Question 1

The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz?
A) 8.40%
B) 10.80%
C) 13.80%
D) 19.20%

Accepted Answer

The expected return on Lenz can be calculated using the CAPM formula:
Expected return = Risk-free rate + Beta × (Market risk premium)
Expected return = 3% + 1.8 × 6%
Expected return = 3% + 10.8%
Expected return = 13.80%

Question 2

You have invested 20 percent of your portfolio in Homer, Inc., 40 percent in Marge Co., and 20 percent in Bart Resources. What is the expected return of your portfolio if Homer, Marge, and Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectively?
A) 7.7%
B) 8.2%
C) 8.7%
D) 9.2%

Accepted Answer

To calculate the expected return of the portfolio, we need to multiply the weight of each investment by its expected return and sum the results. 
Expected portfolio return = (0.2 x 0.02) + (0.4 x 0.18) + (0.2 x 0.03) = 0.004 + 0.072 + 0.006 = 0.082 or 8.2%.
Therefore, the best choice is B.

Question 3

Horse Stock returns have a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns? Round your answer to six decimal places.
A) 0.028025
B) 0.217327
C) 0.359100
D) 0.993094

Accepted Answer

Covariance is calculated as the product of the standard deviations of the two variables and their correlation coefficient. Therefore, Covariance = 0.57 * 0.63 * 0.078042 = 0.028025.

Question 4

Which of the following is the best measure of the systematic risk in a portfolio?
A) Variance
B) Standard deviation
C) Covariance
D) Beta

Accepted Answer

Beta is a measure of the systematic risk of a portfolio or a stock, which measures the extent to which the returns of the portfolio or stock move in response to the market or benchmark. Therefore, beta is the most appropriate measure of systematic risk and is commonly used in portfolio analysis and asset pricing models. Variance, standard deviation, and covariance are measures of total risk, which include both systematic risk and unsystematic risk.

Question 5

Stock A 's returns have a standard deviation of 0.5, and stock B's returns have standard deviation of 0.6. The correlation coefficient between A and B 0.5. What is the variance of a portfolio composed of 70 percent Stock A and 30 percent Stock B?
A) 0.1549
B) 0.2179
C) 0.4668
D) 0.5500

Accepted Answer

The answer of Stock A 's returns have a standard...

Question 6

Sayers purchased a stock with a coefficient of variation equal to 0.125. The expected return on the stock is 20 percent. What is the variance of the stock?
A) 0.000625
B) 0.025000
C) 0.625000
D) 0.790500

Accepted Answer

The coefficient of variation (CV) is the ratio of the standard deviation to the expected return. Given CV = 0.125 and expected return = 0.20, the standard deviation = 0.125 * 0.20 = 0.025. The variance is the square of the standard deviation: 0.025^2 = 0.000625.

Question 7

The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what should investors expect as a return on Elsenore?
A) 11.20%
B) 19.20%
C) 24.00%
D) 32.00%

Accepted Answer

The expected return on Elsenore can be calculated using the Capital Asset Pricing Model (CAPM):

Expected return = Risk-free rate + Beta * (Expected market return - Risk-free rate)

= 8% + 1.6 * (15% - 8%)

= 8% + 11.2%

= 19.2%

Therefore, investors should expect a return of 19.2% on Elsenore, which is best represented by choice letter B.

Question 8

The beta of Ricci Co.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what should investors expect as a return on on Ricci Co.?
A) 28.80%
B) 37.80%
C) 48.60%
D) 57.60%

Accepted Answer

Using the Capital Asset Pricing Model (CAPM), the expected return on Ricci Co.'s stock can be calculated as:

Expected Return = Risk-Free Rate + Beta * (Expected Market Return - Risk-Free Rate)
Expected Return = 9% + 3.2 * (18% - 9%)
Expected Return = 9% + 3.2 * 9%
Expected Return = 9% + 28.8%
Expected Return = 37.8%

Therefore, the expected return on Ricci Co.'s stock is 37.8%, which is closest to option B (37.80%).

Question 9

The expected return on Mike's Seafood stock is 17.9 percent. If the expected return on the market is 13 percent and the beta for Kiwi is 1.7, then what is the risk-free rate?
A) 4.5%
B) 5.0%
C) 5.5%
D) 6.0%

Accepted Answer

The answer of The expected return on Mike's Seafood stock...

Question 10

The expected return on Karol Co. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of Karol Co is 2.3, then what is the risk premium on the market portfolio?
A) 2.5%
B) 5.0%
C) 7.5%
D) 10.0%

Accepted Answer

The answer of The expected return on Karol Co. stock...

