ECONOMICS

26. Expected Return Compute the expected return given these three economic states, their likelihoods, and the potential returns:


A. 13.5%
B. 22.5%
C. 18.3%
D. 40.0%

 

27. Required Return If the risk-free rate is 8 percent and the market risk premium is 2 percent, what is the required return for the market?
A. 2%
B. 6%
C. 8%
D. 10%

 

28. Required Return If the risk-free rate is 10 percent and the market risk premium is 4 percent, what is the required return for the market?
A. 4%
B. 7%
C. 10%
D. 14%

 

29. Risk Premium The annual return on the S&P 500 Index was 12.4 percent. The annual T-bill yield during the same period was 5.7 percent. What was the market risk premium during that year?
A. 5.7%
B. 6.7%
C. 12.4%
D. 18.1%

 

30. Risk Premium The annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year?
A. 6.2%
B. 11.9%
C. 18.1%
D. 24.3%

 

31. CAPM Required Return A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company’s required return?
A. 6.0%
B. 8.5%
C. 11.0%
D. 13.5%

 

32. CAPM Required Return A company has a beta of 3.25. If the market return is expected to be 14 percent and the risk-free rate is 5.5 percent, what is the company’s required return?
A. 22.750%
B. 33.125%
C. 45.500%
D. 51.000%

 

33. CAPM Required Return A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company’s required return?
A. 33.250%
B. 39.375%
C. 48.875%
D. 55.625%

 

34. Company Risk Premium A company has a beta of 4.5. If the market return is expected to be 14 percent and the risk-free rate is 7 percent, what is the company’s risk premium?
A. 7.0%
B. 25.5%
C. 31.5%
D. 38.5%

 

35. Company Risk Premium A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company’s risk premium?
A. 11.64%
B. 12.00%
C. 22.91%
D. 34.92%

 

36. Portfolio Beta You have a portfolio with a beta of 0.9. What will be the new portfolio beta if you keep 40 percent of your money in the old portfolio and 60 percent in a stock with a beta of 1.5?
A. 1.00
B. 1.20
C. 1.26
D. 2.40

 

37. Portfolio Beta You have a portfolio with a beta of 1.25. What will be the new portfolio beta if you keep 80 percent of your money in the old portfolio and 20 percent in a stock with a beta of 1.75?
A. 1.00
B. 1.35
C. 1.50
D. 3.00

 

38. Stock Market Bubble If the NASDAQ stock market bubble peaked at 3,750, and two and a half years later it had fallen to 2,200, what would be the percentage decline?
A. -15.87%
B. -17.05%
C. -41.33%
D. -58.67%

 

39. Stock Market Bubble If the Japanese stock market bubble peaked at 37,500, and two and a half years later it had fallen to 25,900, what was the percentage decline?
A. -10.31%
B. -27.63%
C. -30.93%
D. -69.07%

 

40. Expected Return A company’s current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10% growth rate, what is its expected return?
A. 4.14%
B. 4.26%
C. 10.00%
D. 14.14%

 

41. Expected Return A company’s current stock price is $65.40 and it is likely to pay a $2.25 dividend next year. Since analysts estimate the company will have a 11.25% growth rate, what is its expected return?
A. 3.44%
B. 3.61%
C. 11.25%
D. 14.69%

 

42. Expected Return Risk Compute the standard deviation of the expected return given these three economic states, their likelihoods, and the potential returns:


A. 6.8%
B. 16.5%
C. 21.5%
D. 46.4%

 

43. Expected Return Risk Compute the standard deviation of the expected return given these three economic states, their likelihoods, and the potential returns:


A. 8.4%
B. 10.87%
C. 11.34%
D. 24.09%

 

44. Under/Over-Valued Stock A manager believes his firm will earn a 16 percent return next year. His firm has a beta of 1.5, the expected return on the market is 14 percent, and the risk-free rate is 4 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.
A. 19%, under-valued
B. 19%, over-valued
C. 22%, under-valued
D. 22%, over-valued

 

45. Under/Over-Valued Stock A manager believes his firm will earn a 12 percent return next year. His firm has a beta of 1.2, the expected return on the market is 8 percent, and the risk-free rate is 3 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.
A. 9%, under-valued
B. 9%, over-valued
C. 13.8%, under-valued
D. 13.8%, over-valued

 

46. Under/Over-Valued Stock A manager believes his firm will earn a 7.5 percent return next year. His firm has a beta of 2, the expected return on the market is 5 percent, and the risk-free rate is 2 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.
A. 8%, under-valued
B. 8%, over-valued
C. 12%, under-valued
D. 12%, over-valued

 

47. Portfolio Beta You own $2,000 of City Steel stock that has a beta of 2.5. You also own $8,000 of Rent-N-Co (beta = 1.9) and $4,000 of Lincoln Corporation (beta = 0.25). What is the beta of your portfolio?
A. 1.51
B. 1.55
C. 4.65
D. 14.00

 

48. Portfolio Beta You own $1,000 of City Steel stock that has a beta of 1.5. You also own $5,000 of Rent-N-Co (beta = 1.8) and $4,000 of Lincoln Corporation (beta = 0.9). What is the beta of your portfolio?
A. 1.4
B. 1.5
C. 4.2
D. 4.65

 

49. Expected Return and Risk Compute the standard deviation given these four economic states, their likelihoods, and the potential returns:


A. 6.71%
B. 22.5%
C. 23.37%
D. 52.20%

 

50. Expected Return and Risk Compute the standard deviation given these four economic states, their likelihoods, and the potential returns:


A. 12.19%
B. 23.8%
C. 38.65%
D. 88.06%

 

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