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54) You recently purchased a stock that is expected to earn 12.6 percent in a booming economy,
8.9 percent in a normal economy, and lose 5.2 percent in a recessionary economy. Each
economic state is equally likely to occur. What is your expected rate of return on this stock?
A) 6.47 percent
B) 8.90 percent
C) 5.43 percent
D) 7.65 percent
E) 7.01 percent
55) Terry owns a stock that is expected to earn 8.7 percent in a booming economy, 9.2 percent in
a normal economy, and 12.6 percent in a recessionary economy. Each economic state is equally
likely to occur. What is his expected rate of return on this stock?
A) 10.38 percent
B) 11.90 percent
C) 10.17 percent
D) 9.98 percent
E) 11.01 percent
56) BPJ stock is expected to earn 14.8 percent in a recession, 6.3 percent in a normal economy,
and lose 4.7 percent in a booming economy. The probability of a boom is 20 percent while the
probability of a normal economy is 55 percent. What is the expected rate of return on this stock?
A) 6.23 percent
B) 6.72 percent
C) 6.81 percent
D) 7.60 percent
E) 8.11 percent
57) Stock A is expected to return 12 percent in a normal economy and lose 7 percent in a
recession. Stock B is expected to return 8 percent in a normal economy and 2 percent in a
recession. The probability of the economy being normal is 80 percent and the probability of a
recession is 20 percent. What is the covariance of these two securities?
A) .004203
B) .004115
C) .003280
D) .003876
E) .003915
58) Stock A is expected to return 14 percent in a normal economy and lose 21 percent in a
recession. Stock B is expected to return 11 percent in a normal economy and 5 percent in a
recession. The probability of the economy being normal is 75 percent and being recessionary is
25 percent. What is the covariance of these two securities?
A) .007006
B) .006563
C) .005180
D) .007309
E) .006274
59) Stock A has a variance of .1428 while Stock B's variance is .0910. The covariance of the
returns for these two stocks is −.0206. What is the correlation coefficient?
A) −.1505
B) −.1146
C) −.1480
D) −.1643
E) −.1807
60) You are comparing Stock A to Stock B. Stock A will return 9 percent in a boom and 4
percent in a recession. Stock B will return 15 percent in a boom and lose 6 percent in a recession.
The probability of a boom is 60 percent while the chance of a recession is 40 percent. Given this
information, which one of these two stocks should you prefer and why?
A) Stock A; because it has a higher expected return and appears to be more risky than Stock B
B) Stock A; because it has a higher expected return and appears to be less risky than Stock B
C) Stock A; because it has a slightly lower expected return but appears to be significantly less
risky than Stock B
D) Stock B; because it has a higher expected return and appears to be just slightly more risky
than Stock A
E) Stock B; because it has a higher expected return and appears to be less risky than Stock A
61) RTF stock is expected to return 10.6 percent if the economy booms and only 4.2 percent if
the economy goes into a recessionary period. The probability of a boom is 55 percent while the
probability of a recession is 45 percent. What is the standard deviation of the returns on RTF
stock?
A) 4.03 percent
B) 2.97 percent
C) 3.18 percent
D) 3.69 percent
E) 5.27 percent
62) 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 20 percent for a boom, 70 percent for a normal
economy, and 10 percent for a recession. What is the variance of the returns?
A) .001044
B) .001280
C) .001863
D) .002001
E) .002471
63) Kali's Ski Resort stock is quite cyclical. In a boom economy, the stock is expected to return
30 percent in comparison to 12 percent in a normal economy and a negative 20 percent in a
recessionary period. The probability of a recession is 15 percent while it is 30 percent for a
booming economy. The remainder of the time, the economy will be at normal levels. What is the
standard deviation of the returns?
A) 10.05 percent
B) 12.60 percent
C) 15.83 percent
D) 17.46 percent
E) 25.04 percent
64) The probability of the economy booming is 10 percent, while it is 60 percent for being
normal, and 30 percent for being recessionary. A stock is expected to return 16 percent in a
boom, 11 percent in a normal economy, and lose 8 percent in a recession. What is the standard
deviation of the returns?
A) 5.80 percent
B) 7.34 percent
C) 8.38 percent
D) 9.15 percent
E) 9.87 percent
65) The variance of Stock A is .0036, the variance of the market is .0059, and the covariance
between the two is .0026. What is the correlation coefficient?
A) .8776
B) .1224
C) .5010
D) .5642
E) .4918
66) Stock A has an expected return of 17.8 percent, and Stock B has an expected return of 9.6
percent. However, the risk of Stock A as measured by its variance is 3 times that of Stock B. If
the two stocks are combined equally in a portfolio, what would be the portfolio's expected
return?
A) 13.37 percent
B) 13.70 percent
C) 15.75 percent
D) 12.41 percent
E) 14.55 percent
67) A portfolio is entirely invested into BBB stock, which is expected to return 16.4 percent, and
ZI bonds, which are expected to return 8.6 percent. Stock BBB comprises 48 percent of the
portfolio. What is the expected return on the portfolio?