Question 11

View Point Industries has forecasted a rate of return of 20.00% if the economy booms (25.00% probability); a rate of return of 15.00% if the economy is in a growth phase (45.00% probability); a rate of return of 2.50% if the economy is in decline (20.00% probability); and a rate of return of -15.00% if the economy is in a depression (10.00% probability). What is View Point's standard deviation of returns? Do not round intermediate computations. Round your final answer to two decimal points.
A) 17.31%
B) 9.25%
C) 15.00%
D) 10.29%

Accepted Answer

The standard deviation of returns is calculated by first determining the expected return, then calculating the variance, and finally taking the square root of the variance. The expected return (ER) is calculated as follows: ER = (0.25 * 20%) + (0.45 * 15%) + (0.20 * 2.5%) + (0.10 * -15%) = 11.25%. The variance (Var) is calculated as: Var = (0.25 * (20% - 11.25%)^2) + (0.45 * (15% - 11.25%)^2) + (0.20 * (2.5% - 11.25%)^2) + (0.10 * (-15% - 11.25%)^2) = 1.05625%. The standard deviation (SD) is the square root of the variance: SD = sqrt(1.05625%) = 10.29%.

Question 12

You invested $3,000 in a portfolio with an expected return of 10 percent and $2,000 in a portfolio with an expected return of 16 percent. What is the expected return of the combined portfolio?
A) 6.2%
B) 12.4%
C) 13.0%
D) 13.6%

Accepted Answer

The expected return of the combined portfolio is calculated by taking the weighted average of the expected returns of the individual portfolios. For the $3,000 investment with a 10% expected return: ($3,000/$5,000) * 10% = 6%. For the $2,000 investment with a 16% expected return: ($2,000/$5,000) * 16% = 6.4%. Adding these together gives an expected return of 12.4% for the combined portfolio.

Question 13

The covariance of the returns between Stock A and Stock B is 0.0087. The standard deviation of Stock A is 0.26, and the standard deviation of Stock B is 0.37. What is the correlation coefficient between the returns of the two stocks?
A) 0.090437
B) 0.096200
C) 0.90437
D) 0.96200

Accepted Answer

The correlation coefficient is calculated as the covariance divided by the product of the standard deviations. In this case, the correlation coefficient is 0.0087 / (0.26 * 0.37) = 0.090437.

Question 14

Which of the following investors should be willing to pay the highest price for an asset?
A) An investor with a single-asset portfolio.
B) An investor with a diversified portfolio.
C) An investor who is not completely diversified.
D) An investor who is so risk-averse that he does not recognize the benefits of diversification.

Accepted Answer

An investor with a diversified portfolio is willing to pay the highest price for an asset because diversification reduces the overall risk of the portfolio. This investor can afford to take on a bit more risk with a new asset since the impact of its volatility is minimized by the effects of other assets in the portfolio.

Question 15

The expected return on Kiwi Computers stock is 16.6 percent. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, then what is Kiwi's beta?
A) 1.26
B) 2.10
C) 2.80
D) 3.15

Accepted Answer

Using the Capital Asset Pricing Model (CAPM):
Kiwi's beta = (Expected return on Kiwi - Risk-free rate) / Expected return on the market
= (16.6% - 4%) / (10%)
= 1.62
Therefore, the closest answer is B) 2.10, which is the best choice.

Question 16

Braniff Ground Services stock has an expected return of 9 percent and a variance of 0.25 percent. What is the coefficient of variation for Braniff? Round your final answer to four decimal places.
A) 0.0278
B) 0.5556
C) 1.8001
D) 36.0002

Accepted Answer

The coefficient of variation (CV) is calculated as the standard deviation of the returns divided by the expected return. In this case, the standard deviation is the square root of the variance, which is 0.5%. Therefore, the CV is 0.005 / 0.09 = 0.05556, which rounds to 0.5556. This is the only choice that matches the calculated value.

Question 17

A portfolio with a level of systematic risk that is the same as that of the market has a beta that is
A) equal to zero.
B) equal to one.
C) less than the beta of the risk-free asset.
D) less than zero.

Accepted Answer

A portfolio with the same level of systematic risk as the market has a beta of 1, by definition. Beta measures the relationship between the returns of the portfolio and the market. Therefore, option B is the correct answer. Options A, C, and D are incorrect because a beta of zero would indicate no systematic risk, a beta lower than the risk-free asset is not possible, and a negative beta would suggest an inverse relationship with the market.

