# ECONOMICS

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

A. 7.5%

B. 12.65%

C. 39.48%

D. 113.69%

52. **Risk Premiums** You own $14,000 of Diner’s Corp stock that has a beta of 2.1. You also own $14,000 of Comm Corp (beta = 1.3) and $12,000 of Airlines Corp (beta = 0.6). Assume that the market return will be 15 percent and the risk-free rate is 6.5 percent. What is the total risk premium of the portfolio?

A. 11.645%

B. 20.55%

C. 23.905%

D. 38.00%

53. **Risk Premiums** You own $5,000 of Software Corp’s stock that has a beta of 3.75. You also own $10,000 of Home Improvement Corp (beta = 1.5) and $15,000 of Publishing Corp (beta = 0.35). Assume that the market return will be 13 percent and the risk-free rate is 4.5 percent. What is the risk premium of the portfolio?

A. 11.05%

B. 16.50%

C. 17.00%

D. 24.70%

54. **Portfolio Beta and Required Return** You hold the positions in the table below. What is the beta of your portfolio? If you expect the market to earn 14 percent and the risk-free rate is 5 percent, what is the required return of the portfolio?

A. 20.21%

B. 22.66%

C. 28.66%

D. 32.48%

55. **Portfolio Beta** You hold the positions in the table below. What is the beta of your portfolio?

A. 1.4

B. 2.08

C. 2.13

D. 5.6

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

A. 3.5%

B. 7.0%

C. 7.5%

D. 12.5%

57. The average annual return on the S&P 500 Index from 1986 to 1995 was 17.6 percent. The average annual T-bill yield during the same period was 9.8 percent. What was the market risk premium during these ten years?

A. 8.2%

B. 7.8%

C. 8.8%

D. 9.8%

58. Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10 percent and the risk-free rate is 4 percent, what is Hastings’ required return?

A. 11.44%

B. 12.44%

C. 14.96%

D. 16.40%

59. Netflicks, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and the risk-free rate is 7 percent, what is Netflicks’ risk premium?

A. 20.91%

B. 22.38%

C. 25.72%

D. 29.38%

60. You have a portfolio with a beta of 3.1. What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta of 4.5?

A. 3.31

B. 3.51

C. 3.61

D. 3.71

61. The Nasdaq stock market bubble peaked at 10,816 in 2000. Two and a half years later it had fallen to 4,000. What was the percentage decline?

A. -63.02%

B. -69.47%

C. -57.13%

D. -49.18%

62. Paccar’s current stock price is $75.10 and it is likely to pay a $3.29 dividend next year. Since analysts estimate Paccar will have a 14.2% growth rate, what is its required return?

A. 15.39%

B. 17.94%

C. 18.58%

D. 19.62%

63. Universal Forest’s current stock price is $154.00 and it is likely to pay a $5.23 dividend next year. Since analysts estimate Universal Forest will have a 13.0% growth rate, what is its required return?

A. 16.40%

B. 15.28%

C. 13.62%

D. 14.71%

64. A manager believes his firm will earn an 18 percent return next year. His firm has a beta of 1.75, the expected return on the market is 13 percent, and the risk-free rate is 5 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%; over-valued

B. 19%; under-valued

C. 16.7%; over-valued

D. 16.7%; under-valued

65. You own $9,000 of Olympic Steel stock that has a beta of 2.5. You also own $7,000 of Rent-a-Center (beta = 1.2) and $8,000 of Lincoln Educational (beta = 0.4). What is the beta of your portfolio?

A. 1.18

B. 1.07

C. 1.42

D. 1.53

66. Compute the expected return and standard deviation given these four economic states, their likelihoods, and the potential returns:

A. 9.5%; 32.43%

B. 9.5%; 21.96%

C. 9.5%; 18.97%

D. 9.5%; 29.18%

67. You own $10,000 of Denny’s Corp stock that has a beta of 3.2. You also own $15,000 of Qwest Communications (beta = 1.9) and $15,000 of Southwest Airlines (beta = 0.4). Assume that the market return will be 13 percent and the risk-free rate is 5.5 percent. What is the risk premium of the portfolio?

A. 10.51%

B. 11.49%

C. 12.45%

D. 13.62%

68. You hold the positions in the table below. What is the beta of your portfolio? If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent, what is the required return of the portfolio?

A. 14.21%

B. 16.76%

C. 13.97%

D. 15.38%

69. You hold the positions in the table below. What is the beta of your portfolio? If you expect the market to earn 10 percent and the risk-free rate is 4 percent, what is the required return of the portfolio?

A. 12.37%

B. 9.73%

C. 10.17%

D. 11.68%