Question 1

What is the expected return of an equally weighted portfolio comprised of the following three stocks? 
A)16.33 percent
B)18.60 percent
C)19.67 percent
D)20.48 percent
E)21.33 percent

Accepted Answer

E(R_p)_Boom = (0.19 + 0.13 + 0.31)/3 = 0.21E(R_p)_Bust = (0.15 + 0.11 + 0.17)/3 = 0.1433E(R_p) = 0.64(0.21) + 0.36(0.1433) = 18.60 percent

Question 2

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.2 percent and the market rate of return is 11.76 percent? 
A)A
B)B
C)C
D)D
E)E

Accepted Answer

E(r)_A = 0.0354 + [0.87 × (0.1176 - 0.0354)] = 0.1069E(r)_B = 0.0354 + [1.09 × (0.1176 - 0.0354)] = 0.1250 Stock B is correctly priced.E(r)_C = 0.0354 + [1.18 × (0.1176 - 0.0354)] = 0.1324E(r)_D = 0.0354 + [1.34 × (0.1176 - 0.0354)] = 0.1456E(r)_E = 0.0354 + [1.62 × (0.1176 - 0.0354)] = 0.1686

Question 3

Your portfolio is invested 30 percent each in Stocks A and C,and 40 percent in Stock B.What is the standard deviation of your portfolio given the following information? 
A)12.38 percent
B)12.64 percent
C)12.72 percent
D)12.89 percent
E) 13.97 percent

Accepted Answer

E(R_p)_Boom = 0.3(0.25) + 0.4(0.25) + 0.3(0.45) = 0.31E(R_p)_Good = 0.3(0.10) + 0.4(0.13) + 0.3(0.11) = 0.115E(R_p)_Poor = 0.3(0.03) + 0.4(0.05) + 0.3(0.05) = 0.044E(R_p)_Bust = 0.3(-0.04) + 0.4(-0.09) + 0.3(-0.09) = -0.075E(R_p) = 0.25(0.31) + 0.25(0.115) + 0.25(0.044) + 0.25(-0.075) = 0.0985σ_p² = 0.25(0.31 - 0.0985)² + 0.25(0.115 - 0.0985)² + 0.25(0.044 - 0.0985)² + 0.25(-0.075 - 0.0985)² = 0.019519250σ_p = √0.019519250 = 13.97 percent

Question 4

A stock has an expected return of 11 percent,the risk-free rate is 5.2 percent,and the market risk premium is 5 percent.What is the stock's beta?
A)1.08
B)1.16
C)1.29
D)1.32
E)1.35

Accepted Answer

E(R_i) = 0.11 = 0.052 + β_i(0.04); β_i = 1.16

Question 5

What is the expected return and standard deviation for the following stock? 
A)15.49 percent; 14.28 percent
B)15.49 percent; 14.67 percent
C)18.80 percent; 14.95 percent
D)18.80 percent; 15.74 percent
E)18.80 percent'; 16.01 percent

Accepted Answer

E(R) = 0.10(-0.19) + 0.60(0.17) + 0.30(0.35) = 18.80 percentσ² = 0.10(-0.19 - 0.188)² + 0.60(0.17 - 0.188)² + 0.30(0.35 - 0.188)² = 0.022356σ = √0.022356 = 14.95 percent

Question 6

Thayer Farms stock has a beta of 1.12.The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent.What is the expected rate of return on this stock?
A)8.35 percent
B)9.01 percent
C)10.23 percent
D)13.21 percent
E)13.73 percent

Accepted Answer

E(r) = 0.0434 + (1.12 × 0.0792) = 13.21 percent

Question 7

The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent.What is the expected rate of return on a stock with a beta of 1.21?
A)10.92 percent
B)11.40 percent
C)12.22 percent
D)12.47 percent
E)12.79 percent

Accepted Answer

E(r) = 0.039 + (1.21 × 0.062) = 11.40 percent

Question 8

You have $10,000 to invest in a stock portfolio.Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 8 percent.Your goal is to create a portfolio with an expected return of 12.4 percent.All money must be invested.How much will you invest in stock X?
A)$800
B)$1,200
C)$4,600
D)$8,800
E)$9,200

