Question 1

Design Interior's stock has an expected return of 10% and a beta of 1.1. The market return is 9.5% and the risk-free rate is 2.0%. This stock is ________ because the CAPM return for the stock is ________%.

Accepted Answer

The CAPM return is calculated as: Risk-free rate + Beta * (Market return - Risk-free rate) = 2.0% + 1.1 * (9.5% - 2.0%) = 10.25%. Since the expected return is 10%, which is less than the CAPM return of 10.25%, the stock is slightly overvalued.

Question 2

What is the beta of a portfolio that consists of the following?
$$\begin{array} { c r r } 
\text { Security } & \text { Invested } & \text { Beta } \
\text { E } & \$ 14,000 & .59 \
\text { F } & \$ 22,000 & 1.46 \
\text { G } & \$ 25,000 & 2.20 \
\text { H } & \$ 19,000 & 1.67
\end{array}$$

Accepted Answer

The answer of What is the beta of a portfolio...

Question 3

A stock has a standard deviation of 18.0% and a covariance with the market of .02. The market has a standard deviation of 14.3%. What is the beta of this stock?

Accepted Answer

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

Question 4

A portfolio consists of two stocks and has a beta of 1.25. The first stock has a beta of 1.02 and comprises 30% of the portfolio. What is the beta of the second stock?

Accepted Answer

The portfolio beta is the weighted average of the betas of the individual stocks. Let x be the beta of the second stock. The equation is: 0.3(1.02) + 0.7(x) = 1.25. Solving for x gives x = 1.35.

Question 5

Stock X has a beta of 1.02 and an expected return of 11.8%. 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 1.02...

Question 6

A stock has a standard deviation of 12.9% and a covariance with the market of .035. The market has a standard deviation of 9.93%. What is the beta of this stock?

Accepted Answer

Beta = Covariance/(Market standard deviation)^2

Beta = 0.035/(0.0993^2)

Beta = 3.550

Question 7

A portfolio consists of two stocks. Stock J accounts for 55% of the portfolio and has a beta of 1.43. Stock K has a beta of .63. What is the portfolio beta?

Accepted Answer

To calculate the portfolio beta, we need to take the weighted average of the betas of the individual stocks. 
Portfolio beta = (weight of stock J * beta of stock J) + (weight of stock K * beta of stock K)
= (0.55 * 1.43) + (0.45 * 0.63)
= 0.7865 + 0.2835
= 1.07
Therefore, the answer is B) 1.07.

Question 8

The following portfolio has an expected return of ________% and a beta of ________.
$\begin{array}{llrl}
\text { Security }& \$ \text { Invested }&E(R) & \text { Beta }\
\text { A } & \$ 40,000 & 9.00 \% & 1.05 \
\text { B } & \$ 34,000 & 10.50 \% & 1.33 \
\text { C } & \$ 26.000 & 11.80 \% & 1.22
\end{array}$

Accepted Answer

We can use the Capital Asset Pricing Model (CAPM) to find the expected return of the portfolio:

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

We are not given the risk free rate or the market return, but we are given the beta of the portfolio as 1.19. We can compare this to the betas of the answer choices to see which one is closest. The closest beta is 1.19, which is option B. Therefore, the expected return of the portfolio is also the expected return of option B, which is 10.24%.

Question 9

Stock Y has a beta of .79 and an expected return of 7.93%. Stock Z has a beta of 1.31 and an expected return of 12.3%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

Accepted Answer

The risk-free rate can be found using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Since we have two stocks, we can set up two equations and solve for the risk-free rate (Rf) and market return (Rm).For Stock Y: 7.93% = Rf + 0.79 * (Rm - Rf)For Stock Z: 12.3% = Rf + 1.31 * (Rm - Rf)Solving these equations simultaneously for Rf gives us a risk-free rate of approximately 1.29%.

Question 10

Grace has one risk-free asset and one risky stock in her portfolio. The risk-free asset has an expected return of 1.2%. The risky asset has a beta of 1.5 and an expected return of 20.0%. What is the expected return on the portfolio if the portfolio beta is 1.05?

Accepted Answer

The expected return on the portfolio can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-free rate + Portfolio Beta * (Market Return - Risk-free rate). Assuming the market return is 20% (same as the risky asset's expected return), the expected return is 1.2% + 1.05 * (20% - 1.2%) = 14.36%.

Question 11

Ann realized a total return of 15.3%, which is more than her expected return of 12.0%. What is the amount of her unexpected return?

Accepted Answer

The unexpected return is the difference between the actual return and the expected return, which is 15.3% - 12.0% = 3.3%.

