Question 1

Adam wants to determine the required return on a stock portfolio with a beta coefficient of 0.5. Assuming the risk-free rate of 6 percent and the market return of 12 percent, compute the required rate of return.

Accepted Answer

The answer of Adam wants to determine the required return...

Question 2

What is the expected risk-free rate of return if Asset X, with a beta of 1.5, has an expected return of 20 percent, and the expected market return is 15 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 22.5%

Accepted Answer

The risk-free rate can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values (20% = Risk-Free Rate + 1.5 * (15% - Risk-Free Rate)), we can solve for the Risk-Free Rate, which comes out to be 5%.

Question 3

In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by ________.
A) the risk-free rate
B) the level of the security market line
C) the slope of the security market line
D) the difference between the beta and the risk-free rate

Accepted Answer

The general risk preferences of investors in the marketplace are reflected by the slope of the security market line. The slope of the security market line represents the market risk premium, which reflects the extra return investors demand for taking on additional risk beyond the risk-free rate. The risk-free rate (A), level of the security market line (B), and the difference between the beta and the risk-free rate (D) are all important components of the capital asset pricing model, but they do not directly reflect the general risk preferences of investors in the marketplace.

Question 4

The CAPM can be divided into ________.
A) risk-free rate and risk premium
B) risk premium and inflation rate
C) inflation rate and market rate
D) market rate and inflation premium

Accepted Answer

The CAPM is divided into two components: the risk-free rate and the risk premium.

Question 5

What is the expected return for Asset X if it has a beta of 1.5, the expected market return is 15 percent, and the expected risk-free rate is 5 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 20.0%

Accepted Answer

The expected return for Asset X can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values: Expected Return = 5% + 1.5 * (15% - 5%) = 5% + 1.5 * 10% = 5% + 15% = 20%.

Question 6

An increase in the beta of a corporation, all else being the same, indicates ________.
A) a decrease in risk, a higher required rate of return, and hence a lower share price
B) an increase in risk, a higher required rate of return, and hence a lower share price
C) a decrease in risk, a lower required rate of return, and hence a higher share price
D) an increase in risk, a lower required rate of return, and hence a higher share price

Accepted Answer

An increase in beta indicates increased risk, meaning that investors will require a higher rate of return to compensate for that risk. This in turn leads to a lower share price.

Question 7

Assuming a risk-free rate of 8 percent and a market return of 12 percent, would a wise investor acquire a security with a beta of 1.5 and a rate of return of 14 percent given the facts above?

Accepted Answer

The answer of Assuming a risk-free rate of 8 percent...

Question 8

Dr. Dan is considering investment in a project with beta coefficient of 1.75. What would you recommend him to do if this investment has an 11.5 percent rate of return, risk-free rate is 5.5 percent, and the rate of return on the market portfolio of assets is 8.5 percent?

Accepted Answer

The answer of Dr. Dan is considering investment in a...

Quiz 8: Risk and Return

Adam wants to determine the required return on a stock portfolio with a beta coefficient of 0.5. Assuming the risk-free rate of 6 percent and the market return of 12 percent, compute the required rate of return.

What is the expected risk-free rate of return if Asset X, with a beta of 1.5, has an expected return of 20 percent, and the expected market return is 15 percent?

In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by ________.

The CAPM can be divided into ________.

What is the expected return for Asset X if it has a beta of 1.5, the expected market return is 15 percent, and the expected risk-free rate is 5 percent?

An increase in the beta of a corporation, all else being the same, indicates ________.

Assuming a risk-free rate of 8 percent and a market return of 12 percent, would a wise investor acquire a security with a beta of 1.5 and a rate of return of 14 percent given the facts above?

Dr. Dan is considering investment in a project with beta coefficient of 1.75. What would you recommend him to do if this investment has an 11.5 percent rate of return, risk-free rate is 5.5 percent, and the rate of return on the market portfolio of assets is 8.5 percent?