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52
90) A stock has a beta of 1.17 and an expected return of 15.4 percent. A risk-free asset currently
earns 4.7 percent. The beta of a portfolio comprised of these two assets is .76. What percentage
of the portfolio is invested in the stock?
A) 65 percent
B) 77 percent
C) 74 percent
D) 71 percent
E) 62 percent
91) The market has an expected rate of return of 12.6 percent. The long-term government bond is
expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.7 percent. The
inflation rate is 3.2 percent. What is the market risk premium?
A) 9.4 percent
B) 9.9 percent
C) 7.8 percent
D) 8.5 percent
E) 9.3 percent
53
92) The risk-free rate of return is 2.7 percent, the inflation rate is 3.1 percent, and the market risk
premium is 6.9 percent. What is the expected rate of return on a stock with a beta of 1.08?
A) 10.92 percent
B) 10.15 percent
C) 12.22 percent
D) 11.47 percent
E) 11.79 percent
93) Jerilu Markets has a beta of 1.09. The risk-free rate of return is 3.18 percent and the market
rate of return is 11.27 percent. What is the risk premium on this stock?
A) 3.47 percent
B) 7.03 percent
C) 8.82 percent
D) 8.99 percent
E) 7.80 percent
94) The common stock of Jensen Shipping has an expected return of 15.4 percent. The return on
the market is 11.2 percent, the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6
percent. What is the beta of this stock?
A) 1.46
B) 1.23
C) 1.33
D) 1.41
E) 1.55
95) Suppose the common stock of United Industries has a beta of 1.28 and an expected return of
15.47 percent. The risk-free rate of return is 3.7 percent while the inflation rate is 4.2 percent.
What is the expected market risk premium?
A) 7.02 percent
B) 9.20 percent
C) 10.63 percent
D) 11.22 percent
E) 11.60 percent
55
96) The expected return on JK stock is 16.28 percent while the expected return on the market is
11.97 percent. The stock's beta is 1.63. What is the risk-free rate of return?
A) 2.22 percent
B) 4.31 percent
C) 2.42 percent
D) 4.50 percent
E) 5.13 percent
97) Thayer Farms stock has a beta of 1.38. The risk-free rate of return is 3.87 percent, the
inflation rate is 3.93 percent, and the market risk premium is 9.03 percent. What is the expected
rate of return on this stock?
A) 18.35 percent
B) 19.01 percent
C) 10.23 percent
D) 16.33 percent
E) 13.73 percent
56
98) The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return
of 13.25 percent. The risk-free rate of return is 3.7 percent and the market rate of return is 11.78
percent. Which one of the following statements is true given this information?
A) The actual expected stock return will graph above the security market line.
B) The stock is currently underpriced.
C) To be correctly priced according to CAPM, the stock should have an expected return of 13.56
percent.
D) The stock has less systematic risk than the overall market.
E) The actual expected stock return indicates the stock is currently overpriced.
99) Which one of the following stocks is correctly priced according to CAPM if the risk-free rate
of return is 3.4 percent and the market risk premium is 7.4 percent?
Stock
Beta
Expected
Return
A
.87
.096
B
1.09
.102
C
1.62
.146
D
.98
.107
E
1.16
.139
A) A
B) B
C) C
D) D
E) E
58
100) Which one of the following stocks is correctly priced if the risk-free rate of return is 2.84
percent and the market rate of return is 10.63 percent?
Stock
Beta
Expected
Return
A
.93
.0892
B
1.18
.1203
C
1.47
.1540
D
1.02
.1006
E
1.26
.1187
A) A
B) B
C) C
D) D
E) E
101) A stock has an expected return of 13.24 percent, the risk-free rate is 4.4 percent, and the
market risk premium is 8.98 percent. What is the stock's beta?
A) 1.03
B) .98
C) 1.09
D) 1.11
E) 1.06
102) Suppose you observe the following situation:
Security
Beta
Expected
Return
A
1.16
.1137
B
.92
.0984
Assume these securities are correctly priced. Based on the CAPM, what is the return on the
market?
A) 9.99 percent
B) 11.42 percent
C) 10.35 percent
D) 9.78 percent
E) 11.01 percent
61
103) Consider the following information:
State of
Economy
Probability of
State of Economy
Rate of Return
if State Occurs
Stock A
Stock B
Recession
.04
.097
.102
Normal
.72
.114
.133
Boom
.24
.156
.148
The market risk premium is 7.4 percent, and the risk-free rate is 3.1 percent. The beta of Stock A
is ________ and the beta of Stock B is ________.
A) 1.25; 1.89
B) 1.47; 1.76
C) 1.21; 1.76
D) 1.47; 1.41
E) 1.25; 1.41
62
104) Suppose you observe the following situation:
State of
Economy
Probability of
State of Economy
Rate of Return
if State Occurs
Stock A
Stock B
Boom
.21
.189
.097
Normal
.74
.158
.076
Recession
.05
-
.246
.042
Assume the capital asset pricing model holds and Stock A's beta is greater than Stock B's beta by
.84. What is the expected market risk premium?
A) 8.28 percent
B) 9.05 percent
C) 10.06 percent
D) 7.94 percent
E) 7.81 percent