Accepted Answer

E(R_p) = 0.124 = .13x + .08(1 - x); x = 88 percentInvestment in Stock X = 0.88($10,000) = $8,800

Question 9

You own a portfolio equally invested in a risk-free asset and two stocks.One of the stocks has a beta of 1.9 and the total portfolio is equally as risky as the market.What is the beta of the second stock?
A)0.75
B)0.80
C)0.94
D)1.00
E)1.10

Accepted Answer

β_p = 1.0 = (1/3)(0) + (1/3)(βx) + (1/3)(1.9); βx = 1.1

Question 10

The market has an expected rate of return of 11.2 percent.The long-term government bond is expected to yield 5.8 percent and the U.S.Treasury bill is expected to yield 3.9 percent.The inflation rate is 3.6 percent.What is the market risk premium?
A)6.0 percent
B)7.3 percent
C)7.6 percent
D)8.5 percent
E)9.3 percent

Accepted Answer

Market risk premium = 11.2 percent - 3.9 percent = 7.3 percent

Question 11

Your portfolio has a beta of 1.12.The portfolio consists of 40 percent U.S.Treasury bills,30 percent stock A,and 30 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) 1.69
D) 1.84
E) 2.73

Accepted Answer

Beta_Portfolio = 1.12 = (0.4 × 0) + (0.3 × 1) + (0.3 × β_B); β_B = 2.73The beta of a risk-free asset is zero. The beta of the market is 1.0.

Question 12

A stock has a beta of 1.2 and an expected return of 17 percent.A risk-free asset currently earns 5.1 percent.The beta of a portfolio comprised of these two assets is 0.85.What percentage of the portfolio is invested in the stock?
A)71 percent
B)77 percent
C)84 percent
D)89 percent
E)92 percent

Accepted Answer

β_p = 0.85 = 1.2x + (1 - x)(0); B_p = 71 percent

Question 13

The common stock of Jensen Shipping has an expected return of 14.7 percent.The return on the market is 10.8 percent and the risk-free rate of return is 3.8 percent.What is the beta of this stock?
A).92
B)1.23
C)1.33
D)1.41
E)1.56

Accepted Answer

E(r) = 0.147 = 0.038 + β (0.108 - 0.038); β = 1.56

Question 14

You would like to combine a risky stock with a beta of 1.68 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)32 percent
B)40 percent
C)54 percent
D)60 percent
E)68 percent

Accepted Answer

Beta_Portfolio = 1.0 = [(x) × 1.68] + [(1 - x) × 0]; x = 60 percent

Question 15

You own a portfolio that has $2,000 invested in Stock A and $3,500 invested in Stock B.The expected returns on these stocks are 14 percent and 9 percent,respectively.What is the expected return on the portfolio?
A) 10.06 percent
B) 10.50 percent
C) 10.82 percent
D) 11.13 percent
E) 11.41 percent

Accepted Answer

E(R_p) = [$2,000/($2,000 + $3,500)] [0.14] + [$3,500/($2,000 + $3,500)] [0.09] = 10.82 percent

Question 16

The expected return on JK stock is 15.78 percent while the expected return on the market is 11.34 percent.The stock's beta is 1.51.What is the risk-free rate of return?
A)2.22 percent
B)2.31 percent
C)2.42 percent
D)2.50 percent
E)2.63 percent

Accepted Answer

E(r) = 0.1578 = r_f + 1.51 (0.1134 - r_f); r_f = 2.63 percent

Question 17

The common stock of Alpha Manufacturers has a beta of 1.14 and an actual expected return of 15.26 percent.The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 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 underpriced.
C)To be correctly priced according to CAPM, the stock should have an expected return of 21.95 percent.
D)The stock has less systematic risk than the overall market.
E)The actual expected stock return indicates the stock is currently underpriced.

Accepted Answer

E(r) = 0.043 + 1.14 (0.1201 - 0.043) = 13.09 percentThe stock is underpriced because its actual expected return is greater than the CAPM return.

