Question

Assume the risk free rate is 0.0%. The SP500 is considered the market. Six years of annual returns are provided in the table below. Use this information to help answer questions 21-22 SP500 Stock A Stock B 2013 80% 64% 4.8% 2014 4.0% 3.2% 2.4% 1 Year Returns 2015 400% 32.0% 24.0% 2016 15.0% 12.0% 9.0% 2017 200% 16.0% 12.0% 2018 12.0% 9.6% 7.2% 21. Which of the following statements is most likely FALSE: a. The SP500 index has a higher beta than Stock B b. The SP500 index has a higher beta than Stock A c. Stock A has a higher beta than Stock B d. Stock A index has a beta of 0.80 e. The SP500 index has a beta of 1.20 22. Over the past six years, which of the following statements is most likely TRUE: a. The SP500 index has the highest arithmetic average return, but the lowest geometric return b. The SP500 index has the highest arithmetic average return, while Stock A has the lowest geometric return c. The SP500 index has the highest arithmetic average return, while Stock B has the lowest geometric return d. The SP500 index has the lowest geometric average return, while Stock B has the highest arithmetic return e. The SP500 index has the lowest geometric average return, while Stock A has the highest arithmetic return Use the following information about to help answer problems 23-24 TIME 0 5 CFs $ 2,200.00 <?$ 3,279.58 Next Year (T1), you will deposit $2,200.00 in a savings account Over the short term, you will increase the amount you deposit each year by a constant growth rate so that at the end of year 5 T-5) you will make a deposit of $3,279.58 You will make no deposits beyond the $3,279.58 at the end of year 5 (T 5) You earn a rate of return of 12.0% on your savings every year 23. The deposit you will make at the end of year 4 (T-4) is closest to: a. $2,968 b. $3,091 c. $3,346 d. $3,462 e. $3,848 24. The future value of your savings account at the end of year 6 (T6) is closest to a. $13,565 b. $17,790 c. $18,121 d. $19,120 e. $20,459

Answer 1

21.

Beta is price sensitivity of an assets due to change in market. Thus, Beta of Market always equals to 1 as correlation between market to market is 1.

Option-e is the Answer

The SP500 index has beta of 1.20 is a false statement.

22.

Option-a is Correct.

The SP500 index has the highest arithmetic average, but the lowest geometric average.

Please refer to below spreadsheet for calculation of Beta , arithmetic average and geometric average.

Formula reference -

23.

Option - a is correct i.e $ 2,968

24.

Option-c is correct i.e $ 18,121

Please find below spreadsheet for calculation of (23). Deposit make at the end of year -4 and (24). Future value of saving account at the end of 6th year.

Formula reference -