Question 1

A stock has a beta of 1.24, an expected return of 13.68 percent, and lies on the security market line. A risk-free asset is yielding 2.8 percent. You want to create a $6,000 portfolio consisting of Stock A and the risk-free security such that the portfolio beta is 0.65. What rate of return should you expect to earn on your portfolio?
A) 8.50 percent
B) 9.16 percent
C) 9.33 percent
D) 9.41 percent
E) 9.56 percent

Accepted Answer

E(R) = 0.1368 = 0.028 + 1.24(MRP)MRP = 0.087742E(R_P) = 0.028 + 0.65(0.087742) = 8.50 percent

Question 2

The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a beta of 0.87 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not?
A) No; Stock A is underpriced and stock B is overpriced.
B) No; Stock A is overpriced and stock B is underpriced.
C) No; Stock A is overpriced but stock B is correctly priced.
D) No; Stock A is underpriced but stock B is correctly priced.
E) Yes; Both stocks are correctly priced.

Accepted Answer

To determine if a stock is correctly priced, we need to compare its expected return with the return it should earn according to the CAPM using the risk-free rate, market risk premium, and its beta. Stock A has a higher expected return than what it should earn according to the CAPM (12.66%), indicating that it is overpriced. Stock B has a lower expected return than what it should earn according to the CAPM (12.05%), indicating that it is underpriced. Therefore, option B is the correct answer.

Question 3

Global Importers predicted that its earnings per share for the year would be $1.86. Today, the firm released its earnings report and the earnings per share turned out to be $1.99 per share. In response to the earnings report, the price per share of Global Importers stock declined by 3.4 percent. Explain how the market price can decrease when the announced earnings were higher than the firm predicted.

Accepted Answer

The answer of Global Importers predicted that its earnings per...

Question 4

You own a stock that has an expected return of 16.48 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.65 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market?
A) 13.07 percent
B) 13.30 percent
C) 13.64 percent
D) 14.09 percent
E) 14.42 percent

Accepted Answer

The formula for calculating the expected rate of return on a stock is:

expected return = risk-free rate + beta * (expected market return - risk-free rate)

Substituting the given values, we get:

16.48% = 3.65% + 1.33 * (expected market return - 3.65%)

Solving for the expected market return, we get:

Expected market return = (16.48% - 3.65%) / 1.33 + 3.65%
= 13.30%

Therefore, the expected rate of return on the market is 13.30%.

Option B is the correct answer as it matches with the calculated expected rate of return on the market.

Question 5

Stock J has a beta of 1.47 and an expected return of 15.8 percent. Stock K has a beta of 1.05 and an expected return of 11.9 percent. What is the risk-free rate if these securities both plot on the security market line?
A) 2.15 percent
B) 3.34 percent
C) 3.88 percent
D) 4.41 percent
E) 4.68 percent

Accepted Answer

(0.158 - R_f)/1.47 = (0.119 - R_f)/1.05R_f = 2.15 percent

Question 6

LKP, Inc., stock has an expected return of 14.47 percent. The risk-free rate is 3.8 percent and the market risk premium is 8.6 percent. What is the stock's beta?
A) 1.19
B) 1.21
C) 1.24
D) 1.28
E) 1.32

Accepted Answer

The answer of LKP, Inc., stock has an expected return...

Question 7

Explain the differences between total risk, unsystematic risk, and systematic risk. Identify which risk is measured by standard deviation and which is measured by beta.

Accepted Answer

The answer of Explain the differences between total risk, unsystematic...

Question 8

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.04 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?
A) 1.37
B) 1.54
C) 1.96
D) 2.30
E) 2.97

Accepted Answer

The portfolio's beta is 1 (as it is equally as risky as the market). With equal investment in a risk-free asset (beta = 0), stock 1 (beta = 1.04), and stock 2 (unknown beta), the equation is: (0 + 1.04 + x) / 3 = 1. Solving for x gives x = 1.96.

Question 9

A stock has a beta of 1.37 and an expected return of 16.6 percent. The risk-free rate is 4.8 percent. What is the slope of the security market line?
A) 6.49 percent
B) 7.28 percent
C) 8.61 percent
D) 9.23 percent
E) 9.99 percent

Accepted Answer

The slope of the security market line (SML) is given by the formula:
SML slope = [E(Rm) - Rf] / β
where E(Rm) is the expected return on the market portfolio, Rf is the risk-free rate, and β is the beta of the stock.

We are given that β = 1.37, E(R) = 16.6%, and Rf = 4.8%. Rearranging the formula, we have:
[E(Rm) - Rf] = SML slope * β

Substituting the values, we get:
[ E(Rm) - 4.8% ] = SML slope * 1.37
[ E(Rm) - 4.8% ] / 1.37 = SML slope

Finally, we can solve for SML slope:
SML slope = [ 16.6% - 4.8% ] / 1.37
SML slope = 8.61%

Therefore, the best choice is C.

Question 10

Using a security market line graph, illustrate a security that is overpriced and has a beta of 0.89. Label all relevant points, including those that represent the overall market. Explain why the security plots as you have illustrated it.

Accepted Answer

The answer of Using a security market line graph, illustrate...

Question 11

What is the significance of the slope of the security market line? Should investors prefer a steeper slope or a flatter slope?

Accepted Answer

The answer of What is the significance of the slope...