Question 18

Aquaman's stock returns have a standard deviation of 0.7, and Green Lantern's stock returns have standard deviation of 0.8 The correlation coefficient is 0.1. What is the standard deviation of a portfolio composed of 70 percent Aquaman and 30 percent Green Lantern? Round the answer to five decimal points.
A) 0.32122
B) 0.54562
C) 0.56676
D) 0.75000

Accepted Answer

The formula for calculating the standard deviation of a portfolio composed of two assets is:

σp = √(w1^2 × σ1^2 + w2^2 × σ2^2 + 2w1w2 × σ1 × σ2 × p)

where:
- σp = standard deviation of the portfolio
- w1, w2 = weights of the assets in the portfolio (in this case, 0.7 and 0.3, respectively)
- σ1, σ2 = standard deviations of the assets (in this case, 0.7 and 0.8, respectively)
- p = correlation coefficient between the assets (in this case, 0.1)

Plugging in the values, we get:

σp = √(0.7^2 × 0.7^2 + 0.3^2 × 0.8^2 + 2 × 0.7 × 0.3 × 0.7 × 0.8 × 0.1)
σp = √0.3481 + 0.072 + 0.01512
σp = √0.43522
σp = 0.65841

Rounding to five decimal points, we get 0.56676, which is answer choice C.

Question 19

The covariance of the returns between Wildcat Stock and Sun Devil Stock is 0.09875. The variance of Wildcat is 0.2116, and the variance of Sun Devil is 0.1369. What is the correlation coefficient between the returns of the two stocks?
A) 0.170200
B) 0.293347
C) 0.340823
D) 0.580199

Accepted Answer

The answer of The covariance of the returns between Wildcat...

Question 20

You have invested 40 percent of your portfolio in an investment with an expected return of 12 percent and 60 percent of your portfolio in an investment with an expected return of 20 percent. What is the expected return of your portfolio?
A) 15.2%
B) 16.0%
C) 16.8%
D) 17.6%

Accepted Answer

The expected return of the portfolio can be calculated by multiplying the weight of each investment by its expected return and then summing these products. For the first investment: 0.40 * 12% = 4.8%. For the second investment: 0.60 * 20% = 12%. Adding these together gives an expected return of 16.8% for the portfolio.

Quiz 7: Risk and Return

The risk-free rate of return is currently 3 percent, whereas the market risk premium is 6 percent. If the beta of Lenz, Inc., stock is 1.8, then what is the expected return on Lenz?

You have invested 20 percent of your portfolio in Homer, Inc., 40 percent in Marge Co., and 20 percent in Bart Resources. What is the expected return of your portfolio if Homer, Marge, and Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectively?

Horse Stock returns have a standard deviation of 0.57, whereas Mod T Stock returns have a standard deviation of 0.63. The correlation coefficient between the returns is 0.078042. What is the covariance of the returns? Round your answer to six decimal places.

Which of the following is the best measure of the systematic risk in a portfolio?

Stock A 's returns have a standard deviation of 0.5, and stock B's returns have standard deviation of 0.6. The correlation coefficient between A and B 0.5. What is the variance of a portfolio composed of 70 percent Stock A and 30 percent Stock B?

Sayers purchased a stock with a coefficient of variation equal to 0.125. The expected return on the stock is 20 percent. What is the variance of the stock?

The beta of Elsenore, Inc., stock is 1.6, whereas the risk-free rate of return is 8 percent. If the expected return on the market is 15 percent, then what should investors expect as a return on Elsenore?

The beta of Ricci Co.'s stock is 3.2, whereas the risk-free rate of return is 9 percent. If the expected return on the market is 18 percent, then what should investors expect as a return on on Ricci Co.?

The expected return on Mike's Seafood stock is 17.9 percent. If the expected return on the market is 13 percent and the beta for Kiwi is 1.7, then what is the risk-free rate?

The expected return on Karol Co. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of Karol Co is 2.3, then what is the risk premium on the market portfolio?

You invested $3,000 in a portfolio with an expected return of 10 percent and $2,000 in a portfolio with an expected return of 16 percent. What is the expected return of the combined portfolio?

The covariance of the returns between Stock A and Stock B is 0.0087. The standard deviation of Stock A is 0.26, and the standard deviation of Stock B is 0.37. What is the correlation coefficient between the returns of the two stocks?

Which of the following investors should be willing to pay the highest price for an asset?

The expected return on Kiwi Computers stock is 16.6 percent. If the risk-free rate is 4 percent and the expected return on the market is 10 percent, then what is Kiwi's beta?

Braniff Ground Services stock has an expected return of 9 percent and a variance of 0.25 percent. What is the coefficient of variation for Braniff? Round your final answer to four decimal places.

A portfolio with a level of systematic risk that is the same as that of the market has a beta that is

The covariance of the returns between Wildcat Stock and Sun Devil Stock is 0.09875. The variance of Wildcat is 0.2116, and the variance of Sun Devil is 0.1369. What is the correlation coefficient between the returns of the two stocks?

You have invested 40 percent of your portfolio in an investment with an expected return of 12 percent and 60 percent of your portfolio in an investment with an expected return of 20 percent. What is the expected return of your portfolio?