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Homework answers / question archive / University of West Georgia FINC MISC Chapter 6 1)How would the Security Market Line be affected, other things held constant, if the expected inflation rate decreases and investors also become more risk averse? sider Consider the following average annual returns for Stocks A and B and the Market

University of West Georgia FINC MISC Chapter 6 1)How would the Security Market Line be affected, other things held constant, if the expected inflation rate decreases and investors also become more risk averse? sider Consider the following average annual returns for Stocks A and B and the Market

Finance

University of West Georgia

FINC MISC

Chapter 6

1)How would the Security Market Line be affected, other things held constant, if the expected inflation rate decreases and investors also become more risk averse?

  1. sider Consider the following average annual returns for Stocks A and B and the Market. Which of the possible answers best describes the historical betas for A and B?(Hint: Notice the higher values under negative market returns)
  2. If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value
  3. You have developed the following data on three stocks: Stock A has a standard deviation of .15 and a Beta of .79. Stock B has a standard deviation of .25 and a Beta of .61. Stock C has a standard deviation of .20 and a Beta of 1.29. If you are a risk minimizer, you should choose Stock                 if it is to be held in isolation and Stock              if it is to be held as part of a well-diversified portfolio.
  4. Which one of the following statements is correct?
  5. Which one of the following statements related to unexpected returns is correct?
  6. The returns of Railroad United (RIU) are listed below, along with the returns on Major Application of Technology (MAT). Economy 1 (with probability .15) gives a return of -14% for RIU and -9% for MAT. Economy 2 (with probability .15) gives a return of 16% for RIU and 11% for MAT. Economy 3 (with probability .30) gives a return of 22% for RIU and 15% for MAT. Economy 4 (with probability .30) gives a return of 7% for RIU and 5% for MAT. Economy 5 (with probability .10) gives are return of -2% for RIU and -10% for MAT. What is the expected return and standard deviation on a portfolio that is 50% RIU and 50% MAT?
  7. You own a portfolio that has $2,000 invested in Stock A and $3,500 invested in Stock B. The expected returns on these stocks are 14 percent and 9 percent, respectively. What is the expected return on the portfolio?
  8. Donald Gilmore has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock
  1. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?
  1. sider Consider the following information and then calculate the required rate of return for the Universal Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows. Asset A with investment of $200,000 has a beta of 1.5, Asset B with investment of $300,000 has a beta of -.5. Asset C with investment of

$500,000 has a beta of 1.25, Asset B with investment of $1,000,000 has a beta of .75.

  1. Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each. The portfolio's beta is 1.12. Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80. What will the portfolio's new beta be?

 

  1. Assume that the risk-free rate is 5 percent, and that the market risk premium is 12 percent. If a stock has a required rate of return of 14 percent, what is its beta ?

 

  1. The        tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.
  2. When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.
  3. Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)
  4. The expected risk premium on a stock is equal to the expected return on the stock minus the:
  5. Which one of the following is least apt to reduce the unsystematic risk of a portfolio?
  6. Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B. Stock A has a beta of 1.2 and a standard deviation of 20%. Stock B has a beta of 0.8 and a standard deviation of 25%. Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)
  7. 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?
  8. Consider the following information and then calculate the required rate of return for the Universal Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:
  9. Shirley Paul's 2-stock portfolio has a total value of $100,000. $37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is her portfolio's beta?
  10. Bloome Co.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?
  11. Gardner Electric has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T- bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 12.50%. Using the SML, what is the firm's required rate of return?
  12. Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?
  13. You have developed the following data on three stocks. Stock A has standard deviation of .15 and beta of .79. Stock B has standard deviation of .25 and beta of .61. Stock C has standard deviation of .20 and beta of 1.29. If you are a risk minimizer, you should choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.
  14. Which of the following statements is most correct?
  15. Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true about these securities? (Assume market equilibrium.)
  16. Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. Your portfolio consists of 50% A and 50% B. Which of the following statements is CORRECT?
  17. Which one of the following risks is irrelevant to a well-diversified investor?

 

  1. You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?
  2. Calculate the return and standard deviation for the following stock, in an economy with five possible states. If a Boom (Probability=25%) economy occurs, then the expected return is 50%. If a Good (Probability=25%) economy occurs, then the expected return is 25%. If a Normal (Probability=20%) economy occurs, then the expected return is 15%. If a Bad (Probability=20%) economy occurs, then the expected return is 0%. If a Recession (Probability=10%) economy occurs, then the expected return is -18%. Show your work for partial credit.
  3. 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?
  4. You have the following information about your stock portfolio. You own 8 ,000 shares of Stock A which sells for $ 14 with an expected return of 4 %. You own 2,000 shares of Stock B which sells for $10 with an expected return of 6%. You own 4,000 shares of Stock C which sells for $12 with an expected return of 9%. You own 9 ,000 shares of Stock D which sells for $ 15 with an expected return of 11 %. What is the expected return on your portfolio?
  5. You would like to combine a risky stock with a beta of 1.68 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in the risky stock?
  6. Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the stock market is 11.00%, and the risk- free rate is 4.25%. What is the difference between A's and B's required rates of return?

 

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