Flashcards in Seven Calcclaztions Deck (33):

1

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Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3?

A. , 6%

B. , 15.6%

C. , 18%

D. , 21.6%

###
D. , 21.6%

E[rs] = 6% + [18% - 6%](1.3) = 21.6%

2

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Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%?

A. , .5

B. , .7

C. , 1

D. , 1.2

###
D. , 1.2

17% = 5% + [15% - 5%]βs; βs = 1.2

3

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Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate?

A. , 2%

B. , 6%

C. , 8%

D. , 12%

###
C. , 8%

20% = rF + (18 - rF)(1.2); rF = 8%

4

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You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?

A. , 1.048

B. , 1.033

C. , 1

D. , 1.037

###
A. , 1.048

#22 calcualation

5

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Consider the single factor APT. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 8%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________.

A. , A; A

B. , A; B

C. , B; A

D. , B; B

###
B. , A; B

#29 Calculaaction

6

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Consider the single factor APT. Portfolio A has a beta of .2 and an expected return of 13%. Portfolio B has a beta of .4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _________.

A. , A; A

B. , A; B

C. , B; A

D. , B; B

###
C. , B; A

#30

7

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Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist.

A. , 13.5%

B. , 15%

C. , 16.25%

D. , 23%

###
C. , 16.25%

E(rA) = 7 + 0.5(1) + 1.25(7) = 16.25%

8

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Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-diversified portfolio is approximately _________.

A. , .1152

B. , .1270

C. , .1521

D. , .1342

###
A. , .1152

#32 calculation

9

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Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________.

A. , fairly priced

B. , overpriced

C. , underpriced

D. , none of these answers

###
B. , overpriced

In equilibrium,

E(rX) = 5% + 1.15(15% - 5%) = 16.5%.

10

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Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The variance of return on the market portfolio is .0225. If the risk-free rate of return is 4%, the expected return on the market portfolio is _________.

A. , 6.75%

B. , 9%

C. , 10.75%

D. , 12%

###
C. , 10.75%

E(rm) = .04+3(.0225) = 10.75

11

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You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is _________.

A. , 1.14

B. , 1.2

C. , 1.26

D. , 1.5

### C. , 1.26

12

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Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________.

A. , -1.7%

B. , 3.7%

C. , 5.5%

D. , 8.7%

###
B. , 3.7%

alpha = .12-[.05+1.1(.08 - .05)] .037

13

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The variance of the return on the market portfolio is .04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is _________.

A. , .5

B. , 2.5

C. , 3.5

D. , 5

###
B. , 2.5

A = (.20 - .10)/.04 = 2.5

14

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The risk-free rate and the expected market rate of return are 6% and 16%, respectively. According to the capital asset pricing model, the expected rate of return on security X with a beta of 1.2 is equal to _________.

A. , 12%

B. , 17%

C. , 18%

D. , 23%

###
C. , 18%

E(rx)=.06+1.2(.16-.06)=.18

15

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Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered the better buy because _________.

A. , A; it offers an expected excess return of .2%

B. , A; it offers an expected excess return of 2.2%

C. , B; it offers an expected excess return of 1.8%

D. , B; it offers an expected return of 2.4%

###
C. , B; it offers an expected excess return of 1.8%

#45 calculation

16

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Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately _________.

A. .60

B. 1

C. 1.67

D. 3.20

###
C. , 1.67

#43 calculation

17

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You run a regression of a stock's returns versus a market index and find the following: Based on the data, you know that the stock _____.

A. , earned a positive alpha that is statistically significantly different from zero

B. , has a beta precisely equal to .890

C. , has a beta that is likely to be anything between .6541 and 1.465 inclusive

D. , has no systematic risk

### C. , has a beta that is likely to be anything between .6541 and 1.465 inclusive

18

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The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, _________.

A. , SDA Corp. stock is underpriced

B. , SDA Corp. stock is fairly priced

C. , SDA Corp. stock's alpha is -.75%

D. , SDA Corp. stock alpha is .75%

###
C. , SDA Corp. stock's alpha is -.75%

Alpha = .16 - [.08+1.25(.15-.08)] = -.0075

19

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Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y _________.

