Homework Answers
Based on CAPM,
Expected return = Risk free rate + Beta * Market risk premium
Expected return = 2.6% + 2.8 * 5.1%
Expected return = 2.6% + 14.28%
Expected return = 16.88%
Total Expected return = Expected dividend yield + Expected capital gains yield
16.88% = 3.9% + Expected capital gains yield
Expected capital gains yield = 12.98%
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Chapter 07 Practice Test Question 06 Alpha and the CAPM A stock with a beta of 0.81 has an expected return of 11% and an alpha of 1.47% when the market expected return is 11%. What must be the risk free rate that satisfies these conditions? points Skipped eBook Print 10 0 0 0 References Chapter 07 Practice Test Question 07 Portfolio Beta An investor places $5,000 in Stock A, $4,000 in Stock B and $10,000 in Stock C. Stock...
Chapter 07 Practice Test Question 09 CAPM and Security Pricing Stock A has an expected return of 28% and a beta of 2.3. Stock B has an expected return of 28% and a beta of 1.9 when the risk free rate is 5%. Which of the following statements are correct? points Skipped 1. Stock A is underpriced relative to Stock B II. Stock B is underpriced relative to Stock A III. This situation is inconsistent with the CAPM IV. This...
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Chapter 06 Practice Test Question 07 19 Calculating A Two Security Portfolio Standard Deviation An investor puts 60% of their money in Stock 1 and the rest in Stock 2. Stock 1 has a standard deviation of 45% and Stock 2 has a standard deviation of 35%. The covariance between the two stocks is 0.091344. What is the portfolio's standard deviation? points Skipped Multiple Choice eBook 41.49% Print References 36.29% 34.96% 36.92%
Chapter 06 Practice Test Question 17 15 Asset Allocation Between Risky and Riskless Investments You have a risky portfolio with a beta of 1.3. You wish to reduce the portfolio beta to 0.3. In order to do this you will change your asset allocation and add risk free government bonds. What percentage of your investment should be in government bonds and what percentage should be in the risky portfolio to accomplish your goal? points Skipped Multiple Choice eBook Print O...
Chapter 06 Practice Test Question 05 Calculating Ex-Post Covariance An analyst obtains 24 annual return observations for Stock 1 and Stock 2. The analyst finds that the sum of the squared deviations from the mean for Stock 1 and Stock 2 are 1.8775 and 1.4197 respectively. The sum of the product of the deviations from the mean for Stock 1 and Stock 2 is 1.7528. The covariance between the stocks is points Skipped eBook 1 Print 0 0.0648 References 0...
Chapter 14 Practice Test Question 08 ROE A firm has net income of $28 million, assets of $228 million and liabilities of $65 million. What is the firm's ROE? points Skipped Multiple Choice eBook Print References Oo oo 16.71% 17.18% Chapter 14 Practice Test Question 09 ROE and ROA XYZ firm has EBIT of $26 and assets of $260. The firm's debt carries an interest rate of 4% and the firm has $1.30 of debt for every dollar of equity....
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00 Chapter 14 Practice Test Question 10 " Leverage and ROE Firm A uses debt and has $580 in equity. Firm B does not use debt and has $1,000 in equity. Both firms pay a 39% tax rate and both firms have EBIT of $57. Firm A has interest expense of $32. There are no other expenses. If EBIT doubles for both firms ROE for Firm A will be_ ; ROE for Firm B will be points Skipped Multiple Choice...
Chapter 08 Practice Test Question 05 Forms of Market Efficiency in the following Venn diagram of forms of market efficiency the I. is the II. is the and the III. is the points Skipped eBook Print Multiple Choice References O strong form; semi-strong form; weak form weak form; strong form; semi-strong form weak form; semi-strong form; strong form o oo strong form; weak form; semi-strong form
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