Question 1

A stock has an expected return of 14.59 percent and a beta of 1.35.What is the risk-free rate if the market rate is 12.7 percent?
A)6.48 percent
B)6.92 percent
C)7.01 percent
D)7.30 percent
E)7.90 percent

Accepted Answer

14.59 = r_f + 1.35 (12.7 - r_f); r_f = 7.3 percent

Question 2

Western Exports stock has a standard deviation of 15.6 percent and a covariance with the market of .0150.The market has a standard deviation of 13.7 percent.What is the correlation of this stock with the market?
A).58
B).61
C).68
D).70
E).77

Accepted Answer

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

Question 3

The common stock of Industrial Technologies has an expected return of 12.4 percent.The market return is 9.2 percent and the risk-free return is 3.87 percent.What is the stock's beta?
A)0.42
B)1.00
C)1.32
D)1.42
E)1.60

Accepted Answer

12.4 = 3.87 + β (9.2 - 3.87); β = 1.60

Question 4

The common stock of Blasco Books has a standard deviation of 16.4 percent as compared to the market standard deviation of 12.7 percent.The covariance of this stock with the market is .0217.What is the beta of Blasco Books' stock?
A).96
B)1.05
C)1.07
D)1.35
E)1.42

Accepted Answer

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

Question 5

A stock has a standard deviation of 25.4 percent and a covariance with the market of .0160.The market has a standard deviation of 12.2 percent.What is the beta of this stock?
A).294
B).572
C).926
D).973
E)1.075

Accepted Answer

Beta is calculated as the covariance of the stock with the market divided by the variance of the market. The variance of the market is the square of the market's standard deviation (0.122^2 = 0.014884). Therefore, beta = 0.0160 / 0.014884 = 1.075.

Question 6

The market has an expected return of 11.4 percent and a risky asset with a beta of 1.18 has an expected return of 13 percent.Based on this information,what is the pure time value of money?
A)1.84 percent
B)1.90 percent
C)2.38 percent
D)2.51 percent
E)2.90 percent

Accepted Answer

13 = r_f + 1.18(11.4 - r_f); r_f = 2.51 percent

Question 7

A stock has a beta of 1.58 and an expected return of 16.2 percent.The risk-free rate is 3.8 percent.What is the market risk premium?
A)7.85 percent
B)10.01 percent
C)11.72 percent
D)12.50 percent
E)13.40 percent

Accepted Answer

16.2 = 3.8 + 1.58(MRP); MRP = 7.85 percent

Question 8

What is the covariance of security A to the market given the following information? 
A)23.14
B)29.88
C)48.83
D)99.18
E)114.01

Accepted Answer

Average return_Security = 26/4 = 6.5Average return_Market = 27/4 = 6.75Covariance = 146.5/(4 - 1) = 48.83

Question 9

Stock X has a beta of .95 and an expected return of 10.8 percent.Stock Y has a beta of 1.2 and an expected return of 13.1 percent.What is the risk-free rate of return assuming that both stock X and stock Y are correctly priced?
A)1.10 percent
B)1.20 percent
C)2.06 percent
D)3.30 percent
E)3.50 percent

Accepted Answer

[10.80 - r_f]/.95 = [13.1 - r_f]/1.2; r_f = 2.06%

Question 10

Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent.The risk-free rate is 2.6 percent and the market risk premium is 6 percent.This stock is _____ because the CAPM return for the stock is _____ percent.
A)undervalued; 7.34
B)undervalued; 7.49
C)undervalued; 7.64
D)overvalued; 7.34
E)overvalued; 7.49

Accepted Answer

E (R_A) = 2.6 + .84(6.0) = 7.64 percentThe stock is undervalued because its expected return of 7.8 percent exceeds the CAPM return of 7.64 percent.

Question 11

A risky security has a variance of .036190 and a covariance with the market of .0222.The variance of the market is .01975.What is the correlation of the risky security to the market?
A).51
B).65
C).72
D).83
E).85

Accepted Answer

Correlation = covariance / (standard deviation of the security * standard deviation of the market)
Standard deviation of the market = sqrt(0.01975) = 0.1405
Standard deviation of the security = sqrt(0.036190) = 0.1902
Correlation = 0.0222 / (0.1405 * 0.1902) = 0.83
Therefore, the correlation of the risky security to the market is 0.83, which corresponds to answer choice D.

Question 12

What is the covariance of security A to the market given the following information? 
A)507.9
B)514.1
C)517.5
D)523.5

Accepted Answer

Average return_Security = 9Average return_Market = 10Covariance = 10475/(3 - 1) = 523.5

Question 13

The stock of Healthy Eating,Inc.,has a beta of .88.The risk-free rate is 3.8 percent and the market return is 9.6 percent.What is the expected return on Healthy Eating's stock?
A)6.25 percent
B)6.07 percent
C)8.90 percent
D)11.15 percent
E)11.47 percent

Accepted Answer

E(R) = 3.80 + .88(9.60 - 3.80) = 8.90 percent

Question 14

The risk-free rate is 4.1 percent,the market rate is 13.2 percent,and the expected return on a stock is 15.84 percent.What is the beta of the stock?
A).52
B).81
C)1.13
D)1.19
E)1.29

