stock C (%) Growth .07 18.9 10.2 12.1 Stagnant .93 5.7 8.5 9.3

1.68 percent

Given the following information, what is the standard deviation of the returns on a portfolio that is invested 35 percent in both Stocks A and C, and 30 percent in Stock B? Rate of Return if State Occurs: State of Economy Probability of State Occurring Stock A (%) Stock B (%) Stock C (%) Growth .08 21.6 12.8 11.6 Stagnant .92 7.4 7.2 10.1

1.95 percent

You own a portfolio of two stocks, A and B. Stock A is valued at $84,650 and has an expected return of 10.6 percent. Stock B has an expected return of 6.4 percent. What is the expected return on the portfolio if the portfolio value is $97,500?

10.05 percent

Assume the economy has an 6 percent chance of booming, am 8 percent chance of being recessionary, and being normal the remainder of the time. A stock is expected to return 22.5 percent in a boom, 11.5 percent in a normal economy, and −8 percent in a recession. What is the expected rate of return on this stock?

10.60 percent

Crabby Shores stock is expected to return 16 percent in a booming economy, 11.5 percent in a normal economy, and 1.8 percent in a recession. The probabilities of an economic boom, normal state, or recession are 6 percent, 85 percent, and 9 percent, respectively. What is the expected rate of return on this stock?

10.90 percent

You have compiled the following information on your investments. What rate of return should you expect to earn on this portfolio? Stock Number of Shares Price per share Expected Return A 500 $ 51 13.6 % B 200 66 14.8 % C 300 42 7.5 % D 250 29 2.1 %

11.13 percent

Stock J has a beta of 1.06 and an expected return of 12.3 percent, while Stock K has a beta of .74 and an expected return of 6.7 percent. If you create portfolio with the same risk as the market, what rate of return should you expect to earn?

11.25 percent

Midwest Fastener Supply stock is expected to return 16 percent in a booming economy, 12 percent in a normal economy, and −3 percent in a recession. The probabilities of an economic boom, normal state, or recession are 12 percent, 80 percent, and 8 percent, respectively. What is the expected rate of return on this stock?

11.28 percent

The stock of Wiley United has a beta of .98. The market risk premium is 7.6 percent and the risk-free rate is 3.9 percent. What is the expected return on this stock?

11.35 percent

A stock has a beta of 1.04, the expected return on the market is 11.75, and the risk-free rate is 3.75. What must the expected return on this stock be?

12.07 percent

Given the following information, what is the expected return on a portfolio that is invested 35 percent in Stock A, 45 percent in Stock B, and the balance in Stock C? Rate of Return if State Occurs: State of Economy Probability of State Occurring Stock A (%) Stock B (%) Stock C (%) Boom .12 16.7 18.9 6.4 Normal .85 14.2 11.4 9.5 Recession .03 6.4 −3.8 11.2

12.16 percent

You want to create a $50,000 portfolio that consists of three stocks and has an expected return of 12.6 percent. Currently, you own $14,200 of Stock A and $21,700 of Stock B. The expected return for Stock A is 16.2 percent, and for Stock B it is 10.4 percent. What is the expected rate of return for Stock C?

12.36 percent

You own a portfolio that is invested 32 percent in Stock A, 43 percent in Stock B, and the remainder in Stock C. The expected returns on stocks A, B, and C are 11.5 percent, 15.2 percent, and 8.8 percent, respectively. What is the expected return on the portfolio?

12.42 percent

A stock has a beta of 0.95, the expected return on the market is 13.25, and the risk-free rate is 3.66. What must the expected return on this stock be?

12.77 percent

You own a stock that has an expected return of 15.72 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.82 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market?

12.77 percent

Assume the economy has an 18 percent chance of booming, a 3 percent chance of being recessionary, and being normal the remainder of the time. A stock is expected to return 16.8 percent in a boom, 12.9 percent in a normal economy, and −4.5 percent in a recession. What is the expected rate of return on this stock?

13.08 percent

You own a portfolio that has $2,200 invested in Stock A and $1,300 invested in Stock B. If the expected returns on these stocks are 11 percent and 17 percent, respectively, what is the expected return on the portfolio?

13.23 percent

You own a portfolio consisting of the securities listed below. The expected return for each security is as shown. What is the expected return on the portfolio? Stock Number of Shares Price per share Expected Return A 175 $ 9 11.2 % B 250 18 16.4 % C 400 56 8.7 % D 225 39 24.5 %

13.46 percent

Popular Finger Foods stock is expected to return 20 percent in a booming economy, 14 percent in a normal economy, and −5 percent in a recession. The probabilities of an economic boom, normal state, or recession are 8 percent, 87 percent, and 5 percent, respectively. What is the expected rate of return on this stock?

13.53 percent

Bama Entertainment has common stock with a beta of 1.22. The market risk premium is 8.1 percent and the risk-free rate is 3.9 percent. What is the expected return on this stock?

13.78 percent

Southern Wear stock has an expected return of 15.1 percent. The stock is expected to lose 8 percent in a recession and earn 18 percent in a boom. The probabilities of a recession, a normal economy, and a boom are 2 percent, 87 percent, and 11 percent, respectively. What is the expected return on this stock if the economy is normal?

15.26 percent

You own a $58,600 portfolio comprised of four stocks. The values of Stocks A, B, and C are $11,200, $17,400, and $20,400, respectively. What is the portfolio weight of Stock D?

