Question 1

Wilson Farms' stock has a beta of .73 and an expected return of 9.0%. The risk-free rate is 1.9% and the market risk premium is 7.3%. This stock is ________ because the CAPM return for the stock is ________%.

Accepted Answer

Using the CAPM formula, we can calculate that the expected return for Wilson Farms' stock is 1.9% + (0.73 x 7.3%) = 6.38%. Since the expected return based on the CAPM (6.38%) is higher than the given expected return (9.0%), the stock is undervalued. Solving for the required rate of return using the CAPM formula gives us 1.9% + (0.73 x 7.3%) = 6.38%, which rounds to 7.23%. Therefore, the CAPM return for the stock is 7.23%. Choice A is correct.

Question 2

The stock of Healthy Eating, Inc., has a beta of 1.31. The risk-free rate is 1.12% and the market return is 12.32%. What is the expected return on Healthy Eating's stock?

Accepted Answer

The answer of The stock of Healthy Eating, Inc., has...

Question 3

Western Exports stock has a standard deviation of 15.6% and a covariance with the market of .0150. The market has a standard deviation of 13.7%. What is the correlation of this stock with the market?

Accepted Answer

The answer of Western Exports stock has a standard deviation...

Question 4

A stock has a standard deviation of 21.0% and a covariance with the market of .0110. The market has a standard deviation of 12.0%. What is the beta of this stock?

Accepted Answer

The answer of A stock has a standard deviation of...

Question 5

A risky security has a variance of .023983 and a covariance with the market of .0323. The variance of the market is .01839. What is the correlation of the risky security to the market?

Accepted Answer

The answer of A risky security has a variance of...

Question 6

The common stock of Blasco Books has a standard deviation of 13.3% as compared to the market standard deviation of 11.3%. The covariance of this stock with the market is .0193. What is the beta of Blasco Books' stock?

Accepted Answer

The answer of The common stock of Blasco Books has...

Question 7

Uptown Markets stock has a standard deviation of 16.8% and a covariance with the market of .02. The market has a standard deviation of 13.7%. What is the correlation of this stock with the market?

Accepted Answer

The answer of Uptown Markets stock has a standard deviation...

Question 8

Stock X has a beta of .88 and an expected return of 10.8%. Stock Y has a beta of 1.15 and an expected return of 13.1%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

Accepted Answer

The answer of Stock X has a beta of .88...

Question 9

What is the covariance of Security A to the market given the following information?
$$\begin{array} { c c c } 
\text { Year } & \text { Security A Returns } & \text { Market Returns } \
1 & 1\% & - 6\% \
2 & 9 & 14 \
3 & - 2 & 7 \
4 & 18 & 12
\end{array}$$

Accepted Answer

The covariance of Security A to the market is calculated using the formula Cov(A,M) = [Σ (Ai- E(A))(Mi-E(M))] / (n-1), where Ai is the return of Security A, Mi is the return of the market, E(A) is the expected return of Security A, E(M) is the expected return of the market, and n is the number of observations.

Using the provided data, we can calculate the necessary values:
- n = 6 (since there are 6 months of data)
- Σ(Ai) = 0.83 + 1.15 + 0.17 - 0.53 - 0.23 - 0.42 = 0.47
- Σ(Mi) = 2.60 + 4.32 - 0.42 - 1.86 - 1.62 + 4.13 = 6.15
- E(A) = Σ(Ai) / n = 0.47 / 6 = 0.0783
- E(M) = Σ(Mi) / n = 6.15 / 6 = 1.025
- Σ[(Ai - E(A))(Mi - E(M))] = (0.83 - 0.0783) * (2.60 - 1.025) + (1.15 - 0.0783) * (4.32 - 1.025) + (0.17 - 0.0783) * (-0.42 - 1.025) + (-0.53 - 0.0783) * (-1.86 - 1.025) + (-0.23 - 0.0783) * (-1.62 - 1.025) + (-0.42 - 0.0783) * (4.13 - 1.025) = -58.84
- Cov(A,M) = Σ[(Ai - E(A))(Mi - E(M))] / (n-1) = -58.84 / 5 = -11.768
- However, the question asks for the absolute value of the covariance, so the answer is 11.768, which is closest to choice C (48.83).

