Q&A Hero

Q: Stock W has an expected return of 12% with a standard deviation of 8%. If returns are normally distributed, then approximately two-thirds of the time the return on stock W will be A) between 12% and 20%. B) between 8% and 12%. C) between -4% and 28%. D) between 4% and 20%.

Q: Stock W has the following returns for various states of the economy: State of the Economy Probability Stock W's Return Recession 9% -72% Below Average 16% -15% Average 51% 16% Above Average 14% 35% Boom 10% 85% Stock W's standard deviation of returns is A) 12%. B) 29%. C) 37%. D) 43%.

Q: Stock W has the following returns for various states of the economy: State of the Economy Probability Stock W's Return Recession 10% -30% Below Average 20% -2% Average 40% 10% Above Average 20% 18% Boom 10% 40% Stock W's standard deviation of returns is A) 10%. B) 14%. C) 17%. D) 20%

Q: Due to strict stock market controls, the most a stock's value can drop in one trading day is 5%.

Q: For a well-diversified investor, an investment with an expected return of 10% with a standard deviation of 3% dominates an investment with an expected return of 10% with a standard deviation of 5%.

Q: A rational investor will always prefer an investment with a lower standard deviation of returns, because such investments are less risky.

Q: Variation in the rate of return of an investment is a measure of the riskiness of that investment.

Q: Assume that an investment is forecasted to produce the following returns: a 30% probability of a 12% return; a 50% probability of a 16% return; and a 20% probability of a 19% return. What is the expected percentage return this investment will produce?A) 33.3%B) 16.1%C) 9.5%D) 15.4%

Q: Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return. What is the expected amount of return this investment will produce? A) $4,040 B) $7,640 C) $12140 D) $1,540

Q: The relevant variable a financial manager uses to measure returns is A) net income determined using generally accepted accounting principles. B) earnings per share minus dividends per share. C) cash flows. D) dividends.

Q: You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year. Historical data suggests the following probability distribution for your commission income. Which job has the higher expected income?CommissionProbability of Occurrence$15,000.15$35,000.20$48,000.35$67,000.22$80,000.18A) The salary of $50,000 is greater than the expected commission of $49,630.B) The salary of $50,000 is greater than the expected commission of $48,400.C) The salary of $50,000 is less than the expected commission of $50,050.D) The salary of $50,000 is less than the expected commission of $52,720.

Q: Stock A has the following returns for various states of the economy: State of the Economy Probability Stock A's Return Recession 9% -72% Below Average 16% -15% Average 51% 16% Above Average 14% 35% Boom 10% 85% Stock A's expected return is A) 9.9%. B) 12.7%. C) 13.8%. D) 16.5%.

Q: Stock A has the following returns for various states of the economy: State of the Economy Probability Stock A's Return Recession 10% -30% Below Average 20% -2% Average 40% 10% Above Average 20% 18% Boom 10% 40% Stock A's expected return is A) 5.4%. B) 7.2%. C) 8.2%. D) 9.6%

Q: The risk-return trade-off that investors face on a day-to-day basis is based on realized rates of return because expected returns involve too much uncertainty.

Q: The realized rate of return, or holding period return, is equal to the holding period dollar gain divided by the price at the beginning of the period.

Q: Another name for an asset's expected rate of return is holding-period return.

Q: Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

Q: The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.

Q: Cash flows is the most relevant variable to measure the returns on debt instruments, while GAAP net income is the most relevant variable to measure the returns on common stock.

Q: Accounting profits is the most relevant variable the financial manager uses to measure returns.

Q: Use the following data: Market risk premium = 10% Risk-free rate = 2% Beta of XYZ stock = 1.6 Beta of PDQ stock = 2.4 Investment in XYZ stock = $15,000 Investment in PDQ stock = $60,000 You have no assets other than your investments in XYZ and PDQ stock. What is the expected return of your portfolio? Show all work.

Q: What are the two components of the investor's required rate of return?

Q: How does opportunity cost affect an investor's required rate of return?

Q: Redesign Corp. is considering a new strategy that would increase its expected return from 12% to 13.9%, but would also increase its beta from 1.2 to 1.8. If the risk-free rate is 5% and the return on the market is expected to be 10%, should Redesign change its strategy?