Accepted Answer

15.84 = 4.1 + β (13.2 - 4.1); β = 1.29

Question 15

Dinner Foods stock has a beta of 1.45 and an expected return of 13.43 percent.Edwards' Meals stock has a beta of .95 and an expected return of 10.27 percent.Assume that both stocks are correctly priced.Given this,the risk-free rate is _____ percent and the market rate of return is _____ percent.
A)4.02; 11.53
B)4.09; 12.35
C)4.10; 11.53
D)4.27; 10.59
E)4.41; 10.25

Accepted Answer

[13.34 - r_f]/1.45 = [10.27 - r_f]/.95; r_f = 4.266% ≈ 4.27%[13.3 - 4.27]/1.45 = [R_m - 4.27]/1.00; R_m = 10.586% ≈ 10.59%

Question 16

Stock A is a risky asset that has a beta of 1.4 and an expected return of 13.2 percent.Stock B is also a risky asset and has a beta of 1.25.The risk-free rate is 5.5 percent.Assuming both stocks are correctly priced,what is the expected return on stock B?
A)11.90 percent
B)12.11 percent
C)12.29 percent
D)12.38 percent
E)12.46 percent

Accepted Answer

11ea6d0e_c3e3_b053_b3c7_8dfa76c0a125_TB1223_00

Question 17

What is the covariance of security A to the market given the following information? 
A)75.0
B)80.1
C)83.8
D)87.0
E)91.1

Accepted Answer

Average return_Security = 21/3 = 7.0Average return_Market = 15/3 = 5.0Covariance = 150/(3 - 1) = 75.0

Question 18

Uptown Markets stock has a standard deviation of 16.8 percent and a covariance with the market of .0178.The market has a standard deviation of 13.6 percent.What is the correlation of this stock with the market?
A).74
B).78
C).87
D).89
E).91

Accepted Answer

The correlation between the stock and the market can be calculated using the formula:

Correlation = Covariance / (Standard Deviation of Stock * Standard Deviation of Market)

Plugging in the given values:

Correlation = .0178 / (0.168 * 0.136) = 0.781

Rounding to two decimal places, the correlation is 0.78, which corresponds to choice B.

Question 19

Farm Tractors,Inc.,stock has a beta of 1.12 and an expected return of 12.8 percent.The risk-free rate is 3.84 percent.What is the market rate of return?
A)6.67 percent
B)8.90 percent
C)9.08 percent
D)11.84 percent
E)12.63 percent

Accepted Answer

12.8 = 3.84 + 1.12(E(R_M) - 3.84); E(R_M) = 11.84 percent

Question 20

Home Interior's stock has an expected return of 13.2 percent and a beta of 1.28.The market return is 10.7 percent and the risk-free rate is 2.8 percent.This stock is _____ because the CAPM return for the stock is _____ percent.
A)greatly overvalued; 16.50
B)slightly overvalued; 12.91
C)priced correctly; 12.89
D)slightly undervalued; 12.91
E)greatly undervalued; 16.50

Accepted Answer

E (R_A) = 2.8 + 1.28(10.7 - 2.8) = 12.91 percentThe stock is slightly undervalued because its expected return of 13.2 percent is more than the CAPM return of 12.91 percent.

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

A stock has an expected return of 14.59 percent and a beta of 1.35.What is the risk-free rate if the market rate is 12.7 percent?

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

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

The common stock of Blasco Books has a standard deviation of 16.4 percent as compared to the market standard deviation of 12.7 percent.The covariance of this stock with the market is .0217.What is the beta of Blasco Books' stock?

A stock has a standard deviation of 25.4 percent and a covariance with the market of .0160.The market has a standard deviation of 12.2 percent.What is the beta of this stock?

The market has an expected return of 11.4 percent and a risky asset with a beta of 1.18 has an expected return of 13 percent.Based on this information,what is the pure time value of money?

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

What is the covariance of security A to the market given the following information?

Stock X has a beta of .95 and an expected return of 10.8 percent.Stock Y has a beta of 1.2 and an expected return of 13.1 percent.What is the risk-free rate of return assuming that both stock X and stock Y are correctly priced?

Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent.The risk-free rate is 2.6 percent and the market risk premium is 6 percent.This stock is _ because the CAPM return for the stock is _ percent.

A risky security has a variance of .036190 and a covariance with the market of .0222.The variance of the market is .01975.What is the correlation of the risky security to the market?

What is the covariance of security A to the market given the following information?

The stock of Healthy Eating,Inc.,has a beta of .88.The risk-free rate is 3.8 percent and the market return is 9.6 percent.What is the expected return on Healthy Eating's stock?

The risk-free rate is 4.1 percent,the market rate is 13.2 percent,and the expected return on a stock is 15.84 percent.What is the beta of the stock?

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

Stock A is a risky asset that has a beta of 1.4 and an expected return of 13.2 percent.Stock B is also a risky asset and has a beta of 1.25.The risk-free rate is 5.5 percent.Assuming both stocks are correctly priced,what is the expected return on stock B?

What is the covariance of security A to the market given the following information?

Uptown Markets stock has a standard deviation of 16.8 percent and a covariance with the market of .0178.The market has a standard deviation of 13.6 percent.What is the correlation of this stock with the market?

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

Home Interior's stock has an expected return of 13.2 percent and a beta of 1.28.The market return is 10.7 percent and the risk-free rate is 2.8 percent.This stock is _ because the CAPM return for the stock is _ percent.