Question

1) ased on the following information, what is the expected return?

State of	Probability of State	Rate of Return if
Economy	of Economy	State Occurs
Recession	.33	−	10.10%
Normal	.36		11.60%
Boom	.31		21.40%

Multiple Choice

• a) 7.63%

• b) 10.81%

• c) 7.48%

• d) 7.56%

• e) 14.14%

• f) f6.85%

2) A stock has a beta of 1.17 and an expected return of 11.21 percent. If the risk-free rate is 3.2 percent, what is the stock's reward-to-risk ratio?

Multiple Choice

• 5.99%

• 9.58%

• 8.21%

• 6.32%

3) Stock market events in 1929, 1987, and 2008 are most apt to be used as examples in support of which one of these theories?

Multiple Choice

• a) Blanket theory

• b) Advanced markets theory

• c) Value theory

• d) Bubble theory

• e) Behavioral theory

Answer 1

1.

Expected Return = 0.33(-0.1010) + 0.36(0.1160) + 0.31(0.2140)

Expected Return = 7.48%

2.

Reward to Risk Ratio = (0.1121)/1.17

Reward to Risk Ratio = 9.58%

3.

Bubble theory

Mismatch in supply and demand in the market leads to formation of bubble in the market.