Homework 6 part 4

Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation?

Normal distribution

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

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

What is the standard deviation of returns for stock A?

.1252

Calculate the standard deviation of a portfolio that contains 40% of one stock with a standard deviation of 14% and 60% of another stock with a standard deviation of 25%, and the correlation of their stock return is 0.9.

.2019

What is the probability associated with a return that lies in the upper tail when the mean plus two standard deviations is graphed?

2.5 percent

Calculate the expected return on a portfolio that contains 30% of a stock with an expected return of 10% and 70% of a stock with an expected return of 5%.

=(.3 X .10) + (.7 x .05) .0650

A portfolio has 70% invested in stock A and the rest invested in stock B. If stock A has a beta of 1.6 and stock B has a beta of 0.6, what's the bets of the portfolio?

=(0.7 x 1.6) + (0.3 x 0.6) 1.3

One year ago, Jason purchased 100 shares of Terry Corporation stock at $21 per share. Today, one year later, the stock pays a $2 per share dividend and the price is now $29 per share. What is the total percentage on the investment for the one year?

=(29-21+2)/21 .4762

The risk-free rate is 2.5% and the market risk premium is 5.5%. A stock has a beta of 1.3, what is its expected return of the stock?

=.025+1.3*(.055) .0965

A firm has a beta of 1.3. Calculate its equity cost of capital assuming that the expected return on the market is 10% and the risk-free rate is 2%.

=1.3*(0.1-0.02)+0.02 .1240

Calculate the earnings before interest and taxes.

=940-463-100 377

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

Diversification

By combining many stocks into a portfolio, the systematic risk of investing in stocks can be eliminated.

False

The expected return on a security is currently based on a 22 percent chance of a 15 percent return given an economic boom and a 78 percent chance of a 12 percent return given a normal economy. Which of the following chances will decrease the expected return on this security?

I and II only

Investors require a 3 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 3 percent. What is this excess return called?

Risk Premium

Which one of the following describes systemic risk?

Risk that affects a large number of assets

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

Risk-free rate

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

Security beta multiplied by the market risk premium

For the period 1926-2014, which one of the following had the largest risk premium?

Small-company stocks

Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment?

The dollar return is dependent on the size of the investment while the percentage return is not

Consider a portfolio comprised of four risky securities. Assume the economy has three 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 are constant under different economic states

Increases in inflation increase nominal interest rates because lenders will not want the real interest rate that they earn to fall.

True

Mary owned a risky stock and she earned 16.5 percent on her investment last year. Which one of the following best describes the 16.5 percent rate?

Wrong Expected return

Jeff deposits $3,000 into an account which pays 5 percent interest, compounded annually. At the same time, Kurt deposits $3,000 into an account paying 3 percent interest, compounded annually. At the end of three years:

Wrong Kurt will earn exactly twice the amount of interest that Jeff earns.

The expected rate of return on Delaware Shores, Inc. 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?

Wrong The variance must be negative provided that each state of the economy produces a different expected rate of return,

Which one of the following statement about the capital asset pricing model is correct?

Wrong assumes the market risk premium is constant over time.

Mann is a chemist for ABC, a major drug manufacturer. Mann earn excess profits by trading ABC stock based on the knowledge he has related to hie experiments if the financial markets are:

Wrong strong form efficient

Which one of the following is the positive square root of the variance?

standard deviation

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 porfolio

The standard deviation measures the ____ of a security's returns over time.

volatility