Question 1

You own a portfolio that is invested 50% in a risk-free asset and 50% in a stock that is equally as risky as the market. The risk-free asset has an expected return of 5%. Your portfolio has an expected return of 8.80%. What is the expected return on the market?
A) 11.60%
B) 11.75%
C) 12.30%
D) 12.35%
E) 12.60%

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Question 2

What is the expected return on a portfolio comprised of $4,500 in stock X and $5,500 in stock Y if the economy booms? 
A) 10.16%
B) 12.75%
C) 13.33%
D) 14.68%
E) 15.30%

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Question 3

The performance of the common stock of Creekside Stores is highly dependent upon the state of the economy. In a boom economy, the stock is expected to return 24% in comparison to 11% in a normal economy and a negative 18% in a recessionary period. The probability of a recession is 10%. There is a 20% chance of a boom economy. The remainder of the time the economy will be at normal levels. What is the standard deviation of the returns on Creekside stock?
A) 10.68%
B) 10.85%
C) 11.13%
D) 11.22%
E) 11.28%

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Question 4

What is the portfolio expected return and the portfolio beta if you invest 30% in A, 30% in B and 40% in the risk-free asset?
A) 9.6%; 1.32
B) 9.6%; 1.00
C) 10.1%; 0.95
D) 10.1%; 0.72
E) 10.1%; 0.63

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Question 5

The common stock of GO Limited has a beta of 1.23 and an expected return of 12.84%. The risk-free rate of return is 4.2%. What is the expected return on the market?
A) 7.02%
B) 8.64%
C) 10.63%
D) 11.22%
E) 17.04%

Accepted Answer

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Question 6

The risk-free rate of return is 3.78% and the market risk premium is 6.42%. What is the expected rate of return on a stock with a beta of 1.09?
A) 7.00%
B) 7.78%
C) 10.54%
D) 10.78%
E) 11.12%

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Question 7

The stock of Uncle Fred's has a beta a 1.23 and an expected return of 13.42%. The risk-free rate of return is 3.8%. What is the expected return on the market?
A) 9.87%
B) 10.04%
C) 10.67%
D) 11.23%
E) 11.62%

Accepted Answer

The expected return on the market can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Rearranging the formula to solve for the Market Return gives: Market Return = ((Expected Return - Risk-Free Rate) / Beta) + Risk-Free Rate. Plugging in the given values: Market Return = ((13.42% - 3.8%) / 1.23) + 3.8% = 11.62%.

Question 8

What is the expected return on the following stock? 
A) 6%
B) 9%
C) 12%
D) 15%
E) 18%

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Question 9

What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy enjoys a boom period? 
A) 6.4%
B) 6.8%
C) 10.4%
D) 13.2%
E) 14.0%

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Question 10

The stock of Jen's Boutique has a beta of 1.26. The risk-free rate of return is 4.15% and the market risk premium is 8.78%. What is the expected rate of return on Jen's stock?
A) 9.98%
B) 10.26%
C) 10.77%
D) 15.21%
E) 16.29%

Accepted Answer

The expected rate of return on Jen's stock can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + (Beta * Market Risk Premium). Plugging in the values: Expected Return = 4.15% + (1.26 * 8.78%) = 4.15% + 11.06% = 15.21%.

Question 11

Asset A has a reward to risk ratio of.075 and a beta of 1.5. The risk-free rate is 5%. What is the expected return on A?
A) 11.25%
B) 12.25%
C) 13.50%
D) 14.25%
E) 16.25%

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Question 12

What is the expected return on this portfolio? 
A) 10.84%
B) 11.67%
C) 12.39%
D) 12.91%
E) 13.16%

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Question 13

What is the expected market return if the expected return on asset A is 16% and the risk-free rate is 7%? Asset A has a beta of 1.2.
A) 9.5%
B) 14.5%
C) 16.5%
D) 17.5%
E) 20.5%

Accepted Answer

The expected market return can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Rearranging the formula to solve for the Market Return gives: Market Return = ((Expected Return - Risk-Free Rate) / Beta) + Risk-Free Rate. Plugging in the given values: Market Return = ((16% - 7%) / 1.2) + 7% = 14.5%.

Question 14

What is the expected return for the following portfolio? 
A) 10%
B) 11.5%
C) 12.25%
D) 15.5%
E) 18.5%

Accepted Answer

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Question 15

A stock has a beta of 1.4. The expected return on the market is 8% and T-bills are yielding 2%. What is the expected return on the stock?
A) 8.40%
B) 9.65%
C) 10.40%
D) 11.65%
E) 13.20%

Accepted Answer

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Question 16

Kurt's Adventures, Inc. stock is quite cyclical. In a boom economy, the stock is expected to return 30% in comparison to 12% in a normal economy and a negative 20% in a recessionary period. The probability of a recession is 15%. There is a 30% chance of a boom economy. The remainder of the time the economy will be at normal levels. What is the standard deviation of the returns on Kurt's Adventures, Inc. stock?
A) 10.05%
B) 12.60%
C) 15.83%
D) 17.46%
E) 25.04%