16.38 percent

Stock A has an expected return of 14.4 percent and a beta of 1.21. Stock B has an expected return of 12.87 percent and a beta of 1.06. Both stocks have the same reward-to-risk ratio. What is the risk-free rate?

2.06 percent

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?

2.38 percent

Ben & Terry's has an expected return of 13.2 percent and a beta of 1.08. The expected return on the market is 12.4 percent. What is the risk-free rate?

2.40 percent

Stock J has a beta of 1.52 and an expected return of 15.76 percent. Stock K has a beta of .98 and an expected return of 11.44 percent. What is the risk-free rate if these securities both plot on the security market line?

3.60 percent

North Around, Inc. stock is expected to return 22 percent in a boom, 13 percent in a normal economy, and −15 percent in a recession. The probabilities of a boom, normal economy, and a recession are 6 percent, 92 percent, and 2 percent, respectively. What is the standard deviation of the returns on this stock?

4.53 percent

Consider the following information on a portfolio of three stocks: Rate of Return State of Economy Probability of State Occurring Stock A (%) Stock B (%) Stock C (%) Boom .05 7 15 28 Normal .80 9 12 17 Bust .15 10 2 −35 The portfolio is invested 40 percent in each Stock A and Stock B and 20 percent in Stock C. If the expected T-bill rate is 4.03 percent, what is the expected risk premium on the portfolio?

5.80 percent

A stock has an expected return of 11.3 percent and a beta of 1.08. The risk-free rate is 4.7 percent. What is the slope of the security market line?

6.11 percent

A stock has a beta of 1.32 and an expected return of 12.8 percent. The risk-free rate is 3.6 percent. What is the slope of the security market line?

6.97 percent

You own a portfolio that is invested as follows: $22,575 of Stock A, $3,750 of Stock B, $12,500 of Stock C, and $5,800 of Stock D. What is the portfolio weight of Stock B?

8.40 percent

Bass Clef Music Stores' stock has a risk premium of 7 percent while the inflation rate is 1.9 percent and the risk-free rate is 2.2 percent. What is the expected return on this stock?

9.2 percent

Sarina Stable Supply stock has a risk premium of 6.2 percent while the inflation rate is 1.7 percent and the risk-free rate is 3.1 percent. What is the expected return on this stock?

9.3 percent

Given the following information, what is the expected return on a portfolio that is invested 30 percent in both Stocks A and C, and 40 percent in Stock B? Rate of Return if State Occurs: State of Economy Probability of State Occurring Stock A (%) Stock B (%) Stock C (%) Boom 0.08 15.6 13.2 12.9 Normal 0.87 11.2 9.6 8 Recession 0.05 2.5 1.2 −5.6

9.44 percent

A stock has a beta of 1.10, an expected return of 12.11 percent, and lies on the security market line. A risk-free asset is yielding 3.2 percent. You want to create a portfolio valued at $12,000 consisting of Stock A and the risk-free security such that the portfolio beta is .80. What rate of return should you expect to earn on your portfolio?

9.68 percent

Stock A has a beta of 1.09 while Stock B has a beta of .76 and an expected return of 8.2 percent. What is the expected return on Stock A if the risk-free rate is 4.6 percent and both stocks have equal reward-to-risk premiums?

9.76 percent

Crabby Shores stock is expected to return 15.7 percent in a booming economy, 9.8 percent in a normal economy, and 2.3 percent in a recession. The probabilities of an economic boom, normal state, or recession are 15 percent, 73 percent, and 12 percent, respectively. What is the expected rate of return on this stock?

9.79 percent

Which one of these represents systematic risk?

Increase in consumption created by a reduction in personal tax rates

World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stock's rate of return without affecting the risk level of the stock, all else constant?

Increase in the market risk-to-reward ratio

Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives?

Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0

Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following?

Reduce the portfolio's unique risks

Which one of the following best exemplifies unsystematic risk?

Unexpected increase in the variable costs for a firm

A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock?

a decrease in the probability of an economic boom

Systematic risk is defined as:

any risk that affects a large number of assets

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

The capital asset pricing model:

considers the relationship between the fluctuations in a security's returns versus the market's returns.

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

costs of capital

According to the capital asset pricing model, the expected return on a security will be affected by all of the following except the:

security's standard deviation

Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?

statement by a firm that it has just discovered a manufacturing defect and is recalling its product

The expected rate of return on Delaware Shores stock is based on three possible states of the economy. These states are boom, normal, and recession which have probabilities of occurrence of 20 percent, 75 percent, and 5 percent, respectively. Which one of the following statements is correct concerning the variance of the returns on this stock?

the variance must be positive provided that each state of the economy produces a different expected rate of return

Which statement is true?

the weights of the securities held in any portfolio must equal 1.0

Standard deviation measures ________ risk while beta measures ________ risk.

total; systematic

A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is .74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta:

will be greater than or equal to .74 but less than or equal to 1.51.

Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security?

zero

Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security's beta, and E(RM) is the expected rate of return on the market.

β[E(RM) − Rf]

Bernard Companies stock has an expected return of 9.5 percent. The stock is expected to return 11 percent in a normal economy and 13.4 percent in a boom. The probabilities of a recession, normal economy, and a boom are 10 percent, 84 percent, and 6 percent, respectively. What is the expected return if the economy is in a recession?

−5.44 percent