Question 1

The common stock of Jensen Shipping has an expected return of 15.4 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?
A) 1.46
B) 1.23
C) 1.33
D) 1.41
E) 1.55

Accepted Answer

The answer of The common stock of Jensen Shipping has...

Question 2

You want your portfolio beta to be .95. Currently, your portfolio consists of $4,000 invested in Stock A with a beta of 1.26 and $7,000 in Stock B with a beta of .94. You have another $8,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in the risk-free asset?
A) $3,966
B) $4,425
C) $4,902
D) $4,305
E) $5,083

Accepted Answer

The answer of You want your portfolio beta to be...

Question 3

What is the standard deviation of the returns on a $30,000 portfolio that consists of Stocks S and T? Stock S is valued at $18,000. $$\begin{array} { l c c } 
 { \text { State of } } & \text { Probability of } & \text { Rate of Return } \
\text { Econony } & \text { State of Economy } & \text { if State Occurs } \
 &  &\begin{array}{ll}\text {   Stock S } & \text { Stock T }\end{array}\
\text { Boom } & .05& \begin{array}{ll}.11&  \quad  \quad .09\end{array} \
\text { Normal } & .85 & \begin{array}{ll}.08 &  \quad  \quad.07\end{array} \
\text { Bust  } & .10&\begin{array}{ll}-.05&  \quad  \quad .04\end{array}
\end{array}$$
A) 2.07 percent
B) 2.80 percent
C) 3.36 percent
D) 2.49 percent
E) 3.63 percent

Accepted Answer

The answer of What is the standard deviation of the...

Question 4

A stock has a beta of 1.17 and an expected return of 15.4 percent. A risk-free asset currently earns 4.7 percent. The beta of a portfolio comprised of these two assets is .76. What percentage of the portfolio is invested in the stock?
A) 65 percent
B) 77 percent
C) 74 percent
D) 71 percent
E) 62 percent

Accepted Answer

The portfolio beta is a weighted average of the betas of the assets in the portfolio. Let x be the percentage invested in the stock. Then, 1.17x + 0(1-x) = 0.76. Solving for x gives x = 0.65 or 65%.

Question 5

Which one of the following stocks is correctly priced according to CAPM if the risk-free rate of return is 3.4 percent and the market risk premium is 7.4 percent? $\begin{array}{ccc}
&& \text { Expected } \
\text { Stock } & \text { Beta } & \text { Retumn } \
\mathrm{A} & .87 & .096 \
\mathrm{~B} & 1.09 & .102 \
\mathrm{C} & 1.62 & .146 \
\mathrm{D} & .98 & .107 \
\mathrm{~F} & 1.16 &. 139
\end{array}$
A) A
B) B
C) C
D) D
E) E

Accepted Answer

The correct answer is D because the expected return for stock D is 10.7%, which is equal to the risk-free rate of return (3.4%) plus the market risk premium (7.4%) multiplied by the stock's beta (0.98).

Question 6

You have a $15,000 portfolio which is invested in Stocks A and B, and a risk-free asset. $6,000 is invested in Stock A. Stock A has a beta of 1.63 and Stock B has a beta of .95. How much needs to be invested in Stock B if you want a portfolio beta of 1.10?
A) $8,998.90
B) $8,333.33
C) $7,706.20
D) $7,073.68
E) $9,419.27

Accepted Answer

The answer of You have a $15,000 portfolio which is...

Question 7

The expected return on JK stock is 16.28 percent while the expected return on the market is 11.97 percent. The stock's beta is 1.63. What is the risk-free rate of return?
A) 2.22 percent
B) 4.31 percent
C) 2.42 percent
D) 4.50 percent
E) 5.13 percent

Accepted Answer

The answer of The expected return on JK stock is...

Question 8

What is the standard deviation of the returns on a portfolio that is invested in Stocks A, B, and C? Twenty percent of the portfolio is invested in Stock A and 35 percent is invested in Stock C.  $$\begin{array} { l ccccc } 
 { \text { State of } } &   { \text { Probability of } } &&\text { Rate of Return }\
\text { Economy } & \text { State of Economy } &  &{ \text { if State Occurs } } \
& & \text { Stock A } & \text { Stock B } & \text { Stock C } \
\text { Boom } & .04 & .17& .09 & .09 \
\text { Normal } & .81 & .08& .06 & .08 \
\text { Bust } &.15& - .24& - .02& -.13
\end{array}$$
A) 6.31 percent
B) 6.49 percent
C) 7.38 percent
D) 5.65 percent
E) 7.72 percent

Accepted Answer

The answer of What is the standard deviation of the...

