last thing for school ever

The common stock of Manchester & Moore is expected to earn 17 percent in a recession, 7 percent in a normal economy, and lose 8 percent in a booming economy. The probability of a boom is 15 percent while the probability of a recession is 5 percent. What is the expected rate of return on this stock?

(.05(.17)+(.07)(.80) + (.15)(-.08)= E(r) = .05(.17) + .80(.07) + .15(−.08) E(r) = .0525, or 5.25%

Over the past four years a stock had returns of 10%, -8%, 23%, and 0%, respectively. What was the geometric average return on this stock?

(1..10+.92+1.23+1)^1/4-1 Geometric average return = {1.1 x 0.92 x 1.23 x 1}1/4 - 1 = 5.63% `

What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 3.1 percent, the inflation rate is 2.6 percent, and the market rate of return is 7.4 percent?

0-Treasury bills are risk free assets so the risk premium on a Treasury bill is zero.

A stock has an expected rate of return of 9.8 percent and a standard deviation of 15.4 percent. Which one of the following best describes the probability that this stock will lose at least half of its value in any one given year?

0..05If a stock loses at least half of its value, it means the return is less than -50%. The lower bound of the 99 percent probability range = .098 − (3) (.154) Lower bound of 99 percent range = −.364, or −36.4 percent. Probability of losing 36.4 percent or more is 0.005. Probability of losing 50 percent or more in any one year is less than 0.005 or 0.5 percent.

Which of the following statements are correct concerning diversifiable risks? I. Diversifiable risks can be essentially eliminated by investing in 30 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk.

1 11 111 only

Which of the following are examples of diversifiable risk?. 1 An earthquake damages an entire town II. The federal government imposes a $100 fee on all business entities III. Employment taxes increase nationally IV. All toymakers are required to improve their safety standards

1 and 1v

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 10 percent, 13 percent, 19 percent, −4 percent, and 15 percent. Suppose the T-bill rate was 3.1 percent. Based on this information, what was the risk premium?

Arithmetic average return = (10 + 13 + 19 + -4 + 15)/5 = 10.6 percent Risk premium = 10.6% - 3.1% = 7.5%

The common stock of Air Express had annual returns of 11.7 percent, 8.8 percent, 16.7 percent, and −7.9 percent over the last four years, respectively. What is the standard deviation of these returns?

Average return = (.117 + .088 + .167 − .079)/4 Average return = .07325 or 7.325% σ = {[1/(4 − 1)] [(.117 − .07325)2 + (.088 − .07325)2 + (.167 − .07325)2 + (−.079 − .07325)2]}.5 σ = .1066, or 10.66%

A stock had returns of 14 percent, 13 percent, −10 percent, and 7 percent for the past four years. What is the 95 percent probability range of returns for this stock?

Average return = (.14 + .13 − .10 + .07)/4 Average return = .06, or 6% σ = {[1/(4 − 1)] [(.14 − .06)2 + (.13 − .06)2 + (−.10 − .06)2 + (.07 − .06)2]}.5 σ = .111, or 11.1% Lower bound of 95 percent range = .06 − 2 (.111) Lower bound of 95 percent range = −.162, or −16.2% Upper bound of 95 percent range = .06 + 2 (.111) Upper bound of 95 percent range = .282 or 28.2%

Total risk is measured by ________ and systematic risk is measured by ________.

B) standard deviation; beta

Which of the following statements are true based on the historical record for 1926-2016?

Bonds are generally a safer, or less risky, investment than are stocks.

Today, you sold 540 shares of stock and realized a total return of 6.3 percent. You purchased the shares one year ago at a price of $24 a share and have received a total of $117 in dividends. What is your capital gains yield on this investment?

Capital Gains Yield = 0.063 - 117/(540 x 24) = 0.063 - 0.0090 = 0.054 = 5.40 percent. Total Percentage Return = Dividend Yield + Capital Gains Yield

You own 850 shares of Western Feed Mills stock valued at $53.15 per share. What is the dividend yield if your total annual dividend income is $1,256?

Dividend yield = ($1,256/850)/$53.15 or Dividend Yield = 1256/(850x53.15) = 0.0278 Dividend yield = .0278, or 2.78%

Consider the following information on three stocks: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Stock C Boom .25 .27 .15 .11 Normal .65 .14 .11 .09 Bust .10 −.19 −.04 .05 A portfolio is invested 45 percent each in Stock A and Stock B and 10 percent in Stock C. What is the expected risk premium on the portfolio if the expected T-bill rate is 4.1 percent?

E(RP)Boom = .45(.27) + .45(.15) + .10(.11) = .2000 E(RP)Normal = .45(.14) + .45(.11) + .10(.09) = .1215 E(RP)Bust = .45(-.19) + .45(-.04) + .10(.05) = -.0985 E(RP) = .25(.2000) + .65(.1215) + .10(−.0985) E(RP) = .1191, or 11.91% Risk Premium (Portfolio) = .1191 − .041 = 0.0781 = 7.81%

You have $1,000,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 18 percent and Stock Y with an expected return of 10 percent. Your goal is to create a portfolio with an expected return of 13 percent. All money must be invested. How much will you invest in Stock X?

