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Exam 13: Return,Risk,and the Security Market Line

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Question 31

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The rate of return on the common stock of Lancaster Woolens is expected to be 21 percent in a boom economy,11 percent in a normal economy,and only 3 percent in a recessionary economy.The probabilities of these economic states are 10 percent for a boom,70 percent for a normal economy,and 20 percent for a recession.What is the variance of the returns on this common stock?

A) 0.002150
B) 0.002606
C) 0.002244
D) 0.002359
E) 0.002421

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

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Question 32

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Which of the following are examples of diversifiable risk? I.earthquake damages an entire town II.federal government imposes a $100 fee on all business entities III.employment taxes increase nationally IV.toymakers are required to improve their safety standards

A) I and III only
B) II and IV only
C) II and III only
D) I and IV only
E) I, III, and IV only

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

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Question 33

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Consider the following information on Stocks I and II: The market risk premium is 8 percent,and the risk-free rate is 3.6 percent.The beta of stock I is _____ and the beta of stock II is _____.

A portfolio beta is a weighted average of the betas of the individual securities which comprise the portfolio.However,the standard deviation is not a weighted average of the standard deviations of the individual securities which comprise the portfolio.Explain why this difference exists.

At a minimum,which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? I.asset's standard deviation II.asset's beta III.risk-free rate of return IV.market risk premium

A stock has an expected return of 11 percent,the risk-free rate is 5.2 percent,and the market risk premium is 5 percent.What is the stock's beta?

What is the beta of the following portfolio?

The returns on the common stock of New Image Products are quite cyclical.In a boom economy,the stock is expected to return 32 percent in comparison to 14 percent in a normal economy and a negative 28 percent in a recessionary period.The probability of a recession is 25 percent while the probability of a boom is 20 percent.What is the standard deviation of the returns on this stock?

If the economy is normal,Charleston Freight stock is expected to return 16.5 percent.If the economy falls into a recession,the stock's return is projected at a negative 11.6 percent.The probability of a normal economy is 80 percent while the probability of a recession is 20 percent.What is the variance of the returns on this stock?

The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent.What is the expected rate of return on a stock with a beta of 1.21?

The common stock of Alpha Manufacturers has a beta of 1.14 and an actual expected return of 15.26 percent.The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 percent.Which one of the following statements is true given this information?

You are comparing stock A to stock B.Given the following information,what is the difference in the expected returns of these two securities?

What is the expected return on a portfolio which is invested 25 percent in stock A,55 percent in stock B,and the remainder in stock C?

Which one of the following events would be included in the expected return on Sussex stock?

The principle of diversification tells us that:

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?

The common stock of Manchester & Moore is expected to earn 13 percent in a recession,6 percent in a normal economy,and lose 4 percent in a booming economy.The probability of a boom is 5 percent while the probability of a recession is 45 percent.What is the expected rate of return on this stock?

Thayer Farms stock has a beta of 1.12.The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent.What is the expected rate of return on this stock?

Your portfolio is invested 30 percent each in Stocks A and C,and 40 percent in Stock B.What is the standard deviation of your portfolio given the following information?

Explain how the beta of a portfolio can equal the market beta if 50 percent of the portfolio is invested in a security that has twice the amount of systematic risk as an average risky security.