Unformatted text preview: t. What is the portfolio weight of the riskfree security? [ ] .30 [ ] .36 [ ] .41 v [ ] .64 [ ] .70 72) What is the expected return on Louisiana Electric stock if the stock has a beta of .74, the expected market return is 13.8 percent, and the riskfree rate is 3.6 percent? [ ] 7.55 percent [ ] 10.21 percent v [ ] 11.15 percent [ ] 12.67 percent [ ] 13.81 percent 73) Which one of the following statements related to the security market line (SML) is correct? [ ] A stock with a beta of zero will plot at the same point on the SML as the market as long as the stock is correctly priced. [ ] A stock which lies below the SML is underpriced. [ ] The higher the beta, the lower the expected return as graphically illustrated by the SML. [ ] A portfolio which is overpriced and has a beta of 1.2 will lie below the SML and to the left of the market position on the SML. v [ ] A stock which is correctly priced and has a beta of .87 will lie on the SML to the left of the market position. 74) The assumption of homogeneous expectations assumes that all investors have the same: I. aversion to risk. II. estimates of expected return. III. estimates of covariances. IV. estimates of variances. [ ] I only [ ] I and II only [ ] II and IV only v [ ] II, III, and IV only [ ] I, II, III, and IV 75) Assume that two stocks have a negative covariance. Given this, the return on Stock B will most likely be _____ its average when the return on Stock A is above its average return. [ ] above [ ] equal to v [ ] below [ ] double [ ] You cannot make this determination based on the information provided. 76) What is the risk premium on the following stock if the riskfree rate is 3.5 percent? State of Probability of State Rate of Economy Of Economy Return Boom .10 .28 Good .75 .14 Recession .15 .06 v [ ] 0.089 [ ] 0.099 [ ] 0.156 [ ] 0.117 [ ] 0.124 77) A financial hedge is best described by which one of the following? [ ] negative standard deviation [ ] positive variance [ ] positive correlation [ ] high expected rate of return v [ ] negative covariance 78) The covariance between two securities is equal to the correlation between the securities: [ ] divided by (sAsB). v [ ] multiplied by (sAsB). [ ] divided by the average standard deviation of the individual securities. [ ] plus (sAsB). [ ] divided by (2sAsB)....
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This note was uploaded on 06/15/2008 for the course ACC 501 504 taught by Professor Na during the Spring '08 term at University of Texas.
 Spring '08
 NA

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