Question 18

The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent.The risk-free rate of return is 3.7 percent.What is the expected market risk premium?
A)7.02 percent
B)7.90 percent
C)10.63 percent
D)11.22 percent
E)11.60 percent

Accepted Answer

E(r) = 0.1429 = 0.037 + 1.34 M_rp; M_rp = 7.90 percent

Question 19

Your portfolio is comprised of 40 percent of stock X,15 percent of stock Y,and 45 percent of stock Z.Stock X has a beta of 1.16,stock Y has a beta of 1.47,and stock Z has a beta of 0.42.What is the beta of your portfolio?
A)0.87
B)1.09
C)1.13
D)1.18
E)1.21

Accepted Answer

Beta_Portfolio = (0.40 × 1.16) + (0.15 × 1.47) + (0.45 × 0.42) = 0.87

Question 20

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium is 8.8 percent? 
A)A
B)B
C)C
D)D
E)E

Accepted Answer

E(r)_A = 0.037 + (0.64 × 0.088) = 0.0933E(r)_B = 0.037 + (0.97 × 0.088) = 0.1224E(r)_C = 0.037 + (1.22 × 0.088) = 0.1444 Stock C is correctly priced.E(r)_D = 0.037 + (1.37 × 0.088) = 0.1576E(r)_E = 0.037 + (1.68 × 0.088) = 0.1848

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

What is the expected return of an equally weighted portfolio comprised of the following three stocks?

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.2 percent and the market rate of return is 11.76 percent?

Your portfolio is invested 30 percent each in Stocks A and C,and 40 percent in Stock B.What is the standard deviation of your portfolio given the following information?

A stock has an expected return of 11 percent,the risk-free rate is 5.2 percent,and the market risk premium is 5 percent.What is the stock's beta?

What is the expected return and standard deviation for the following stock?

Thayer Farms stock has a beta of 1.12.The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent.What is the expected rate of return on this stock?

The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent.What is the expected rate of return on a stock with a beta of 1.21?

You have $10,000 to invest in a stock portfolio.Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 8 percent.Your goal is to create a portfolio with an expected return of 12.4 percent.All money must be invested.How much will you invest in stock X?

You own a portfolio equally invested in a risk-free asset and two stocks.One of the stocks has a beta of 1.9 and the total portfolio is equally as risky as the market.What is the beta of the second stock?

The market has an expected rate of return of 11.2 percent.The long-term government bond is expected to yield 5.8 percent and the U.S.Treasury bill is expected to yield 3.9 percent.The inflation rate is 3.6 percent.What is the market risk premium?

Your portfolio has a beta of 1.12.The portfolio consists of 40 percent U.S.Treasury bills,30 percent stock A,and 30 percent stock B.Stock A has a risk-level equivalent to that of the overall market.What is the beta of stock B?

A stock has a beta of 1.2 and an expected return of 17 percent.A risk-free asset currently earns 5.1 percent.The beta of a portfolio comprised of these two assets is 0.85.What percentage of the portfolio is invested in the stock?

The common stock of Jensen Shipping has an expected return of 14.7 percent.The return on the market is 10.8 percent and the risk-free rate of return is 3.8 percent.What is the beta of this stock?

You would like to combine a risky stock with a beta of 1.68 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?

You own a portfolio that has $2,000 invested in Stock A and $3,500 invested in Stock B.The expected returns on these stocks are 14 percent and 9 percent,respectively.What is the expected return on the portfolio?

The expected return on JK stock is 15.78 percent while the expected return on the market is 11.34 percent.The stock's beta is 1.51.What is the risk-free rate of return?

The common stock of Alpha Manufacturers has a beta of 1.14 and an actual expected return of 15.26 percent.The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 percent.Which one of the following statements is true given this information?

The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent.The risk-free rate of return is 3.7 percent.What is the expected market risk premium?

Your portfolio is comprised of 40 percent of stock X,15 percent of stock Y,and 45 percent of stock Z.Stock X has a beta of 1.16,stock Y has a beta of 1.47,and stock Z has a beta of 0.42.What is the beta of your portfolio?

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium is 8.8 percent?