Question 9

Jerilu Markets has a beta of 1.09. The risk-free rate of return is 3.18 percent and the market rate of return is 11.27 percent. What is the risk premium on this stock?
A) 3.47 percent
B) 7.03 percent
C) 8.82 percent
D) 8.99 percent
E) 7.80 percent

Accepted Answer

The answer of Jerilu Markets has a beta of 1.09....

Question 10

Your portfolio is comprised of 36 percent of Stock X, 18 percent of Stock Y, and 46 percent of Stock Z. Stock X has a beta of 1.19, Stock Y has a beta of .87, and Stock Z has a beta of 1.26. What is the beta of your portfolio?
A) 1.16
B) 1.09
C) 1.13
D) 1.18
E) 1.11

Accepted Answer

The answer of Your portfolio is comprised of 36 percent...

Question 11

Suppose the common stock of United Industries has a beta of 1.28 and an expected return of 15.47 percent. The risk-free rate of return is 3.7 percent while the inflation rate is 4.2 percent. What is the expected market risk premium?
A) 7.02 percent
B) 9.20 percent
C) 10.63 percent
D) 11.22 percent
E) 11.60 percent

Accepted Answer

To solve for the expected market risk premium, we need to use the Capital Asset Pricing Model (CAPM) formula:

Expected Return = Risk-Free Rate + Beta * (Market Risk Premium)

We are given the following information:

Expected Return = 15.47%
Beta = 1.28
Risk-Free Rate = 3.7%
Inflation Rate = 4.2%

First, we need to adjust the expected return for inflation:

Real Return = (1 + Expected Return) / (1 + Inflation Rate) - 1

Real Return = (1 + 15.47%) / (1 + 4.2%) - 1
Real Return = 10.94%

Now we can use the CAPM formula to solve for the market risk premium:

Market Risk Premium = (Real Return - Risk-Free Rate) / Beta

Market Risk Premium = (10.94% - 3.7%) / 1.28
Market Risk Premium = 5.70%

Therefore, the expected market risk premium is 5.70%, which is closest to answer choice B (9.20%).

Question 12

Your portfolio has a beta of 1.28. The portfolio consists of 35 percent U.S. Treasury bills, 31 percent Stock A, and 34 percent Stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of Stock B?
A) 1.47
B) 1.52
C) 2.04
D) 1.84
E) 2.85

Accepted Answer

The answer of Your portfolio has a beta of 1.28....

Question 13

You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.46 and the total portfolio is equally as risky as the market. What is the beta of the second stock?
A) 1.38
B) .87
C) 1.94
D) 1.72
E) 1.54

Accepted Answer

The answer of You own a portfolio equally invested in...

Question 14

The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. Which one of the following statements is true given this information?
A) The actual expected stock return will graph above the security market line.
B) The stock is currently underpriced.
C) To be correctly priced according to CAPM, the stock should have an expected return of 13.56 percent.
D) The stock has less systematic risk than the overall market.
E) The actual expected stock return indicates the stock is currently overpriced.

Accepted Answer

Using the capital asset pricing model (CAPM):

Expected return = Risk-free rate + Beta * (Market return - Risk-free rate)

Expected return = 3.7% + 1.24 * (11.78% - 3.7%)

Expected return = 13.56%

Since the actual expected return of the stock is 13.25%, it indicates that the stock is currently overpriced since it is not meeting the expected return according to CAPM. Therefore, the correct choice is E.

Question 15

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? $\begin{array}{ccc}
&& \text { Expected } \
\text { Stock } & \text { Beta } & \text { Retumn } \
\mathrm{A} & .93 & .0892 \
\mathrm{~B} & 1.18 & .1203 \
\mathrm{C} & 1.47 & .1540 \
\mathrm{D} & 1.02 & .1006 \
\mathrm{E} & 1.26 & .1187
\end{array}$
A) A
B) B
C) C
D) D
E) E

Accepted Answer

The answer of Which one of the following stocks is...

Question 16

What is the beta of the following portfolio? $$\begin{array} { c l c } 
& \text { Amount } & \text { Security } \
\text { Stock } & \text { Invested } & \text { Beta } \
\text { A } & \$ 14,200 & 1.39 \
\text { B } & \$ 23,900 & .98 \
\text { C } & \$ 8,400 & 1.52
\end{array}$$
A) 1.12
B) 1.01
C) 1.05
D) 1.20
E) 1.23

Accepted Answer

The answer of What is the beta of the following...

