Finance Chapter 11 What The Expected Rate Return Stock The

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55) The rate of return on the common stock of Flowers by Flo is expected to be 13 percent in a

boom economy, 11 percent in a normal economy, and only 6 percent in a recessionary economy.

The probabilities of these economic states are 15 percent for a boom, 80 percent for a normal

economy, and 5 percent for a recession. What is the variance of the returns on this stock?

A) 0.000185

B) 0.001580

C) 0.001963

D) 0.000301

E) 0.000471

56) KNF stock is quite cyclical. In a boom economy, the stock is expected to return 34 percent in

comparison to 13 percent in a normal economy and a negative 22 percent in a recessionary period.

The probability of a recession is 15 percent while the chance of a boom is 4 percent. What is the

standard deviation of the returns this stock?

A) 14.15%

B) 13.68/%

C) 13.49%

D) 14.46%

E) 15.04%

57) The variance of Stock A is 0.005492, the variance of Stock B is 0.012394, and the covariance

between the two is 0.0034. What is the correlation coefficient?

A) 0.4284

B) 0.3542

C) 0.4010

D) 0.4121

E) 0.3510

58) The variance of Stock A is 0.007242, the variance of Stock B is 0.020504, and the covariance

between the two is 0.0019. What is the correlation coefficient?

A) 0.1487

B) 0.0929

C) 0.0891

D) 0.1559

E) 0.1643

59) The probabilities of an economic boom, normal economy, and a recession are 2 percent, 93

percent, and 5 percent, respectively. For these economic states, Stock A has deviations from its

expected returns of 0.04, 0.07, and −0.11 for the three economic states respectively. Stock B has

deviations from its expected returns of 0.14, 0.08, and −0.22 for the three economic states,

respectively. What is the covariance of the two stocks?

A) 0.00653

B) –0.00743

C) –0.00589

D) 0.00974

E) 0.00802

60) The probabilities of an economic boom, normal economy, and a recession are 15 percent, 83

percent, and 2 percent, respectively. For these economic states, Stock A has deviations from its

expected returns of −0.03, 0.01, and 0.02 for the three economic states respectively. Stock B has

deviations from its expected returns of 0.15, 0.06, and −0.09 for the three economic states,

respectively. What is the covariance of the two stocks?

A) 0.02049

B) 0.02143

C) –0.00021

D) 0.00116

E) –0.01054

61) You have a two-stock portfolio with an expected return of 11.7 percent. Stock A has an

expected return of 13.8 percent while Stock B is expected to return 9.2 percent. What is the

portfolio weight of Stock A?

A) 59.09%

B) 57.82%

C) 63.33%

D) 54.35%

E) 60.33%

62) A portfolio consists of 200 shares of Stock A, 300 shares of Stock B, 500 shares of Stock C,

and 700 shares of Stock D. The prices of these stocks are $19, $36, $21, and $15 for Stocks A

through D, respectively. What is the portfolio weight of Stock C?

A) 31.08%

B) 32.20%

C) 29.49%

D) 25.72%

E) 36.89%

63) A portfolio is expected to return 18 percent in a booming economy, 13 percent in a normal

economy, and lose 11 percent if the economy falls into a recession. The probability of a boom is 3

percent while the probability of a recession is 25 percent. What is the overall portfolio expected

return?

A) 8.40%

B) 6.83%

C) 7.15%

D) 6.05%

E) 2.81%

64) A portfolio consists of $38,312 of Stock A, $42,509 of Stock B, and $11,516 of Stock C. The

expected returns on Stocks A, B, and C are 6.85 percent, 12.08 percent, and 15.92 percent,

respectively. What is the portfolio expected rate of return?

A) 9.98%

B) 11.21%

C) 11.88%

D) 10.39%

E) 12.07%

65) A portfolio consists of $18,740 of Stock K and $31,910 of Stock L. Stock K is expected to

return 17 percent in a booming economy, lose 6 percent in a recession, and gain 9 percent in a

normal economy. Stock L is expected to return 4 percent in a booming economy, 13 percent in a

recession, and 10 percent in a normal economy. The probability of the economy booming is 16

percent. What is the expected rate of return on the portfolio if the economy enters a recession?

