85.
A stock has an expected return of 14.5 percent, the risk-free rate is 4 percent and the
return on the market is 11 percent. What is this stock‘s beta?
86.
In 2000, the S&P 500 Index earned 11 percent while the T-bill yield was 4.4 percent. Given
this information, which of the following statements is correct with respect to the market
risk premium?
87.
How might a small market risk premium impact people’s desire to buy stocks?
88.
How might a large market risk premium impact people’s desire to buy stocks?
89.
Consider an asset that provides the same return no matter what economic state occurs.
What would be the standard deviation of this asset?
90.
Whenever a set of stock prices go unnaturally high and subsequently crash down, the
market experiences what we call a(n):
91.
All of the following are necessary conditions for an efficient market EXCEPT:
92.
Which of the following is most correct?
93.
Which of the following statements is incorrect?
94.
Which of the following statements is correct?
95.
The study of the cognitive processes and biases associated with making financial and
economic decisions is known as:
96.
You obtain beta estimates of General Electric from two different online sources and you
are surprised to find that they are so different. Which of the following would not be a
correct explanation for the difference?
97.
Which of the following is incorrect?
98.
Which of the following is a concern regarding beta?
99.
Which of the following statements is incorrect regarding how beta is calculated?
100.
You have a portfolio consisting of 20 percent Boeing (beta = 1.3) and 40 percent Hewlett–
Packard (beta = 1.6) and 40 percent McDonald’s stock (beta = 0.7). How much market
risk does the portfolio have?
101.
Expected Return A company’s current stock price is $22.00 and its most recent dividend
was $0.75 per share. Since analysts estimate the company will have a 12 percent growth
rate, what is its expected return?
Essay Questions
102.
Describe how adding a risk-free security to modern portfolio theory allows investors to do
better than the efficient frontier.
103.
Land O Lakes Systems has a beta of 1.66. Does this mean that you should expect Land O
Lakes to earn a return 88 percent higher than the S&P 500 Index return? Explain.
104.
Required Return Using the information in the table, compute the required return for each
company using both CAPM and the constant growth model. Compare and discuss the
results. Assume that the market portfolio will earn 11 percent and the risk-free rate is 2.5
percent.
105.
List and describe the three basic levels of market efficiency.
106.
The constant growth model requires what information for computing shareholders’
required return?
107.
How can one account for movements in the economy when evaluating a firm’s stock return
performance?
108.
Explain the risk premiums of stock.
109.
Explain the security market line’s equation.
110.
Contrast computing beta for riskless securities versus stocks.
111.
Explain insider trading.
112.
What must financial managers understand when analyzing new business opportunities?
113.
What is required to use the constant-growth model to compute required return?