Question 12

The stock of Billingsley United has a beta of 0.92. The market risk premium is 8.4 percent and the risk-free rate is 3.2 percent. What is the expected return on this stock?
A) 8.87 percent
B) 9.69 percent
C) 10.93 percent
D) 11.52 percent
E) 12.01 percent

Accepted Answer

The expected return on the stock can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * Market Risk Premium. Substituting the given values: 3.2% + 0.92 * 8.4% = 10.93%.

Question 13

You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in Stock B. If the expected returns on these stocks are 9 percent and 15 percent, respectively, what is the expected return on the portfolio?
A) 10.57 percent
B) 11.14 percent
C) 11.96 percent
D) 12.52 percent
E) 13.07 percent

Accepted Answer

E(R) = [1,900/($1,900 + $2,700)][0.09] + [$2,700/($1,900 + $2,700)][0.15] = 12.52 percent

Question 14

Worth While Entertainment has common stock with a beta of 1.46. The market risk premium is 9.1 percent and the risk-free rate is 4.6 percent. What is the expected return on this stock?
A) 16.31 percent
B) 16.67 percent
C) 17.40 percent
D) 17.89 percent
E) 18.23 percent

Accepted Answer

The answer of Worth While Entertainment has common stock with...

Question 15

Consider the following information:  What is the variance of a portfolio invested 30 percent each in A and B and 40 percent in C?
A) 0.000065
B) 0.000163
C) 0.000289
D) 0.000528
E) 0.001740

Accepted Answer

The answer of Consider the following information:  What is...

Question 16

Currently, the risk-free rate is 3.5 percent. Stock A has an expected return of 9.6 percent and a beta of 1.08. Stock B has an expected return of 13.5 percent. The stocks have equal reward-to-risk ratios. What is the beta of stock B?
A) 1.21
B) 1.33
C) 1.52
D) 1.68
E) 1.77

Accepted Answer

The answer of Currently, the risk-free rate is 3.5 percent....

Question 17

A stock has an expected return of 17.2 percent and a beta of 1.59. The risk-free rate is 5.1 percent. What is the slope of the security market line?
A) 7.55 percent
B) 7.61 percent
C) 7.78 percent
D) 7.92 percent
E) 8.03 percent

Accepted Answer

The answer of A stock has an expected return of...

Question 18

Stock A has a beta of 1.47 while stock B has a beta of 1.08 and an expected return of 13.2 percent. What is the expected return on stock A if the risk-free rate is 4.5 percent and both stocks have equal reward-to-risk premiums?
A) 12.12 percent
B) 15.07 percent
C) 16.34 percent
D) 16.89 percent
E) 17.78 percent

Accepted Answer

The answer of Stock A has a beta of 1.47...

Question 19

Hardware and Moore has an expected return of 12.9 percent and a beta of 1.21. The expected return on the market is 11.7 percent. What is the risk-free rate?
A) 3.87 percent
B) 4.24 percent
C) 4.61 percent
D) 5.38 percent
E) 5.99 percent

Accepted Answer

The answer of Hardware and Moore has an expected return...

Question 20

Explain the relationships among the reward-to-risk ratio, risk-free rate of return, market rate of return, market risk premium, beta, and the security market line.

Accepted Answer

The answer of Explain the relationships among the reward-to-risk ratio,...

Quiz 11: Risk and Return

The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a beta of 0.87 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not?

You own a stock that has an expected return of 16.48 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.65 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market?

Stock J has a beta of 1.47 and an expected return of 15.8 percent. Stock K has a beta of 1.05 and an expected return of 11.9 percent. What is the risk-free rate if these securities both plot on the security market line?

LKP, Inc., stock has an expected return of 14.47 percent. The risk-free rate is 3.8 percent and the market risk premium is 8.6 percent. What is the stock's beta?

Explain the differences between total risk, unsystematic risk, and systematic risk. Identify which risk is measured by standard deviation and which is measured by beta.

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.04 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

A stock has a beta of 1.37 and an expected return of 16.6 percent. The risk-free rate is 4.8 percent. What is the slope of the security market line?

Using a security market line graph, illustrate a security that is overpriced and has a beta of 0.89. Label all relevant points, including those that represent the overall market. Explain why the security plots as you have illustrated it.

What is the significance of the slope of the security market line? Should investors prefer a steeper slope or a flatter slope?

The stock of Billingsley United has a beta of 0.92. The market risk premium is 8.4 percent and the risk-free rate is 3.2 percent. What is the expected return on this stock?

You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in Stock B. If the expected returns on these stocks are 9 percent and 15 percent, respectively, what is the expected return on the portfolio?

Worth While Entertainment has common stock with a beta of 1.46. The market risk premium is 9.1 percent and the risk-free rate is 4.6 percent. What is the expected return on this stock?

Consider the following information: What is the variance of a portfolio invested 30 percent each in A and B and 40 percent in C?

Currently, the risk-free rate is 3.5 percent. Stock A has an expected return of 9.6 percent and a beta of 1.08. Stock B has an expected return of 13.5 percent. The stocks have equal reward-to-risk ratios. What is the beta of stock B?

A stock has an expected return of 17.2 percent and a beta of 1.59. The risk-free rate is 5.1 percent. What is the slope of the security market line?

Stock A has a beta of 1.47 while stock B has a beta of 1.08 and an expected return of 13.2 percent. What is the expected return on stock A if the risk-free rate is 4.5 percent and both stocks have equal reward-to-risk premiums?

Hardware and Moore has an expected return of 12.9 percent and a beta of 1.21. The expected return on the market is 11.7 percent. What is the risk-free rate?

Explain the relationships among the reward-to-risk ratio, risk-free rate of return, market rate of return, market risk premium, beta, and the security market line.