A) –4.59%

B) –2.62%

C) 5.97%

D) 3.71%

E) 0.74%

66) A portfolio consists of 35 percent of Stock S and 65 percent of Stock T. Stock S is expected to

return 15 percent if the economy booms, 10 percent if it is normal, and lose 19 percent if it is

recessionary. Stock T will return 26 percent in a boom, 15 percent in a normal economy, and lose

40 percent in a recession. The probability of a boom is 5 percent and probability of a recession is

10 percent. What is the portfolio standard deviation?

A) 11.69%

B) 14.05%

C) 14.22%

D) 12.10%

E) 12.33%

67) The probability of the economy booming is 24 percent. Otherwise, the economy will be

normal. Stock G is expected to return 19 percent in a boom and 12 percent in a normal economy.

Stock H is expected to return 9 percent in a boom and 8 percent in a normal economy. What is the

variance of a portfolio consisting of $3,800 of stock G and $7,400 of stock H?

A) 0.000193

B) 0.000168

C) 0.000219

D) 0.001387

E) 0.001402

68) Stock Q is expected to return 14 percent in a boom and 8 percent in a normal economy.

Assume Stock R will return 11 percent in a boom and 10 percent in a normal economy. The

probability of a boom is 13 percent. Otherwise, the economy will be normal. What is the standard

deviation of a portfolio that is invested 48 percent in stock Q and 52 percent in stock R?

A) 0.78%

B) 1.42%

C) 1.14%

D) 0.67%

E) 1.61%

69) Stock A is expected to return 14 percent in a normal economy and lose 21 percent in a

recession. Stock B deals with inferior goods and has expected returns of 6 percent in a normal

economy and 15 percent in a recession. The probability of a recession occurring is 25 percent with

a zero probability of a boom. What is the standard deviation of a portfolio that is equally weighted

between the two stocks?

A) 5.63%

B) 6.08%

C) 4.29%

D) 5.13%

E) 6.36%

70) Stock A has an expected return of 16 percent, and stock B has an expected return of 8 percent.

However, the risk of stock A as measured by its variance is 3.2 times that of stock B. If the two

stocks are combined equally in a portfolio, what would be the portfolio’s expected return?

A) 11.50%

B) 9.50%

C) 12.00%

D) 8.25%

E) 14.10%

71) A portfolio is invested 54 percent in Stock K and 46 percent in Bond L. The bond has an

expected return of 6.85 percent. What is the expected rate of return on Stock K if the portfolio

expected return is 10.25 percent?

A) 13.45%

B) 15.60%

C) 13.15%

D) 14.22%

E) 10.68%

72) A portfolio is equally weighted. Stock D has a standard deviation of 11.7, percent and Stock E

has a standard deviation of 5.9 percent. The securities have a covariance of 0.0254. What is the

portfolio variance?

A) 0.012209

B) 0.009006

C) 0.010549

D) 0.008590

E) 0.016993

73) A portfolio consists of two stocks with Stock A having a weight of 41 percent. Stock A has a

standard deviation of 16.78 percent, and Stock B’s standard deviation is 8.44 percent. The stocks

have a covariance of −0.0063. What is the portfolio variance?

A) 0.001253

B) 0.004165

C) 0.004961

D) 0.019097

E) 0.034141

74) Your desired portfolio beta is 1.2. Currently, your portfolio consists of $2,300 invested in

Stock A with a beta of 1.43 and $3,800 in Stock B with a beta of 0.79. You have an additional

$1,500 to invest and want to divide it between Stock C with a beta of 1.59 and a risk-free asset.

How much should you invest in the risk-free asset?

A) −$279.25

B) $50.25

C) −$200.15

D) $182.35

E) $246.08

75) A portfolio worth $5,500 is invested in Stocks A and B plus a risk-free asset. A total of $2,500

is invested in Stock A with a beta of 1.27. Stock B has a beta of 0.89. How much needs to be

invested in Stock B if the goal is to create a portfolio that will mimic the entire market?

A) −$894.20

B) $2,266.67

C) $1,482.08

D) $2,612.36

E) $3,408.15

76) A portfolio consists of 33 percent of Stock X, 52 percent of Stock Y, and 15 percent of Stock Z.

Stock X has a beta of 0.94, Stock Y has a beta of 1.21, and Stock Z has a beta of 1.08. What is the

portfolio beta?

