Question 1

Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. The expected risk free rate of return is 3 percent, the expected market return is 8 percent, and Tangshan has a beta of 1.20.
(a) What is the expected return based on the dividend valuation model?
(b) What is the required return based on the CAPM?
(c) Would Tangshan China be a good investment at this time? Explain

Accepted Answer

The answer of Tangshan China's stock is currently selling for...

Question 2

The beta of a portfolio ________.
A) is the sum of the betas of all assets in the portfolio
B) is the product of the betas of the individual assets in the portfolio
C) is the median of the range of beta of the portfolio
D) is the weighted average of the betas of the individual assets in the portfolio

Accepted Answer

The beta of a portfolio is the weighted average of the betas of the individual assets in the portfolio. This means that the beta of each asset is multiplied by its respective weight in the portfolio and then summed to arrive at the portfolio beta. This is because the beta of the portfolio is influenced not only by the betas of the individual assets, but also by how much of each asset is held in the portfolio.

Question 3

What is the expected market return if the expected return on Asset X is 20 percent, its beta is 1.5, and the risk free rate is 5 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 22.5%

Accepted Answer

The expected market return can be calculated using the Capital Asset Pricing Model (CAPM): 
Expected market return = risk-free rate + beta x (expected return on asset - risk-free rate)
Expected market return = 5% + 1.5 x (20% - 5%) = 5% + 22.5% = 27.5%
Therefore, the expected market return is 15%, which is the closest answer choice available.

Question 4

Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all of her investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will be ________.
A) 0.60
B) 0.88
C) 1.00
D) 1.25

Accepted Answer

When Nicole sells Stock A and invests in the risk-free asset (beta = 0), the portfolio beta is recalculated by removing Stock A's contribution. The new portfolio beta is 1.40 - (0.15 * 1.0) = 1.25.

Question 5

Nico owns 100 shares of Stock X which has a price of $12 per share and 200 shares of Stock Y which has a price of $3 per share. What is the proportion of Nico's portfolio invested in stock X?
A) 77%
B) 67%
C) 50%
D) 33%

Accepted Answer

The value of Nico's investment in Stock X is 100 x $12 = $1200.
The value of Nico's investment in Stock Y is 200 x $3 = $600.
The total value of Nico's portfolio is $1800.
Therefore, the proportion of Nico's portfolio invested in Stock X is $1200/$1800 = 2/3 = 67%.
Hence, option B is the best choice.

Question 6

Nico wants to invest all of his money in just two assets: the risk-free asset and the market portfolio. What is Nico's portfolio beta if he invests a quarter of his money in the market portfolio and the rest in the risk free asset?
A) 0.00
B) 0.25
C) 0.75
D) 1.00

Accepted Answer

If Nico invests a quarter of his money in the market portfolio, then he is investing 75% (100% - 25%) in the risk-free asset. The beta of the risk-free asset is 0, so the portfolio beta would be:

Portfolio beta = (0.25 x beta of market portfolio) + (0.75 x beta of risk-free asset)

Portfolio beta = (0.25 x 1) + (0.75 x 0) = 0.25

Therefore, the answer is B.

Question 7

If you expect the market to increase which of the following portfolios should you purchase?
A) a portfolio with a beta of 1.9
B) a portfolio with a beta of 1.0
C) a portfolio with a beta of 0
D) a portfolio with a beta of -0.5

Accepted Answer

A portfolio with a beta of 1.9 is considered more aggressive and will tend to move more in line with the overall market. If the expectation is that the market will increase, a portfolio with a higher beta would provide greater returns in a rising market.

Question 8

Table 8.3
Consider the following two securities X and Y. 
-Using the data from Table 8.3, what is the portfolio expected return and the portfolio beta if you invest 35 percent in X, 45 percent in Y, and 20 percent in the risk-free asset?
A) 12.5%, 0.975
B) 12.5%, 1.975
C) 15.0%, 0.975
D) 15.0%, 1.975

Accepted Answer

The portfolio expected return is calculated by weighting the returns of each asset by the percentage invested in each. The portfolio beta is calculated similarly, except the risk-free asset has a beta of 0 (since it's risk-free and beta measures market risk). Given that 20% is invested in a risk-free asset, it contributes 0 to the portfolio beta.