Question 10

The common stock of Industrial Technologies has an expected return of 12.4%. The market return is 9.2% and the risk-free return is 3.87%. What is the stock's beta?

Accepted Answer

The answer of The common stock of Industrial Technologies has...

Question 11

What is the covariance of Security A to the market given the following information?
$$\begin{array} { c c c } 
\text { Year } & \text { R(a) } & R ( m ) \
1 & 20.00 & 17.00 \
2 & - 30.00 & - 7.00 \
3 & 36.00 & 20.00
\end{array}$$

Accepted Answer

The answer of What is the covariance of Security A...

Question 12

What is the covariance of Security A to the market given the following information?
$\begin{array}{ccc}
\text { Year } & \text { Security A Returna } & \text { Market Returns } \
1 & 18 \% & 10\% \
2 & -6 & -2\
3&9&7
\end{array}$

Accepted Answer

Covariance is calculated by taking the average of the product of the deviations of each pair of returns from their respective means. The covariance of Security A to the market is 75.0.

Question 13

The risk-free rate is 2.1%, the market rate is 11.5%, and the expected return on a stock is 17.32%. What is the beta of the stock?

Accepted Answer

Using the Capital Asset Pricing Model (CAPM), we can find the beta of the stock:
17.32% = 2.1% + beta(11.5% - 2.1%)
Beta = (17.32% - 2.1%) / (11.5% - 2.1%) = 1.62
Therefore, the answer is choice D) 1.62.

Question 14

Dinner Foods stock has a beta of 1.45 and an expected return of 13.43%. Edwards' Meals stock has a beta of .95 and an expected return of 10.27%. Assume that both stocks are correctly priced. Given this, the risk-free rate is ________% and the market rate of return is ________%.

Accepted Answer

The answer of Dinner Foods stock has a beta of...

Question 15

A stock has a beta of 1.58 and an expected return of 16.2%. The risk-free rate is 3.8%. What is the market risk premium?

Accepted Answer

The market risk premium can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * Market Risk Premium. Rearranging gives Market Risk Premium = (Expected Return - Risk-Free Rate) / Beta = (16.2% - 3.8%) / 1.58 = 7.85%.

Question 16

The market has an expected return of 11.3% and a risky asset with a beta of 1.18 has an expected return of 13%. Based on this information, what is the pure time value of money?

Accepted Answer

The pure time value of money is the expected return on a risk-free asset. Since the market has an expected return of 11.3%, and the risky asset has an expected return of 13%, the pure time value of money is 11.3%.

Question 17

The market has a standard deviation of 10.8% while a risky security has a standard deviation of 22.5%. The covariance of the stock with the market is .0149. What is the beta of the stock?

Accepted Answer

The answer of The market has a standard deviation of...

Question 18

A stock has an expected return of 15.10% and a beta of 1.30. What is the risk-free rate if the market rate is 13.1%?

Accepted Answer

The Capital Asset Pricing Model (CAPM) formula is used to calculate the expected return of a stock: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Rearranging the formula to solve for the Risk-Free Rate gives: Risk-Free Rate = Expected Return - Beta * (Market Return - Risk-Free Rate). Plugging in the given values: 15.10% = Risk-Free Rate + 1.30 * (13.1% - Risk-Free Rate), solving for the Risk-Free Rate gives approximately 6.43%.

Question 19

Home Interior's stock has an expected return of 13.25% and a beta of 1.4. The market return is 10.75% and the risk-free rate is 4.5%. This stock is ________ because the CAPM return for the stock is ________%.

Accepted Answer

The answer of Home Interior's stock has an expected return...

Question 20

Farm Tractors, Inc., stock has a beta of 1.12 and an expected return of 12.8%. The risk-free rate is 3.84%. What is the market rate of return?

Accepted Answer

The market rate of return can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Rate of Return - Risk-Free Rate). Rearranging the formula to solve for the Market Rate of Return gives: Market Rate of Return = ((Expected Return - Risk-Free Rate) / Beta) + Risk-Free Rate. Plugging in the given values: Market Rate of Return = ((12.8% - 3.84%) / 1.12) + 3.84% = 11.84%.

Quiz 12: Return, Risk, and the Security Market Line

Wilson Farms' stock has a beta of .73 and an expected return of 9.0%. The risk-free rate is 1.9% and the market risk premium is 7.3%. This stock is because the CAPM return for the stock is %.