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36
66) Farm Tractors, Inc., stock has a beta of 1.12 and an expected return of 12.8 percent. The risk-
free rate is 3.84 percent. What is the market rate of return?
A) 6.67 percent
B) 8.90 percent
C) 9.08 percent
D) 11.84 percent
E) 12.63 percent
67) Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent. The risk-free
rate is 2.6 percent and the market risk premium is 6 percent. This stock is ________ because the
CAPM return for the stock is ________ percent.
A) undervalued; 7.34
B) undervalued; 7.49
C) undervalued; 7.64
D) overvalued; 7.34
E) overvalued; 7.49
37
68) Home Interior's stock has an expected return of 13.25 percent and a beta of 1.4. The market
return is 10.75 percent and the risk-free rate is 4.5 percent. This stock is ________ because the
CAPM return for the stock is ________ percent.
A) greatly overvalued; 16.50
B) slightly overvalued; 14.91
C) priced correctly; 13.25
D) slightly undervalued; 12.91
E) greatly undervalued; 16.50
69) A stock has a beta of 1.58 and an expected return of 16.2 percent. The risk-free rate is 3.8
percent. What is the market risk premium?
A) 7.85 percent
B) 10.01 percent
C) 11.72 percent
D) 12.50 percent
E) 13.40 percent
38
70) The risk-free rate is 4.1 percent, the market rate is 13.2 percent, and the expected return on a
stock is 15.84 percent. What is the beta of the stock?
A) 0.52
B) 0.81
C) 1.13
D) 1.19
E) 1.29
71) The market has an expected return of 11.3 percent and a risky asset with a beta of 1.18 has an
expected return of 13 percent. Based on this information, what is the pure time value of money?
A) 1.86 percent
B) 1.90 percent
C) 2.38 percent
D) 2.51 percent
E) 2.90 percent
39
72) Dinner Foods stock has a beta of 1.45 and an expected return of 13.43 percent. Edwards'
Meals stock has a beta of .95 and an expected return of 10.27 percent. Assume that both stocks
are correctly priced. Given this, the risk-free rate is ________ percent and the market rate of
return is ________ percent.
A) 4.02; 11.53
B) 4.09; 12.35
C) 4.10; 11.53
D) 4.27; 10.59
E) 4.41; 10.25
40
73) What is the covariance of security A to the market given the following information?
Year
Security A Returns
Market Returns
1
18
%
10
%
2
−6
−2
3
9
6
A) 75.0
B) 80.1
C) 83.8
D) 87.0
E) 91.1
41
74) What is the covariance of security A to the market given the following information?
Year
R(a)
R(m)
1
20.00
17.00
2
−30.00
−7.00
3
36.00
20.00
A) 505.0
B) 514.1
C) 517.5
D) 523.5
E) 540.6
75) What is the covariance of security A to the market given the following information?
Year
Security A Returns
Market Returns
1
1
%
−6
%
2
9
14
3
−2
7
4
18
12
A) 23.14
B) 29.88
C) 48.83
D) 99.18
E) 114.01
43
76) A risky security has a variance of .036190 and a covariance with the market of .0222. The
variance of the market is .01975. What is the correlation of the risky security to the market?
A) 0.51
B) 0.65
C) 0.72
D) 0.83
E) 0.85
77) Uptown Markets stock has a standard deviation of 16.8 percent and a covariance with the
market of 0.02. The market has a standard deviation of 13.7 percent. What is the correlation of
this stock with the market?
A) 0.74
B) 0.78
C) 0.87
D) 0.89
E) 0.91
44
78) Western Exports stock has a standard deviation of 15.6 percent and a covariance with the
market of 0.0150. The market has a standard deviation of 13.7 percent. What is the correlation of
this stock with the market?
A) 0.58
B) 0.61
C) 0.68
D) 0.70
E) 0.77
79) The common stock of Blasco Books has a standard deviation of 16.4 percent as compared to
the market standard deviation of 12.7 percent. The covariance of this stock with the market is
.0217. What is the beta of Blasco Books' stock?
A) 0.96
B) 1.05
C) 1.07
D) 1.35
E) 1.42
45
80) A stock has a standard deviation of 21.0 percent and a covariance with the market of .0110.
The market has a standard deviation of 12.0 percent. What is the beta of this stock?
A) 0.294
B) 0.572
C) 0.764
D) 0.973
E) 1.075
81) The market has a standard deviation of 10.8 percent (0.108) while a risky security has a
standard deviation of 22.5 (0.225) percent. The covariance of the stock with the market is .0149.
What is the beta of the stock?
A) 1.09
B) 1.11
C) 1.15
D) 1.19
E) 1.28
46
82) Ann realized a total return of 12.8 percent which is more than her expected return of 11.5
percent. What is the amount of her unexpected return?
A) −1.4 percent
B) −0.7 percent
C) 0.7 percent
D) 1.3 percent
E) 1.8 percent
83) A portfolio consists of two stocks and has a beta of 1.25. The first stock has a beta of 1.02
and comprises 30 percent of the portfolio. What is the beta of the second stock?
A) 0.41
B) 0.66
C) 0.82
D) 1.28
E) 1.35
47
84) The following portfolio has an expected return of _____ percent and a beta of _____.
Security
$ Invested
E(R)
Beta
A
$40,000
9.00%
1.05
B
$34,000
10.50%
1.33
C
$26,000
11.80%
1.22
A) 12.45; 1.38
B) 12.80; 1.49
C) 13.06; 1.27
D) 13.39; 1.40
E) 13.45; 1.32
85) Stock X has a beta of 1.02 and an expected return of 11.8 percent. Stock Y has a beta of 1.15
and an expected return of 13.1 percent. What is the risk-free rate of return assuming that both
stock X and stock Y are correctly priced?
A) 1.10 percent
B) 1.60 percent
C) 2.06 percent
D) 3.30 percent
E) 3.50 percent
48
86) Design Interior's stock has an expected return of 11.00 percent and a beta of 1.4. The market
return is 10.75 percent and the risk-free rate is 4.0 percent. This stock is ________ because the
CAPM return for the stock is ________ percent.
A) greatly overvalued; 13.45
B) slightly overvalued; 12.91
C) priced correctly; 13.25
D) slightly undervalued; 12.91
E) greatly undervalued; 13.45
49
87) What is the covariance of security A to the market given the following information?
Year
R(a)
R(m)
1
35.00
28.00
2
−30.00
−8.00
3
20.00
16.00
A) 605.0
B) 614.1
C) 618.0
D) 623.5
E) 640.6
50
88) A stock has a standard deviation of 18.0 percent and a covariance with the market of 0.02.
The market has a standard deviation of 14.3 percent. What is the beta of this stock?
A) 0.294
B) 0.572
C) 0.764
D) 0.978
E) 1.075