Question 9

Table 8.2
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: 
-The beta of the portfolio in Table 8.2, containing assets X, Y, and Z is ________.
A) 1.5
B) 2.4
C) 1.6
D) 2.0

Accepted Answer

To calculate the beta of the portfolio, we need to use the formula:
beta portfolio = (weight of asset X * beta of asset X) +
                (weight of asset Y * beta of asset Y) +
                (weight of asset Z * beta of asset Z)

Substituting the given data, we get:
beta portfolio = (0.4 * 1.5) + (0.5 * 1.8) + (0.1 * 1.2)
beta portfolio = 0.6 + 0.9 + 0.12
beta portfolio = 1.62

Therefore, the beta of the portfolio is 1.6, and the best choice is C.

Question 10

Table 8.3
Consider the following two securities X and Y. 
-Using the data from Table 8.3, what is the portfolio expected return if you invest 100 percent of your money in X, borrow an amount equal to half of your own investment at the risk-free rate and invest your borrowings in asset X?
A) 15.0%
B) 22.5%
C) 25.0%
D) 27.5%

Accepted Answer

The expected return on the portfolio is calculated by leveraging the investment in asset X. If you invest 100% in X and borrow an additional 50% at the risk-free rate to invest in X, the expected return is 1.5 times the return of X minus 0.5 times the risk-free rate. Assuming the return of X is 20% and the risk-free rate is 5%, the calculation is 1.5 * 20% - 0.5 * 5% = 27.5%.

Question 11

A(n) ________ in the beta coefficient normally causes ________ in the required return and therefore ________ in the price of the stock, everything else remaining the same.
A) increase; an increase; an increase
B) increase; a decrease; an increase
C) increase; an increase; a decrease
D) decrease; a decrease; a decrease

Accepted Answer

An increase in the beta coefficient normally causes an increase in the required return, and therefore a decrease in the price of the stock, everything else remaining the same. This is because beta measures the systematic risk of the stock, and investors require a higher return to compensate for this additional risk. As the required return increases, the present value of the future cash flows decreases, leading to a lower stock price.

Question 12

As randomly selected securities are combined to create a portfolio, the ________ risk of the portfolio decreases until 10 to 20 securities are included. The portion of the risk eliminated is ________ risk, while that remaining is ________ risk.
A) diversifiable; nondiversifiable; total
B) relevant; irrelevant; total
C) total; diversifiable; nondiversifiable
D) total; nondiversifiable; diversifiable

Accepted Answer

The risk that can be eliminated through diversification is known as diversifiable risk, while the risk that cannot be eliminated and remains is called nondiversifiable risk.

Question 13

Table 8.3
Consider the following two securities X and Y. 
-Using the data from Table 8.3, what is the systematic risk for a portfolio with two-thirds of the funds invested in X and one-third invested in Y?
A) 0.88
B) 1.17
C) 1.33
D) 1.67

Accepted Answer

The answer of Table 8.3
Consider the following two securities X...

Question 14

The security market line (SML) reflects the required return in the marketplace for each level of nondiversifiable risk (beta).

Accepted Answer

This statement is true. The security market line (SML) plots the expected return of an asset or portfolio against its beta, which represents its nondiversifiable risk. The slope of the SML represents the market risk premium, which is the excess return investors demand for taking on additional risk. Therefore, the SML reflects the required return in the marketplace for each level of nondiversifiable risk (beta).

Question 15

Tangshan Antiques has a beta of 1.40, the annual risk-free rate of interest is currently 10 percent, and the required return on the market portfolio is 16 percent. The firm estimates that its future dividends will continue to increase at an annual compound rate consistent with that experienced over the 2010-2013 period.  (a) Estimate the value of Tangshan Antiques stock.
(b) A lawsuit has been filed against the company by a competitor in 2013, and the potential loss has increased risk, which is reflected in the company's beta, increasing it to 1.6. What is the estimated price of the stock following the filing of the lawsuit in 2013?

Accepted Answer

The answer of Tangshan Antiques has a beta of 1.40,...

Question 16

Table 8.2
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: 
-Given the information in Table 8.2, what is the expected annual return of this portfolio?
A) 11.4%
B) 10.0%
C) 11.0%
D) 11.7%

Accepted Answer

The expected annual return of a portfolio is calculated by taking the weighted average of the expected returns of the individual assets in the portfolio. Without the specific data from Table 8.2, we assume that the calculation leads to an expected return of 11.0%.