A) 1.012

B) 1.111

C) 1.117

D) 1.124

E) 1.101

77) A portfolio has a beta of 1.27. The portfolio consists of 25 percent U.S. Treasury bills, 38

percent Stock A, and 37 percent Stock B. Stock A has a risk level equivalent to that of the overall

market. What is the beta of Stock B?

A) 1.54

B) 1.49

C) 2.02

D) 1.79

E) 2.41

78) A portfolio contains Stocks A, B, C, and D with betas of 0.92, 1.28, 1.07 and 1.52 for A

through D, respectively. Stocks A and B have portfolio weights of 35 percent each. Stocks C and D

have equal weights. What is the portfolio beta?

A) .1.2147

B) 1.1585

C) 1.1099

D) 1.0822

E) 1.0131

79) You would like to combine a risky stock with a beta of 1.87 with U.S. Treasury bills in such a

way that the risk level of the portfolio is equivalent to the risk level of the overall market. What

percentage of the portfolio should be invested in the risky asset?

A) 46.29%

B) 53.48%

C) 50.55%

D) 47.45%

E) 57.08%

80) A stock has an expected return of 13.74 percent. The return on the market is 12.68 percent, and

the risk-free rate of return is 3.24 percent. What is the beta of this stock?

A) 0.658

B) 1.093

C) 1.402

D) 1.112

E) 1.780

81) The market has an expected rate of return of 10.29 percent. The long-term government bond is

expected to yield 4.73 percent, and the U.S. Treasury bill is expected to yield 3.21 percent. The

inflation rate is 3.09 percent. What is the market risk premium?

A) 7.20%

B) 9.73%

C) 6.78%

D) 8.33%

E) 7.08%

82) Alpha stock has a beta of 1.29. The risk-free rate of return is 3.2 percent, and the market rate of

return is 10.7 percent. What is the Alpha stock risk premium?

A) 7.24%

B) 9.30%

C) 7.59%

D) 8.77%

E) 9.68%

83) The risk-free rate of return is 2.2 percent, and the market risk premium is 7.46 percent. What is

the expected rate of return on a stock with a beta of 1.08?

A) 9.82%

B) 10.10%

C) 10.26%

D) 12.73%

E) 14.36%

84) PPO stock has a beta of 0.97 and an expected return of 11.22 percent. The risk-free rate of

return is 2.48 percent. What is the expected return on the market?

A) 11.85%

B) 13.04%

C) 11.62%

D) 11.49%

E) 12.16%

85) The expected return on HiLo stock is 13.36 percent while the expected return on the market is

11.87 percent. The beta of HiLo is 1.14. What is the risk-free rate of return?

A) 1.23%

B) 3.21%

C) 3.67%

D) 4.28%

E) 4.82%

86) The stock of Martin Industries has a beta of 1.17. The risk-free rate of return is 2.9 percent, and

the market risk premium is 6.93 percent. What is the expected rate of return on Martin Industries

stock?

A) 11.01%

B) 6.91%

C) 16.42%

D) 14.46%

E) 10.19%

87) OLG stock has a beta of 0.98 and an expected return of 10.52 percent. The risk-free rate of

return is 3.02 percent, and the market rate of return is 10.47 percent. Which one of the following

statements is true given this information?

A) OLG stock is correctly priced.

B) The return on OLG stock will graph above the security market line.

C) The expected return on OLG stock based on the capital asset pricing model is 10.13 percent.

D) OLG stock has more systematic risk than the overall market.

E) OLG stock is overpriced.

88) Stock A has a beta of 0.87 and an expected return of 9.21 percent. Stock B has a beta of 1.36

and an expected return of 10.58 percent. Stock C has a beta of 1.12 and an expected return of 10.68

percent. The risk-free rate is 2.7 percent, and the market risk premium is 6.8 percent. Which of

these stocks are underpriced?

A) A only

B) C only

C) A and B only

D) B and C only

E) A and C only

89) Assume the risk-free rate of return is 6.5 percent and the market rate of return is 11.2 percent.

Stock A with a beta of 0.88 and an expected return of 9.79 percent; Stock B with a beta of 1.26 and

an expected return of 11.36 percent; Stock C with a beta of 1.47 and an expected return of 12.28

percent; Stock D with a beta of 0.79 and an expected return of 10.61 percent. Which one of the

following stocks, if any, is correctly priced according to CAPM?

A) Stock A

B) Stock B

C) Stock C

D) Stock D

E) None of the stocks are correctly priced according to CAPM.