Accepted Answer

First, calculate the expected return (ER) using the given probabilities and returns:$$ ER = (0.30 \times 30\%) + (0.55 \times 12\%) + (0.15 \times -20\%) = 9\% + 6.6\% - 3\% = 12.6\% $$Next, calculate the variance ($ \sigma^2 $) using the formula for variance in a probability distribution:$$ \sigma^2 = \sum [P(x) \times (R_x - ER)^2] $$$$ = (0.30 \times (30\% - 12.6\%)^2) + (0.55 \times (12\% - 12.6\%)^2) + (0.15 \times (-20\% - 12.6\%)^2) $$$$ = (0.30 \times 0.1736) + (0.55 \times 0.00036) + (0.15 \times 0.3164) $$$$ = 0.05208 + 0.000198 + 0.04746 = 0.099738 $$Finally, calculate the standard deviation ($ \sigma $) as the square root of the variance:$$ \sigma = \sqrt{0.099738} \approx 0.3158 \text{ or } 31.58\% $$It seems there was a miscalculation in the final step. Let's correct the calculation process:Given probabilities and returns:- Boom economy (30% chance): 30%- Normal economy (55% chance, since 100% - 30% - 15% = 55%): 12%- Recession (15% chance): -20%Expected return calculation:$$ ER = (0.30 \times 30) + (0.55 \times 12) + (0.15 \times (-20)) = 9 + 6.6 - 3 = 12.6\% $$Variance calculation:$$ \sigma^2 = (0.30 \times (30 - 12.6)^2) + (0.55 \times (12 - 12.6)^2) + (0.15 \times (-20 - 12.6)^2) $$$$ \sigma^2 = (0.30 \times 17.4^2) + (0.55 \times 0.6^2) + (0.15 \times 32.6^2) $$$$ \sigma^2 = (0.30 \times 302.76) + (0.55 \times 0.36) + (0.15 \times 1062.76) $$$$ \sigma^2 = 90.828 + 0.198 + 159.414 = 250.44 $$The correct variance calculation should be based on the correct interpretation of the expected return and the probabilities, leading to a different set of calculations. The mistake in the final step was incorrectly calculating the variance and standard deviation based on the provided probabilities and returns. The correct approach involves accurately calculating the expected return, then using it to find the variance by considering the squared differences from the expected return, weighted by their probabilities, and finally taking the square root of the variance to find the standard deviation.The correct answer should be recalculated based on accurate variance and standard deviation formulas, considering the probabilities and returns provided. My explanation mistakenly led to an incorrect standard deviation calculation. The correct standard deviation should be recalculated properly using the given probabilities and returns.

Question 17

A) 7.71%
B) 9.60%
C) 12.76%
D) 13.25%
E) 14.88%

Accepted Answer

The answer of 
A) 7.71%
B) 9.60%
C) 12.76%
D) 13.25%
E) 14.88%...

Question 18

What is the expected return on a portfolio that is 40% invested in A and 60% invested in B?
A) 10%
B) 11%
C) 12.1%
D) 12.8%
E) 13.8%

Accepted Answer

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Question 19

The returns on the common stock of Cycles, Inc. are quite cyclical. In a boom economy, the stock is expected to return 27% in comparison to 13% in a normal economy and a negative 20% in a recessionary period. The probability of a recession is 30% while the probability of a boom is 5%. The remainder of the time the economy will be at normal levels. What is the standard deviation of the returns on this stock?
A) 11.40%
B) 14.79%
C) 15.87%
D) 18.27%
E) 22.46%

Accepted Answer

To find the standard deviation, first calculate the expected return: E(R) = 0.05(27) + 0.65(13) + 0.30(-20) = 5.35%. Then, calculate the variance: Var(R) = 0.05(27-5.35)^2 + 0.65(13-5.35)^2 + 0.30(-20-5.35)^2 = 251.7285. The standard deviation is the square root of the variance: √251.7285 ≈ 15.87%.

Question 20

What is the expected return on security B?
A) 8%
B) 10%
C) 11%
D) 12.8%
E) 13.8%

Accepted Answer

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Quiz 13: Return, Risk, and the Security Market Line

You own a portfolio that is invested 50% in a risk-free asset and 50% in a stock that is equally as risky as the market. The risk-free asset has an expected return of 5%. Your portfolio has an expected return of 8.80%. What is the expected return on the market?

What is the expected return on a portfolio comprised of $4,500 in stock X and $5,500 in stock Y if the economy booms?

What is the portfolio expected return and the portfolio beta if you invest 30% in A, 30% in B and 40% in the risk-free asset?

The common stock of GO Limited has a beta of 1.23 and an expected return of 12.84%. The risk-free rate of return is 4.2%. What is the expected return on the market?

The risk-free rate of return is 3.78% and the market risk premium is 6.42%. What is the expected rate of return on a stock with a beta of 1.09?

The stock of Uncle Fred's has a beta a 1.23 and an expected return of 13.42%. The risk-free rate of return is 3.8%. What is the expected return on the market?

What is the expected return on the following stock?

What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy enjoys a boom period?

The stock of Jen's Boutique has a beta of 1.26. The risk-free rate of return is 4.15% and the market risk premium is 8.78%. What is the expected rate of return on Jen's stock?

Asset A has a reward to risk ratio of.075 and a beta of 1.5. The risk-free rate is 5%. What is the expected return on A?

What is the expected return on this portfolio?

What is the expected market return if the expected return on asset A is 16% and the risk-free rate is 7%? Asset A has a beta of 1.2.

What is the expected return for the following portfolio?

A stock has a beta of 1.4. The expected return on the market is 8% and T-bills are yielding 2%. What is the expected return on the stock?

What is the expected return on a portfolio that is 40% invested in A and 60% invested in B?

What is the expected return on security B?