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Chapter 02: Risk and Return: Part I
RATIONALE:
Weight
Company
Investment
Weight
Beta
× beta
POINTS:
1
121. Shirley Paul's 2-stock portfolio has a total value of $100,000. $37,500 is invested in Stock A with a beta of 0.75 and
the remainder is invested in Stock B with a beta of 1.42. What is her portfolio's beta?
a.
1.17
b.
1.23
c.
1.29
d.
1.35
e.
1.42
ANSWER:
a
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Page 62
122. Ivan Knobel holds a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20. He is in the
process of buying 1,000 shares of Syngine Corp at $10 a share and adding it to his portfolio. Syngine has an expected
return of 13.0% and a beta of 1.50. The total value of Ivan's current portfolio is $90,000. What will the expected return
and beta on the portfolio be after the purchase of the Syngine stock?
a.
10.64%; 1.17
b.
11.20%; 1.23
c.
11.76%; 1.29
d.
12.35%; 1.36
e.
12.97%; 1.42
POINTS:
1
123. Calculate the required rate of return for Everest Expeditions Inc., assuming that (1) investors expect a 4.0% rate of
inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the firm has a beta of
1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.
a.
10.29%
b.
10.83%
c.
11.40%
d.
12.00%
e.
12.60%
ANSWER:
d
IP:
4.00%
124. Zacher Co.'s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the
firm's required rate of return?
a.
11.36%
b.
11.65%
c.
11.95%
d.
12.25%
e.
12.55%
ANSWER:
c
125. Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free
rate is 5.00%, what is the market risk premium?
a.
5.80%
b.
5.95%
c.
6.09%
d.
6.25%
e.
6.40%
126. Martin Ortner holds a $200,000 portfolio consisting of the following stocks:
Stock
Investment
Beta
A
$50,000
0.95
B
50,000
0.80
C
50,000
1.00
D
50,000
1.20
Total
$200,000
What is the portfolio's beta?
a.
0.938
b.
0.988
c.
1.037
d.
1.089
e.
1.143
ANSWER:
b
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Page 65
127. Sherrie Hymes holds a $200,000 portfolio consisting of the following stocks. The portfolio's beta is 0.875.
Stock
Investment
Beta
A
$50,000
0.50
B
50,000
0.80
C
50,000
1.00
D
50,000
1.20
Total
$200,000
If Sherrie replaces Stock A with another stock, E, which has a beta of 1.50, what will the portfolio's new beta be?
a.
1.07
b.
1.13
c.
1.18
d.
1.24
e.
1.30
POINTS:
1
128. Megan Ross holds the following portfolio:
Stock
Investment
Beta
A
$150,000
1.40
B
50,000
0.80
C
100,000
1.00
D
75,000
1.20
Total
$375,000
What is the portfolio's beta?
a.
1.06
b.
1.17
c.
1.29
d.
1.42
e.
1.56
ANSWER:
b
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Page 67
129. Paul McLaren holds the following portfolio:
Stock
Investment
Beta
A
$150,000
1.40
B
50,000
0.80
C
100,000
1.00
D
75,000
1.20
Total
$375,000
Paul plans to sell Stock A and replace it with Stock E, which has a beta of 0.75. By how much will the portfolio beta
change?
a.
−0.190
b.
−0.211
c.
−0.234
d.
−0.260
e.
−0.286
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Page 68
130. Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each. The portfolio's beta
is 1.12. Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80. What will the
portfolio's new beta be?
a.
1.286
b.
1.255
c.
1.224
d.
1.194
e.
1.165
ANSWER:
e
131. Porter Plumbing's stock had a required return of 11.75% last year, when the risk-free rate was 5.50% and the market
risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The
risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First
calculate the beta, then find the required return.)
a.
14.38%
b.
14.74%
c.
15.11%
d.
15.49%
e.
15.87%
POINTS:
1
132. Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the stock market is 11.00%,
and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: First find the
market risk premium, then find the required returns on the stocks.)
a.
2.75%
b.
2.89%
c.
3.05%
d.
3.21%
e.
3.38%
POINTS:
1
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Page 70
133. Stock A's stock has a beta of 1.30, and its required return is 12.00%. Stock B's beta is 0.80. If the risk-free rate is
4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)
a.
8.76%
b.
8.98%
c.
9.21%
d.
9.44%
e.
9.68%
134. Barker Corp. has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the
market risk premium is 4.70%. What is Barker's required rate of return?
a.
9.43%
b.
9.67%
c.
9.92%
d.
10.17%
e.
10.42%
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POINTS:
1
135. Brodkey Shoes has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the
stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%.
Based on the SML, what is the firm's required return?
a.
13.51%
b.
13.86%
c.
14.21%
d.
14.58%
e.
14.95%
POINTS:
1