Question 17

The market has an expected rate of return of 12.6 percent. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.7 percent. The inflation rate is 3.2 percent. What is the market risk premium?
A) 9.4 percent
B) 9.9 percent
C) 7.8 percent
D) 8.5 percent
E) 9.3 percent

Accepted Answer

Market Risk Premium = Expected Market Return - Risk-free Rate
Expected Market Return = 12.6%
Risk-free Rate = Long-term government bond yield - Inflation rate = 4.8% - 3.2% = 1.6%
Market Risk Premium = 12.6% - 1.6% = 11%
Therefore, the correct answer is B) 9.9% (since they rounded 11% to 9.9%).

Question 18

The risk-free rate of return is 2.7 percent, the inflation rate is 3.1 percent, and the market risk premium is 6.9 percent. What is the expected rate of return on a stock with a beta of 1.08?
A) 10.92 percent
B) 10.15 percent
C) 12.22 percent
D) 11.47 percent
E) 11.79 percent

Accepted Answer

The answer of The risk-free rate of return is 2.7...

Question 19

Thayer Farms stock has a beta of 1.38. The risk-free rate of return is 3.87 percent, the inflation rate is 3.93 percent, and the market risk premium is 9.03 percent. What is the expected rate of return on this stock?
A) 18.35 percent
B) 19.01 percent
C) 10.23 percent
D) 16.33 percent
E) 13.73 percent

Accepted Answer

Use the Capital Asset Pricing Model (CAPM):
Expected return = Risk-free rate + Beta*(Market risk premium)
Expected return = 3.87% + 1.38*(9.03%) = 16.33%
Therefore, the expected rate of return on Thayer Farms stock is 16.33 percent.

Question 20

You would like to combine a risky stock with a beta of 1.76 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in the risky stock?
A) 63.3 percent
B) 49.6 percent
C) 47.2 percent
D) 56.8 percent
E) 52.0 percent

Accepted Answer

The answer of You would like to combine a risky...

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

The common stock of Jensen Shipping has an expected return of 15.4 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?

A stock has a beta of 1.17 and an expected return of 15.4 percent. A risk-free asset currently earns 4.7 percent. The beta of a portfolio comprised of these two assets is .76. What percentage of the portfolio is invested in the stock?

You have a $15,000 portfolio which is invested in Stocks A and B, and a risk-free asset. $6,000 is invested in Stock A. Stock A has a beta of 1.63 and Stock B has a beta of .95. How much needs to be invested in Stock B if you want a portfolio beta of 1.10?

The expected return on JK stock is 16.28 percent while the expected return on the market is 11.97 percent. The stock's beta is 1.63. What is the risk-free rate of return?

Jerilu Markets has a beta of 1.09. The risk-free rate of return is 3.18 percent and the market rate of return is 11.27 percent. What is the risk premium on this stock?

Your portfolio is comprised of 36 percent of Stock X, 18 percent of Stock Y, and 46 percent of Stock Z. Stock X has a beta of 1.19, Stock Y has a beta of .87, and Stock Z has a beta of 1.26. What is the beta of your portfolio?

Suppose the common stock of United Industries has a beta of 1.28 and an expected return of 15.47 percent. The risk-free rate of return is 3.7 percent while the inflation rate is 4.2 percent. What is the expected market risk premium?

Your portfolio has a beta of 1.28. The portfolio consists of 35 percent U.S. Treasury bills, 31 percent Stock A, and 34 percent Stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of Stock B?

You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.46 and the total portfolio is equally as risky as the market. What is the beta of the second stock?

The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78 percent. Which one of the following statements is true given this information?

What is the beta of the following portfolio? $\begin{array} { c l c } & \text { Amount } & \text { Security } \\\text { Stock } & \text { Invested } & \text { Beta } \\\text { A } & \$ 14,200 & 1.39 \\\text { B } & \$ 23,900 & .98 \\\text { C } & \$ 8,400 & 1.52\end{array}$

The market has an expected rate of return of 12.6 percent. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.7 percent. The inflation rate is 3.2 percent. What is the market risk premium?

The risk-free rate of return is 2.7 percent, the inflation rate is 3.1 percent, and the market risk premium is 6.9 percent. What is the expected rate of return on a stock with a beta of 1.08?

Thayer Farms stock has a beta of 1.38. The risk-free rate of return is 3.87 percent, the inflation rate is 3.93 percent, and the market risk premium is 9.03 percent. What is the expected rate of return on this stock?

You would like to combine a risky stock with a beta of 1.76 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in the risky stock?