A. , are in equilibrium

B. , offer an arbitrage opportunity

C. , are both underpriced

D. , are both fairly priced

###
A. , are in equilibrium

calculation #64

20

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What is the expected return on the market?

A. , 0%

B. , 5%

C. , 10%

D. , 15%

###
C. , 10%

Graph #65

21

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What is the beta for a portfolio with an expected return of 12.5%?

A. , 0

B. , 1

C. , 1.5

D. , 2

###
C. , 1.5

GraphSince rf = 5% and E(rM) = 10%, from the CAPM we know that 12.5% = 5% + beta(10% - 5%), and therefore beta = 1.5.#66

22

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What is the expected return for a portfolio with a beta of .5?

A. , 5%

B. , 7.5%

C. , 12.5%

D. , 15%

###
B. , 7.5%

Rp = Rf+.5(Rm - Rf)= 5% + .5(10%-5%)= 7.5%GRAPH #67

23

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According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%?

A. , 4%

B. , 4.8%

C. , 6.6%

D. , 8%

###
D. , 8%

13.6 = 4 + 1.2 × (MRP); MRP = 8%

24

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According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%?

A. , 5%

B. , 9%

C. , 13%

D. , 14%

###
D. , 14%

15.8 = 5 + 1.2 × (MRP); MRP = 9%; Expected market return = 5 + 9 = 14%

25

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What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and an expected market return of 15.5%?

A. , 3.8%

B. , 13.1%

C. , 15.6%

D. , 19.1%

###
B. , 13.1%

Expected return = 3.5 + (.8)(15.5 - 3.5) = 13.1%

26

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Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return?

A. , 15.9%

B. , 12.9%

C. , 13.2%

D. , 12%

###
B. , 12.9%

E[rnew] = 12% + (5% - 3%)(1.2) + (-2% - 1%)(.5) = 12.9%

27

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There are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below, which equation provides the correct pricing model?

A. E(rP) = 5 + 1.12βP1 + 11.86βP2

B. E(rP) = 5 + 4.96βP1 + 13.26βP2

C. E(rP) = 5 + 3.23βP1 + 8.46βP2

D. E(rP) = 5 + 8.71βP1 + 9.68βP2

###
D. , E(rP) = 5 + 8.71βP1 + 9.68βP2

35 = 5 + 1.5 γ1 + 1.75 γ2; solve for γ1

γ1 = 20 - 1.1667γ2

20 = 5 + γ1 + .65γ2; sub in γ1

20 = 5 + 20 - 1.1667 γ2 + .65 γ2

γ2 = 9.68% γ1 = 8.71%

#48

28

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Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return is 10%. What is the residual given an actual return of 15%?

A. , .0%

B. , 1%

C. , 2%

D. , 3%

###
B. , 1%

Residual = 15 - (3 + 1.1 × 10) = 1%

29

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., The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock?

A. , 10%

B. , 11.5%

C. , 13.6%

D. , 14%

###
C. , 13.6%

Return = .04 + .6(.04) + 1.2(.06) = .136

30

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The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of (-1.3%), and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock?

A. , 8.7%

B. , 11.2%

C. , 13.8%

D. , 15.2%

###
B. , 11.2%

Return = 3.5 + 9 - 1.3 = 11.2%

31

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The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of .4. The risk premium for exposure to the consumer price index is -6%, and the firm has a beta relative to the CPI of .8. If the risk-free rate is 3%, what is the expected return on this stock?

A. , .2%

B. , 1.5%

C. , 3.6%

D. , 4%

###
A. , .2%

Return = .03 + .4(.05) + .8(-.06) = .002

32

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The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock?

A. , 11.6%

B. , 13%

C. , 15.3%

D. , 19.5%

###
D. , 19.5%

Return = 3.5 + 4 + 12 = 19.5%

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