E(Rp) = .13 = .18x + .10(1 − X) x = .375, or 37.5 percent Investment in Stock X = .375($1,000,000) Investment in Stock X = $375,000

The common stock of Jensen Shipping has an expected return of 16.2 percent. The return on the market is 11.2 percent, the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6 percent. What is the beta of this stock?

E(r) = .162 = .036 + β(.112 − .036). 0.126 = 0.076β β = 0.126/0.076 = 1.66

he common stock of Jensen Shipping has an expected return of 16.2 percent. The return on the market is 11.2 percent, the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6 percent. What is the beta of this stock?

E(r) = .162 = .036 + β(.112 − .036). 0.126 = 0.076β β = 0.126/0.076 = 1.66

Which one of the following stocks is correctly priced if the risk-free rate of return is 2.84 percent and the market rate of return is 10.63 percent? Stock Beta Expected Return A .93 .0892 B 1.18 .1203 C 1.47 .1540 D 1.02 .1006 E 1.26 .1187

E(r)A = .0284 + .93(.1063 − .0284) = .1008, or 10.08% E(r)B = .0284 + 1.18(.1063 − .0284) = .1203, or 12.03% Stock B is correctly priced according to CAPM. E(r)C = .0284 + 1.47(.1063 − .0284) = .1429, or 14.29% E(r)D = .0284 + 1.02(.1063 − .0284) = .1079, or 10.79% E(r)E = .0284 + 1.26(.1063 - .0284) = .1266, or 12.66%

What is the variance of the returns on a portfolio that is invested 40 percent in Stock S and 60 percent in Stock T? State of Economy Probability of State of Economy Rate of Return if State Occurs Stock S Stock T Boom .06 .22 .18 Normal .92 .15 .14 Bust .02 −.26 .09

E(r)Boom = .40(.22) + .60(.18) = .196 E(r)Normal = .40(.15) + .60(.14) = .144 E(r)Bust = .40(-.26) +.60(.09) = -.05 E(r)Portfolio = .06(.196) + .92(.144) + .02(−.050) E(r)Portfolio =.14324 σ2Portfolio = .06(.196 − .14324)2 + .92(.144 - .14324)2 + .02(−.050 − .14324)2 σ2Portfolio = .00091

The common stock of Alpha Manufacturers has a beta of 1.18 and an actual expected return of 13.33 percent. The risk-free rate of return is 3.3 percent and the market rate of return is 12.20 percent. Which one of the following statements is true given this information?

E(r)CAPM = .033 + 1.18(.1220 − .033) E(r)CAPM = .1380, or 13.80 Investors require an expected return of 13.80% on this stock given its beta. The stock is overpriced because its actual expected return is less than the CAPM required expected return.

What is the expected return on this portfolio? Stock Expected Return Number of Shares Price per Share A .11 200 $ 18.60 B .06 400 $ 12.85 C .17 300 $ 43.90

Portfolio value = 200($18.60) + 400($12.85) + 300($43.90) Portfolio value = $3,720 + 5,140 + 13,170 Portfolio value = $22,030 E(r) = ($3,720/$22,030)(.11) + ($5,140/$22,030)(.06) + ($13,170/$22,030)(.17) E(r)= .1342, or 13.42%

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

Portfolio weight

Assume the returns from an asset are normally distributed. The average annual return for the asset is 17.4 percent and the standard deviation of the returns is 27.5 percent. What is the approximate probability that your money will double in value in a single year?

Upper tail of the 99 percent range = .174 + 3 (.275) Upper tail of 99 percent range = .999, or 99.9% The upper tail of the 99 percent range is 99.9 percent, which is close to the 100 percent required to double your money. Thus, the probability of occurrence is close to .5 percent.

Which one of the following statements best defines the efficient market hypothesis?

all securities in an efficient manner are zero net present value investments

Suppose a stock had an initial price of $73 per share, paid a dividend of $1.42 per share during the year, and had an ending share price of $81. What was the capital gains yield?

cpy==== 81-73/81--8/81-- 10.96%

Which one of the following is an example of systematic risk?

investors panic causing security prices around the globe to to fall

If a stock portfolio is well diversified, then the portfolio variance:

may be less than the variance of the least risky stock in the portfolio

Which one of the following correctly describes the dividend yield?

next years annual dividend divided by todays stock price

Inside information has the least value when financial markets are:

strong form efficient.

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information.

The rate of return on which type of security is normally used as the risk-free rate of return

treasury bills

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

weak

A stock has a beta of 1.50 and an expected return of 15.4 percent. A risk-free asset currently earns 3.7 percent. The beta of a portfolio comprised of these two assets is .90. What percentage of the portfolio is invested in the stock?

βp = .90 = 1.50x + (1 − x)(0) x = 0.90/1.50 = .60 = 60%