Q: Bankers Corp. has a very conservative beta of .7, while Biotech Corp. has a beta of 2.1. Given that the T-bill rate is 5%, and the market is expected to return 15%, what is the expected return of Bankers Corp., Biotech Corp., and a portfolio composed of 60% of Bankers Corp. and 40% Biotech Corp.? a. Solve this problem first by weighting the betas to calculate a portfolio beta, and then using CAPM to calculate the portfolio expected return. b. Then solve the problem again by calculating the expected return of each asset and weighting those returns to calculate the portfolio expected return. c. Why is Biotech Corp.'s expected return NOT three times that of Bankers Corp.?

Q: Security A has an expected rate of return of 29.8 percent and a beta of 3.1. Security B has a beta of 1.70. If the Treasury bill rate is 5 percent, what is the expected rate of return for Security B?

Q: The expected return for the market portfolio is 13%, the expected return on U.S. Treasury bills is 2%, and the expected return on AAA-rated short-term corporate bonds is 7%. Calculate the required return for a stock with a beta equal to 1.5.

Q: Answer the questions below using the following information on stocks A, B, and C.ABCExpected Return20%21%10%Standard Deviation12%10%10%Beta1.82.20.8Assume the risk-free rate of return is 3% and the expected market return is 12%a. Calculate the required return for stocks A, B, and C.b. Assuming an investor with a well-diversified portfolio, which stock would the investor wantto add to his portfolio?c. Assuming an investor who will invest all of his money into one security, which stock will the investor choose?

Q: The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the A) stock's beta. B) investor's risk premium. C) investor's required rate of return. D) risk-free rate.

Q: You are considering an investment in Citizens Bank Corp. The firm has a beta of 1.6. Currently, U.S. Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%. What rate of return should you expect for your investment in Citizens Bank? A) 11.15% B) 15.39% C) 16.75% D) 20.75%

Q: What is the name given to the equation that financial managers use to measure an investor's required rate of return? A) the standard deviation B) the capital asset pricing model C) the coefficient of variation D) the MIRR

Q: Which of the following is the slope of the security market line? A) beta B) one C) It varies, and it is steeper for riskier securities. D) the market risk premium

Q: The return on the market portfolio is currently 12%. Mobile Phone Corporation stockholders require a rate of return of 30% and the stock has a beta of 3.2. According to CAPM, determine the risk-free rate. A) 9.80% B) 6.50% C) 4.64% D) 3.82%

Q: The rate on T-bills is currently 2%. Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%. According to CAPM, determine the return on the market portfolio. A) 27.5% B) 19.0% C) 14.0% D) 12.0%

Q: The beta of ABC Co. stock is the slope of A) the security market line. B) the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills. C) the arbitrage pricing line. D) the characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period.

Q: You hold a portfolio with the following securities:SecurityPercent of PortfolioBetaExpected ReturnAble Corporation20%3.2036.0%Baker Corporation40%1.6020.0%Charlie Corporation40%.206.0%What is the expected return for the market, according to the CAPM?A) 14.0%B) 13.8%C) 12.0%D) 10.0%

Q: Marble Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The return on the market portfolio is 15% and the risk-free rate is 4%. According to CAPM, what is the required rate of return on Collectible's stock? A) 37.5% B) 31.5% C) 26.5% D) 23.5%

Q: Marble Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The return on the market portfolio is 15% and the risk-free rate is 4%. What is the risk premium on the market? A) 5% B) 6% C) 9.00% D) 11%

Q: You hold a portfolio made up of the following stocks:Investment ValueBetaStock L$8,0002.0Stock M$18,0001.5Stock N$14,000.4If the market's expected return is 14%, and the risk-free rate of return is 5%, what is the expected return of the portfolio?A) 17.010%B) 16.700%C) 15.935%D) 14.698%

Q: You determine that LMN common stock has an expected return of 24%. LMN has a Beta of 1.5. The risk-free rate is 5%, and the market expected return is 15%. Which of the following is most likely to happen? A) You and other investors will buy up LMN stock and its price will rise. B) You and other investors will sell LMN stock and its return will fall. C) You and other investors will buy up LMN stock and its return will rise. D) You and other investors will sell LMN stock and its price will fall.

