exam 2 ta review - FIN 3403 Fall 2008 Exam 2 Review 5 YOU...

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FIN 3403 Fall 2008 Exam 2 Review 5. YOU ARE GIVEN THE FOLLOWING DATA: If the risk-free rate is expected to be 4 percent, and the market risk premium is expected to be 7 percent, then what is the required rate of return for Security A based on the CAPM? A. 13.10% B. 13.50% C. 13.40% D. 13.20% E. 13.30% 37. You are given the probability distribution shown below. As you can calculate, the expected return for Security J is 14 percent, the standard deviation for Security J is 7.3485 percent, the expected return for the Market is 11 percent, and the standard deviation for the Market is 3.7417 percent. Based on this information, determine the beta of Security J. State of Nature Probability Security J Market 1 20.00% 0.00% 5.00% 2 40.00% 15.00% 10.00% 3 40.00% 20.00% 15.00% A. 1.93 B. 1.72 C. 1.86 D. 1.79 E. 1.65 Security A Security B Market Security A 0.00390625 0.00221875 0.00393250 Security B 0.00221875 0.00504100 0.00514250 Market 0.00393250 0.00514250 0.00302500 Variance/Covariance Matrix 44. Assume that you are given the following historical returns for Security J and the Market. Year Market Security J 1 0.10 0.15 2 0.05 - 0.05 3 0.07 0.09 4 0.12 0.14 5 0.04 0.18 Now assume that for the coming year you expect the market to have a return of 10% percent and the risk-free rate to be 6 percent. Using regression analysis, determine the difference between the expected return for Security J next year and its required rate of return.
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