# 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%