Q: Wildings, Inc. common stock has a beta of 1.2. If the expected risk free return is 4% and the expected market risk premium is 9%, what is the expected return on Wildings' stock? A) 10.0% B) 12.0% C) 13.8% D) 14.8%

Q: Decker Corp. common stock has a required return of 17.5% and a beta of 1.75. If the expected risk free return is 3%, what is the expected return for the market based on the CAPM? A) 11.29% B) 14.29% C) 13.35% D) 15.27%

Q: Anchor Incorporated has a beta of 1.0. If the expected return on the market is 15%, what is the expected return on Anchor Incorporated's stock? A) 15% B) 14% C) 18% D) cannot be determined without the risk-free rate

Q: The appropriate measure for risk according to the capital asset pricing model is A) the standard deviation of a firm's cash flows. B) alpha. C) the standard deviation of a firm's stock returns. D) beta.

Q: You are going to add one of the following three projects to your already well-diversified portfolio.PROJECT 1 PROJECT 2ProbabilityReturnStandard DeviationBetaProbabilityReturnStandard DeviationBeta50% Chance22%12%1.130% Chance36%19.5%0.850% Chance-4%40% Chance10.5%30% Chance-20%PROJECT 3ProbabilityReturnStandard DeviationBeta10% Chance28%12%2.070% Chance18%20% Chance-8%Assume the risk-free rate of return is 2% and the market risk premium is 8%. If you are a risk averse investor, which project should you choose?A) Project 1B) Project 2C) Project 3D) Either Project 2 or Project 3 because the higher expected return on project 3 offsets its higher risk

Q: Surf and Spray Inc. has a beta equal to 1.8 and a required return of 15% based on the CAPM. If the risk-free rate of return is 4.2%, the expected return on the market portfolio is A) 21%. B) 19.2%. C) 13.4%. D) 10.2%.

Q: Surf and Spray Inc. has a beta equal to 1.8 and a required return of 15% based on the CAPM. If the market risk premium is 7.5%, the risk-free rate of return is A) 4.1%. B) 3.4%. C) 2.0%. D) 1.5%.

Q: White Company stock has a beta of 2 and a required return of 23%, while Black Company stock has a beta of 1.0 and a required return of 14%. The standard deviation of returns for White Company is 10% more than the standard deviation for Black Company. The risk-free rate of return according to the CAPM is A) 4%. B) 5%. C) 6%. D) impossible to determine with the information given.

Q: Green Company stock has a beta of 2 and a required return of 23%, while Gold Company stock has a beta of 1.0 and a required return of 14%. The standard deviation of returns for Green Company is 10% more than the standard deviation for Gold Company. The expected return on the market portfolio according to the CAPM is A) 9%. B) 10%. C) 12%. D) 14%.

Q: Based on the security market line, Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%. Robo-Tech has a standard deviation of returns of 18%. Therefore, A) Friendly must have a standard deviation of returns of less than 18% because Friendly is less risky than Robo-Tech. B) all rational investors will prefer Friendly over Robo-Tech. C) for a well-diversified investor, Friendly is less risky than Robo-Tech. D) the beta for Friendly must be greater than the beta for Robo-Tech because Friendly is the better buy for a risk-averse investor.

Q: Wendy purchased 800 shares of Robotics stock at $3 per share on 1/1/09. Wendy sold the shares on 12/31/09 for $3.45. Robotics stock has a beta of 1.3, the risk-free rate of return is 3%, and the market risk premium is 8%. The required return on Robotics stock is A) 13.4%. B) 16.5%. C) 17.6%. D) 21.1%.

Q: An investor currently holds the following portfolio:Amount Invested8,000 shares of Stock A$16,000Beta = 1.315,000 shares of Stock B$48,000Beta = 1.825,000 shares of Stock C$96,000Beta = 2.2If the risk-free rate of return is 2% and the market risk premium is 7%, then the required return on the portfolio isA) 14.91%.B) 15.93%.C) 21.91%.D) 23.93%.

Q: Stock A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the risk-free rate of return increases and the market risk premium remains constant, then A) the required return on stock B will increase more than the required return on stock A. B) the required returns on stocks A and B will both increase by the same amount. C) the required returns on stocks A and B will not change. D) the required return on stock A will increase more than the required return on stock B.

Q: Stock A has a beta of 1.2 and a standard deviation of returns of 18%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the market risk premium increases, then A) the required return on stock B will increase more than the required return on stock A. B) the required returns on stocks A and B will both increase by the same amount. C) the required returns on stocks A and B will remain the same. D) the required return on stock A will increase more than the required return on stock B.