Question 12

What is the covariance of Security A to the market given the following information?
$$\begin{array} { c r r } 
\text { Year } & \text { R(a) } & \text { R(m) } \
1 & 35 & 28 \
2 & - 30 & - 8 \
3 & 20 & 16
\end{array}$$

Accepted Answer

Without any data, we cannot calculate the covariance of Security A to the market.

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

Design Interior's stock has an expected return of 10% and a beta of 1.1. The market return is 9.5% and the risk-free rate is 2.0%. This stock is because the CAPM return for the stock is %.

What is the beta of a portfolio that consists of the following? $\begin{array} { c r r } \text { Security } & \text { Invested } & \text { Beta } \\\text { E } & \$ 14,000 & .59 \\\text { F } & \$ 22,000 & 1.46 \\\text { G } & \$ 25,000 & 2.20 \\\text { H } & \$ 19,000 & 1.67\end{array}$

A stock has a standard deviation of 18.0% and a covariance with the market of .02. The market has a standard deviation of 14.3%. What is the beta of this stock?

A portfolio consists of two stocks and has a beta of 1.25. The first stock has a beta of 1.02 and comprises 30% of the portfolio. What is the beta of the second stock?

Stock X has a beta of 1.02 and an expected return of 11.8%. 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?

A stock has a standard deviation of 12.9% and a covariance with the market of .035. The market has a standard deviation of 9.93%. What is the beta of this stock?

A portfolio consists of two stocks. Stock J accounts for 55% of the portfolio and has a beta of 1.43. Stock K has a beta of .63. What is the portfolio beta?

The following portfolio has an expected return of % and a beta of . $\begin{array}{llrl}\text { Security }& \$ \text { Invested }&E(R) & \text { Beta }\\\text { A } & \$ 40,000 & 9.00 \% & 1.05 \\\text { B } & \$ 34,000 & 10.50 \% & 1.33 \\\text { C } & \$ 26.000 & 11.80 \% & 1.22\end{array}$

Stock Y has a beta of .79 and an expected return of 7.93%. Stock Z has a beta of 1.31 and an expected return of 12.3%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

Grace has one risk-free asset and one risky stock in her portfolio. The risk-free asset has an expected return of 1.2%. The risky asset has a beta of 1.5 and an expected return of 20.0%. What is the expected return on the portfolio if the portfolio beta is 1.05?

Ann realized a total return of 15.3%, which is more than her expected return of 12.0%. What is the amount of her unexpected return?

What is the covariance of Security A to the market given the following information? $\begin{array} { c r r } \text { Year } & \text { R(a) } & \text { R(m) } \\1 & 35 & 28 \\2 & - 30 & - 8 \\3 & 20 & 16\end{array}$

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

Design Interior's stock has an expected return of 10% and a beta of 1.1. The market return is 9.5% and the risk-free rate is 2.0%. This stock is ________ because the CAPM return for the stock is ________%.

A stock has a standard deviation of 18.0% and a covariance with the market of .02. The market has a standard deviation of 14.3%. What is the beta of this stock?

A portfolio consists of two stocks and has a beta of 1.25. The first stock has a beta of 1.02 and comprises 30% of the portfolio. What is the beta of the second stock?

Stock X has a beta of 1.02 and an expected return of 11.8%. 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?

A stock has a standard deviation of 12.9% and a covariance with the market of .035. The market has a standard deviation of 9.93%. What is the beta of this stock?

A portfolio consists of two stocks. Stock J accounts for 55% of the portfolio and has a beta of 1.43. Stock K has a beta of .63. What is the portfolio beta?

Stock Y has a beta of .79 and an expected return of 7.93%. Stock Z has a beta of 1.31 and an expected return of 12.3%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

Grace has one risk-free asset and one risky stock in her portfolio. The risk-free asset has an expected return of 1.2%. The risky asset has a beta of 1.5 and an expected return of 20.0%. What is the expected return on the portfolio if the portfolio beta is 1.05?

Ann realized a total return of 15.3%, which is more than her expected return of 12.0%. What is the amount of her unexpected return?

What is the covariance of Security A to the market given the following information? Year R(a) R(m) 135282−30−832016\begin{array} { c r r } \text { Year } & \text { R(a) } & \text { R(m) } \\1 & 35 & 28 \\2 & - 30 & - 8 \\3 & 20 & 16\end{array} Year 123​ R(a) 35−3020​ R(m) 28−816​

Design Interior's stock has an expected return of 10% and a beta of 1.1. The market return is 9.5% and the risk-free rate is 2.0%. This stock is because the CAPM return for the stock is %.

What is the covariance of Security A to the market given the following information? $\begin{array} { c r r } \text { Year } & \text { R(a) } & \text { R(m) } \\1 & 35 & 28 \\2 & - 30 & - 8 \\3 & 20 & 16\end{array}$