A) 13.64 percent
B) 14.36 percent
C) 12.34 percent
D) 14.22 percent
E) 11.69 percent
68) A portfolio has 45 percent of its funds invested in Security One and 55 percent invested in
Security Two. Security One has a standard deviation of 6 percent. Security Two has a standard
deviation of 12 percent. The securities have a coefficient of correlation of .62. What is the
portfolio variance?
A) .006946
B) .007295
C) .007157
D) .008104
E) .007506
69) A portfolio has 38 percent of its funds invested in Security C and 62 percent invested in
Security D. Security C has an expected return of 8.47 percent and a standard deviation of 7.12
percent. Security D has an expected return of 13.45 percent and a standard deviation of 16.22
percent. The securities have a coefficient of correlation of .89. What are the portfolio rate of
return and variance values?
A) 11.09 percent ; .124031
B) 11.56 percent ; .127620
C) 11.56 percent ; .015688
D) 10.87 percent ; .014308
E) 10.87 percent; .127620
70) A portfolio consists of Stocks A and B and has an expected return of 11.6 percent. Stock A
has an expected return of 17.8 percent while Stock B is expected to return 8.4 percent. What is
the portfolio weight of Stock A?
A) 29.87 percent
B) 61.98 percent
C) 32.58 percent
D) 34.04 percent
E) 67.42 percent
71) A portfolio is comprised of 100 shares of Stock A valued at $22 a share, 600 shares of Stock
B valued at $17 each, 400 shares of Stock C valued at $46 each, and 200 shares of Stock D
valued at $38 each. What is the portfolio weight of Stock C?
A) 46.87 percent
B) 48.09 percent
C) 42.33 percent
D) 45.27 percent
E) 47.92 percent
72) The probability the economy will boom is 20 percent, while it is 70 percent for a normal
economy, and 10 percent for a recession. Stock A will return 18 percent in a boom, 11 percent in
a normal economy, and lose 10 percent in a recession. Stock B will return 9 percent in boom, 7
percent in a normal economy, and 4 percent in a recession. Stock C will return 6 percent in a
boom, 9 percent in a normal economy, and 13 percent in a recession. What is the expected return
on a portfolio which is invested 20 percent in Stock A, 50 percent in Stock B, and 30 percent in
Stock C?
A) 7.40 percent
B) 8.25 percent
C) 8.33 percent
D) 9.45 percent
E) 9.50 percent
73) A portfolio consists of three stocks. There are 540 shares of Stock A valued at $24.20 share,
310 shares of Stock B valued at $48.10 a share, and 200 shares of Stock C priced at $26.50 a
share. Stocks A, B, and C are expected to return 8.3 percent, 16.4 percent, and 11.7 percent,
respectively. What is the expected return on this portfolio?
A) 12.50 percent
B) 11.67 percent
C) 12.78 percent
D) 12.47 percent
E) 11.87 percent
74) Stock K is expected to return 12.4 percent while the return on Stock L is expected to be 8.6
percent. You have $10,000 to invest in these two stocks. How much should you invest in Stock L
if you desire a combined return from the two stocks of 11 percent?
A) $3,511
B) $4,209
C) $3,684
D) $2,907
E) $3,415
75) Stock S is expected to return 12 percent in a boom and 6 percent in a normal economy. Stock
T is expected to return 20 percent in a boom and 4 percent in a normal economy. There is a
probability of 40 percent that the economy will boom; otherwise, it will be normal. What is the
portfolio variance if 30 percent of the portfolio is invested in Stock S and 70 percent is invested
in Stock T?
A) .002220
B) .004056
C) .006224
D) .008080
E) .098000
76) The probability the economy will boom is 15 percent; otherwise, it will be normal. Stock G
should return 15 percent in a boom and 8 percent in a normal economy. Stock H should return 9
percent in a boom and 6 percent otherwise. What is the variance of a portfolio consisting of
$3,500 in Stock G and $6,500 in Stock H?
A) .000209
B) .000247
C) .002098
D) .037026
E) .073600
77) There is a probability of 25 percent that the economy will boom; otherwise, it will be normal.
Stock Q is expected to return 18 percent in a boom and 9 percent otherwise. Stock R is expected
to return 9 percent in a boom and 5 percent otherwise. What is the standard deviation of a
portfolio that is invested 40 percent in Stock Q and 60 percent in Stock R?
A) .7 percent
B) 1.4 percent
C) 2.6 percent
D) 6.8 percent
E) 8.1 percent
78) Stock S is expected to return 12 percent in a boom, 9 percent in a normal economy, and 2
percent in a recession. Stock T is expected to return 4 percent in a boom, 6 percent in a normal
economy, and 9 percent in a recession. The probability of a boom is 10 percent while the
probability of a recession is 25 percent. What is the standard deviation of a portfolio which is
comprised of $4,500 of Stock S and $3,000 of Stock T?
A) 1.4 percent
B) 1.9 percent
C) 2.6 percent
D) 5.7 percent
E) 7.2 percent