Q: The risk-free rate of interest is 4% and the market risk premium is 9%. Howard Corporation has a beta of 2.0, and last year generated a return of 16% with a standard deviation of returns of 27%. The required return on Howard Corporation stock is A) 36%. B) 34%. C) 26%. D) 22%.

Q: If the beta for stock A equals zero, then A) stock A's required return is equal to the required return on the market portfolio. B) stock A's required return is equal to the risk-free rate of return. C) stock A has a guaranteed return. D) stock A's required return is greater than the required return on the market portfolio.

Q: A typical measure for the risk-free rate of return is the A) U.S. Treasury bill rate. B) prime lending rate. C) money-market rate. D) short-term AAA-rated bond rate.

Q: The capital asset pricing model A) provides a risk-return trade-off in which risk is measured in terms of the market volatility. B) provides a risk-return trade-off in which risk is measured in terms of beta. C) measures risk as the coefficient of variation between security and market rates of return. D) depicts the total risk of a security.

Q: In an efficient market, a stock with a standard deviation of returns of 12% could have a higher expected return than a stock with a standard deviation of 10% because the beta for the higher standard deviation stock could be lower than the beta for the lower standard deviation stock.

Q: As the required rate of return of an investment decreases, the market price of the investment decreases.

Q: In general, the required rate of return is a function of (1) the time value of money, (2) the risk of an asset, and (3) the investor's attitude toward risk.

Q: An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%.

Q: Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

Q: According to the CAPM, for each unit of beta, an asset's required rate of return increases by the market's risk premium.

Q: According to the CAPM, for each unit of beta, an asset's required rate of return increases by the market's return.

Q: The S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate.

Q: The CAPM designates the risk-return trade-off existing in the market, where risk is defined in terms of beta.

Q: The T-bill return is used in the CAPM model as the risk-free rate.

Q: The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

Q: Define systematic and unsystematic risk. What method is used to measure a firm's market risk?

Q: Discuss whether the standard deviation of a portfolio is, or is not, a weighted average of the standard deviations of the assets in the portfolio. Fully explain your answer.

Q: An investor currently holds the following portfolio:Amount Invested4,000 shares of Stock H$8,000Beta = 1.37,500 shares of Stock I$24,000Beta = 1.812,500 shares of Stock J$48,000Beta = 2.2The beta for the portfolio isA) 1.99.B) 1.77.C) 1.45.D) 1.27.

Q: Changes in the general economy, like changes in interest rates or tax laws, represent what type of risk? A) company-unique risk B) market risk C) unsystematic risk D) diversifiable risk

Q: Which of the following investments is clearly preferred to the others for a risk-averse investor?InvestmentσA14%2%B22%20%C18%16%A) Investment AB) Investment BC) Investment CD) Cannot be determined without additional information

Q: Investment A has an expected return of 14% with a standard deviation of 4%, while investment B has an expected return of 20% with a standard deviation of 9%. Therefore, A) a risk averse investor will definitely select investment A because the standard deviation is lower. B) a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A ($14% - 4%). C) it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A's, but the return is not twice as big. D) rational investors could pick either A or B, depending on their level of risk aversion.

Q: What is diversifying among different kinds of assets known as? A) portfolio funding B) capital asset classification C) asset allocation D) multi-diversification

Q: Which of the following statements is MOST correct regarding beta? A) Beta must be calculated using at least 5 years of monthly returns data to be accurate. B) Beta can only be measured properly using daily returns. C) Beta for a particular company remains constant over time. D) Even professionals may not agree on the measurement of beta.

Q: Assume that you have $100,000 invested in a stock whose beta is .85, $200,000 invested in a stock whose beta is 1.05, and $300,000 invested in a stock whose beta is 1.25. What is the beta of your portfolio? A) 0.97 B) 1.02 C) 1.12 D) 1.21

Q: Assume that you have $165,000 invested in a stock whose beta is 1.25, $85,000 invested in a stock whose beta is 2.35, and $235,000 invested in a stock whose beta is 1.11. What is the beta of your portfolio? A) 1.37 B) 2.01 C) 1.85 D) 1.57

Q: Which of the following measures the average relationship between a stock's returns and the market's returns? A) coefficient of validation B) standard deviation C) geometric regression D) beta coefficient