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Exam 11: Risk and Return

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Question 21

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Bernard Companies stock has an expected return of 9.5 percent.The stock is expected to return 11 percent in a normal economy and 13.4 percent in a boom.The probabilities of a recession, normal economy, and a boom are 10 percent, 84 percent, and 6 percent, respectively.What is the expected return if the economy is in a recession?

A) -5.44 percent
B) -2.97 percent
C) --2.46 percent
D) -10.98 percent
E) -6.98 percent

F) D) and E)
G) A) and E)

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Question 22

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Crabby Shores stock is expected to return 16 percent in a booming economy, 11.5 percent in a normal economy, and 1.8 percent in a recession.The probabilities of an economic boom, normal state, or recession are 6 percent, 85 percent, and 9 percent, respectively.What is the expected rate of return on this stock?

A) 8.96 percent
B) 9.63 percent
C) 9.50 percent
D) 10.90 percent
E) 7.57 percent

F) D) and E)
G) B) and C)

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Question 23

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Julie wants to create a $5,000 portfolio.She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return.However, she wants her portfolio to have no more risk than the overall market.Which one of the following portfolios is most apt to meet all of her objectives?

Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, R_f is the risk-free rate, β is the security's beta, and E(R_M) is the expected rate of return on the market.

Which statement is correct?

Which one of the following portfolios will have a beta of zero?

Which one of the following is the best example of unsystematic risk?

The slope of the security market line represents the:

The common stock of The Dominic Companies should return 29 percent in a boom, 12 percent in a normal economy, and -15 percent in a recession.The probabilities of a boom, normal economy, and recession are 12percent, 86 percent, and 2 percent, respectively.What is the variance of the returns on this stock?

Bernard Companies stock has an expected return of 10.75 percent.The stock is expected to return 13.5 percent in a normal economy and 19.6 percent in a boom.The probabilities of a recession, normal economy, and a boom are 5 percent, 80 percent, and 15 percent, respectively.What is the expected return if the economy is in a recession?

North Around, Inc.stock is expected to return 22percent in a boom, 13percent in a normal economy, and -15 percent in a recession.The probabilities of a boom, normal economy, and a recession are 6 percent, 92 percent, and 2 percent, respectively.What is the standard deviation of the returns on this stock?

Which statement is correct?

You own a stock that has an expected return of 15.72 percent and a beta of 1.33.The U.S.Treasury bill is yielding 3.82 percent and the inflation rate is 2.95 percent.What is the expected rate of return on the market?

For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta:

Which one of the following is the vertical intercept of the security market line?

The security market line is a linear function that is graphed by plotting data points based on the relationship between the:

Consider the following information: What is the variance of a portfolio invested 25 percent each in Stocks A and B and 50 percent in Stock C?

Ben & Terry's has an expected return of 13.2 percent and a beta of 1.08.The expected return on the market is 12.4 percent.What is the risk-free rate?

The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent.Stock A has a beta of 1.1 and an expected return of 13.1 percent.Stock B has a beta of .86 and an expected return of 11.4 percent.Are these stocks correctly priced? Why or why not?

A stock has an expected return of 11.3 percent and a beta of 1.08.The risk-free rate is 4.7 percent.What is the slope of the security market line?