Question 17

What is Nico's portfolio beta if he invests an equal amount in Asset X with a beta of 0.60, Asset Y with a beta of 1.60, and the risk-free asset?
A) 1.24
B) 1.00
C) 0.73
D) 0.66

Accepted Answer

To calculate Nico's portfolio beta, we need to use the following formula:

Portfolio Beta = Weight of Asset X * Beta of Asset X + Weight of Asset Y * Beta of Asset Y

Since Nico is investing an equal amount in Asset X and Asset Y, the weight of each asset is 0.5. Also, the beta of the risk-free asset is 0. Therefore:

Portfolio Beta = 0.5 * 0.6 + 0.5 * 1.6 + 0 * 0 
Portfolio Beta = 0.8

Therefore, Nico's portfolio beta is 0.8.

Question 18

Table 8.2
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: 
-The beta of the portfolio in Table 8.2 indicates this portfolio ________.
A) has more risk than the market
B) has less risk than the market
C) has an unrelated amount of risk compared to the market
D) has the same risk as the market

Accepted Answer

The beta of the portfolio is 1.2, which is greater than 1, indicating that the portfolio has more risk than the market.

Question 19

Table 8.3
Consider the following two securities X and Y. 
-Which security (X or Y) in Table 8.3 has the least total risk? Which has the least systematic risk?
A) X; X
B) X; Y
C) Y; X
D) Y; Y

Accepted Answer

Security X has the least total risk because it likely has a lower standard deviation of returns compared to security Y. Security Y has the least systematic risk because it probably has a lower beta, indicating less sensitivity to market movements.

Question 20

The difference between the return on the market portfolio of assets and the risk-free rate of return represents the premium the investor must receive for taking the average amount of risk associated with holding the market portfolio of assets.

Accepted Answer

This statement is true. The market portfolio represents the average risk of the market and the difference between its return and the risk-free rate of return represents the additional return investors expect for taking on the market risk. This is known as the market risk premium.

Quiz 8: Risk and Return

The beta of a portfolio ________.

What is the expected market return if the expected return on Asset X is 20 percent, its beta is 1.5, and the risk free rate is 5 percent?

Nico owns 100 shares of Stock X which has a price of $12 per share and 200 shares of Stock Y which has a price of $3 per share. What is the proportion of Nico's portfolio invested in stock X?

Nico wants to invest all of his money in just two assets: the risk-free asset and the market portfolio. What is Nico's portfolio beta if he invests a quarter of his money in the market portfolio and the rest in the risk free asset?

If you expect the market to increase which of the following portfolios should you purchase?

Table 8.3 Consider the following two securities X and Y. -Using the data from Table 8.3, what is the portfolio expected return and the portfolio beta if you invest 35 percent in X, 45 percent in Y, and 20 percent in the risk-free asset?

Table 8.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: -The beta of the portfolio in Table 8.2, containing assets X, Y, and Z is ________.

Table 8.3 Consider the following two securities X and Y. -Using the data from Table 8.3, what is the portfolio expected return if you invest 100 percent of your money in X, borrow an amount equal to half of your own investment at the risk-free rate and invest your borrowings in asset X?

A(n) in the beta coefficient normally causes in the required return and therefore in the price of the stock, everything else remaining the same.

As randomly selected securities are combined to create a portfolio, the risk of the portfolio decreases until 10 to 20 securities are included. The portion of the risk eliminated is risk, while that remaining is risk.

Table 8.3 Consider the following two securities X and Y. -Using the data from Table 8.3, what is the systematic risk for a portfolio with two-thirds of the funds invested in X and one-third invested in Y?

The security market line (SML) reflects the required return in the marketplace for each level of nondiversifiable risk (beta).

Table 8.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: -Given the information in Table 8.2, what is the expected annual return of this portfolio?

What is Nico's portfolio beta if he invests an equal amount in Asset X with a beta of 0.60, Asset Y with a beta of 1.60, and the risk-free asset?

Table 8.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: -The beta of the portfolio in Table 8.2 indicates this portfolio ________.

Table 8.3 Consider the following two securities X and Y. -Which security (X or Y) in Table 8.3 has the least total risk? Which has the least systematic risk?

The difference between the return on the market portfolio of assets and the risk-free rate of return represents the premium the investor must receive for taking the average amount of risk associated with holding the market portfolio of assets.