Question 1

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 is the expected return on Ricci Co.?
A) 28.80%
B) 37.80%
C) 48.60%
D) 57.60%

Accepted Answer

The expected return on Ricci Co. can be calculated using the Capital Asset Pricing Model (CAPM):
Expected Return on Ricci Co. = Risk-Free Rate + Beta * (Expected Return on Market - Risk-Free Rate)
Expected Return on Ricci Co. = 9% + 3.2 * (18% - 9%)
Expected Return on Ricci Co. = 9% + 28.8%
Expected Return on Ricci Co. = 37.8% 
Therefore, the best choice is B, as it is the only option that matches the calculated expected return.

Question 2

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 3

Explain the difference between systematic risk and unsystematic risk.

Accepted Answer

The answer of Explain the difference between systematic risk and...

Question 4

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 5

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 6

While performing the regression analysis of historical returns of a stock with a historical return of a general market index, you would plot the line of best fit through those data points. The slope of that line represents the beta of the stock in question. However, in most instances the data points do not lie exactly on that line. Explain the reason.

Accepted Answer

The answer of While performing the regression analysis of historical...

Question 7

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

Expected portfolio return = (weight of Homer x expected return of Homer) + (weight of Marge x expected return of Marge) + (weight of Bart x expected return of Bart)
Expected portfolio return = (0.2 x 2%) + (0.4 x 18%) + (0.2 x 3%)
Expected portfolio return = 0.4% + 7.2% + 0.6%
Expected portfolio return = 8.2%

Question 8

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

Question 9

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 10

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, Inc. can be calculated using the CAPM formula:
Expected Return = Risk-free rate + Beta x Market Risk Premium
Expected Return = 3% + 1.8 x 6%
Expected Return = 3% + 10.8%
Expected Return = 13.8%
Therefore, the expected return on Lenz, Inc. is 13.8%. Option C is the correct answer.

Question 11

Which of the following represents a plot of the relation between expected return and systemic risk?
A) The beta coefficient
B) The covariance of returns line
C) The security market line
D) The variance

Accepted Answer

The security market line represents the plot of the relationship between expected return and systemic risk. It shows the expected return of an investment based on its beta coefficient, which measures systemic risk.

Question 12

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 measures the systematic risk of a portfolio, which is the risk that cannot be diversified away through diversification. Variance measures the overall risk of a portfolio, but it includes both systematic and unsystematic (diversifiable) risk. Standard deviation is a measure of total risk and does not differentiate between systematic and unsystematic risk. Covariance measures the degree to which two assets move together and is not a measure of risk on its own.

Question 13

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 correlation coefficient between the returns of two stocks can be calculated using the formula:

Correlation coefficient = covariance / (standard deviation of Wildcat * standard deviation of Sun Devil)

Using the given values:

Correlation coefficient = 0.09875 / (sqrt(0.2116) * sqrt(0.1369))
                         = 0.580199

Therefore, the correlation coefficient between the returns of the two stocks is 0.580199, which is closest to option D.

Question 14

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 is the expected return on Elsenore?
A) 11.20%
B) 19.20%
C) 24.00%
D) 32.00%

Accepted Answer

The formula for calculating the expected return using the capital asset pricing model (CAPM) is:
Expected return = Risk-free rate + Beta × (Expected market return - Risk-free rate)

Plugging in the numbers, we get:
Expected return = 8% + 1.6 × (15% - 8%)
Expected return = 8% + 1.6 × 7%
Expected return = 8% + 11.2%
Expected return = 19.2%

Therefore, the expected return on Elsenore, Inc., stock is 19.2%. Option B is the correct choice.

Question 15

A portfolio with a level of systematic risk 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 systematic risk as that of the market will have a beta of 1, which is the same as the market's beta. Options A, C, and D are incorrect because the beta cannot be zero or negative, and it cannot be less than the beta of the risk-free asset, which has a beta of zero.

Question 16

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?
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 17

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.

Question 18

Horse Stock returns have exhibited 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 correlation coefficient and the standard deviations of the two stocks: 0.078042 * 0.57 * 0.63 = 0.028025.

Quiz 7: Risk and Return

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 is the expected return 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?

Explain the difference between systematic risk and unsystematic risk.

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

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?

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?

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?

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?

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?

Which of the following represents a plot of the relation between expected return and systemic risk?

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

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?

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 is the expected return on Elsenore?

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

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?

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?

Horse Stock returns have exhibited 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.