EXAM 2 Topic 8 Quiz Flashcards Preview

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Flashcards in EXAM 2 Topic 8 Quiz Deck (8)
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1

You are evaluating a stock return. You are expecting the stock return to change based on economy status. You are expecting that the probability of recession is 20%, normal is 30% and boom is 50%, and returns are -10%, 5%, and 13% respectively. What is the expected rate of return on this stock?

2

The rate of return on the common stock of Flowers by Flo is expected to be 14 percent in a boom economy, 8 percent in a normal economy, and only 2 percent in a recessionary economy. The probabilities of these economic states are 30 percent for a boom, 50 percent for a normal economy, and 20 percent for a recession. What is the standard deviation of returns for this investment?

3

What is the expected return of two-stock portfolio if you invest 30% of your investment into a stock with the expected return of 13% and 70% into a stock with the expected return of 8%?

4

Total value of portfolio = $50,000 + $200,000 + $100,000 + $150,000 = $500,000

Beta of portfolio = (Weight of stock A * Beta of stock A) + (Weight of stock B * Beta of stock B) + (Weight of stock C * Beta of stock C) + (Weight of stock D * Beta of stock D)

Beta of portfolio = [($50,000/$500,000) * 0.7] + [($200,000/$500,000) * 1.1] + [($100,000/$500,000) * 2.1] + [($150,000/$500,000) * 2.4]

Beta of portfolio = 1.65

5

6

Hoogle has the beta of 1.75 which you calculated by running a regression. The annual T-bill rate is currently at 2.5%. Your projection of the market risk premium is 7.0%. Hoogle just paid a dividend of $1.50. What is the required rate of return for this equity?

7

You are analyzing a common stock with a beta of 2.8. The risk-free rate of interest is 5 percent and the expected return on the market is 10 percent. What is the stock's equilibrium required rate of return?

8

Kirtland Signature Inc. has the expected return of 20 percent. The stock has a beta of 1.4. The risk-free rate is 7% and the market return is 10%. Should you buy this stock?