FNAN 405 Chapter 12 Das

Reed Plastics just announced the earnings per share for the quarter just ended were $.45 a share. Analysts were expecting $.51. What is the amount of the surprise portion of the announcement? A.) -$.06 B.) -$.12 C.) $.00 D.) $.03 E.) $.06

A.) -$.06 Surprise = $.45 - $.51 = -$.06

Which one of the following measures systematic risk? A.) beta B.) alpha C.) variance D.) standard deviation E.) correlation coefficient

A.) Beta

Which one of the following is the type of risk that only affects either a single firm or just a small number of firms? A.) unsystematic B.) expected C.) unexpected D.) market E.) systematic

A.) unsystematic

The common stock of Industrial Technologies has an expected return of 12.4 percent. The market return is 9.2 percent and the risk-free return is 3.87 percent. What is the stock's beta? A.) 0.42 B.) 1.60 C.) 1.32 D.) 1.00 E.) 1.42

B.) 1.60 12.4 = 3.87 + β (9.2 - 3.87); β = 1.60

The reward-to-risk ratio is 6.8 percent and the risk-free rate is 5.3 percent. What is the expected return on a risky asset if the beta of that asset is 1.03? A.) 12.02 percent B.) 12.30 percent C.) 7.00 percent D.) 12.07 percent E.) 12.00 percent

B.) 12.30 %

A risky asset has a beta of .88 and an expected return of 7.4 percent. What is the reward-to-risk ratio if the risk-free rate is 2.8 percent? A.) 4.04 percent B.) 5.23 percent C.) 6.51 percent D.) 8.41 percent E.) 11.59 percent

B.) 5.23 percent

Which one of the following is expressed as "E(RM) - Rf"? A.) total expected rate of return B.) market risk premium C.) market rate of return D.) individual security risk premium E.) real rate of return

B.) market risk premium

Brooke invested $3,500 in the stock market with the expectation of earning 9.5 percent. She actually earned 10.7 percent for the year. What is the amount of her unexpected return? A.) -1.2 percent B.) -0.6 percent C.) 1.2 percent D.) 1.9 percent E.) 2.4 percent

C.) 1.2 percent 10.7-9.5=1.2

Which one of the following statements applies to unsystematic risk? A.) It can be eliminated through portfolio diversification B.) it is also called market risk C.) it is a type of risk that applies to most, if not all, securities D.) investors receive a risk premium as compensation for accepting this risk E.) this risk is related to expected returns.

C.) it is a type of risk that applies to most, if not all, securities.

Which one of the following terms is another name for systematic risk? A.) firm risk B.) asset-specific risk C.) market risk D.) diversifiable risk E.) unique risk

C.) market risk

A portfolio is comprised of two stocks. Stock A comprises 65 percent of the portfolio and has a beta of 1.31. Stock B has a beta of .98. What is the portfolio beta? A.) 1.08 B.) 1.03 C.) 1.22 D.) 1.19 E.) .98

D.) 1.19 βp = (.65 × 1.31) + [(1 - .65) × .98] = .85 + .34 = 1.19

Stock A is a risky asset that has a beta of 1.4 and an unexpected return of 13.2 percent. Stock B is also a risky asset and has a beta of 1.25. The risk-free rate is 5.5 percent. Assuming both stocks are correctly priced, what is the expected return on Stock B? A.) 11.90 percent B.) 12.11 percent C.) 12.29 percent D.) 12.38 percent E.) 12.46 percent

D.) 12.38 Percent

Stock X has a beta of .95 and an expected return of 10.8 percent. Stock Y has a beta of 1.2 and an expected return of 13.1 percent. What is the risk-free rate of return assuming that both stock X and stock Y are correctly priced? A.) 1.20 percent B.) 1.10 percent C.) 3.30 percent D.) 2.06 percent E.) 3.50 percent

D.) 2.06 % [10.80 - rf]/.95 = [13.1 - rf]/1.2; rf = 2.06%

The stock of Healthy Eating, Inc., has a beta of .88. The risk-free rate is 3.8 percent and the market return is 9.6 percent. What is the expected return on Healthy Eating's stock? A.) 11.15 percent B.) 11.47 percent C.) 6.07 percent D.) 8.90 percent E.) 6.25 percent

D.) 8.90 % E(R) = 3.80 + .88(9.60 - 3.80) = 8.90 percent

According to the systematic risk principle, the reward for bearing risk is based on which one of the following types of risk? A.) unsystematic B.) firm specific C.) expected D.) systematic E.) diversifiable

D.) Systematic

Farm Tractors, Inc., stock has a beta of 1.02 and an expected return of 12.8 percent. The risk-free rate is 3.9 percent. What is the market rate of return? A.) 6.67 percent B.) 8.90 percent C.) 9.08 percent D.) 11.57 percent E.) 12.63 percent

E.) 12.63 percent

Which one of the following must be equal for two individual securities with different betas if those securities are correctly priced according to the capital asset pricing model? A.) Standard Deviation B.) Rate of Return C.) Beta D.) Risk Premium E.) Reward-to-risk ratio

E.) Reward to Risk Ratio