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Unformatted text preview: 1 Questions for Chapter 6 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. CHAPTER 6 ____ 1. Assume that the riskfree rate is 5 percent, and that the market risk premium is 7 percent. If a stock has a required rate of return of 13.75 percent, what is this stocks beta coefficient? a. 1.25 b. 1.60 c. 1.35 d. 1.37 ____ 2. J. Harper Inc.'s stock has a 50% chance of producing a 35% return, a 30% chance of producing a 10% return, and a 20% chance of producing a 28% return. What is Harper's expected return? a. 14.16% b. 14.53% c. 14.90% d. 15.27% e. 15.65% ____ 3. Given the following probability distribution, what is the expected return and the standard deviation of returns for Security J? State P i r J 1 0.2 10% 2 0.6 15 3 0.2 20 a. 12%; 5.18% b. 20%; 5.00% c. 15%; 3.16% d. 15%; 10.00% e. 15%; 6.50% ____ 4. The following probability distributions of returns for two stocks have been estimated: Probability Stock A Stock B Stock C 0.3 15% 8% 24% 0.4 10% 6% 22% 0.3 6% 4% 20% Which stock has the lesser amount of risk based on using the Coefficient of Variation (CV) to rank riskiness and what is its Coefficient of Variation? a. Stock A (CV = 0.339) b. Stock C (CV = 14.201) c. Stock A (CV = 2.948) d. Stock C (CV = 0.070) 2 ____ 5. Ripken Iron Works believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock? State of the Probability of Stock's Economy State Occurring Expected Return Boom 0.25 25% Normal 0.50 15% Recession 0.25 5% a. 0.4360 b. 0.4714 c. 0.5068 d. 0.5448 e. 0.5856 ____ 6. Given the following information, determine which beta coefficient for Stock A is consistent with equilibrium: r A = 11.3%; r RF = 5%; r M = 10% HINT: A stock or the market will be in equilibrium when the required rate of return (r A ) is equal to the expected rate of return (r 8 ) : a. 1.35 b. 1.26 c. 1.10 d. 0.80 e. 0.86 ____ 7. Rosenberg Inc. is considering a capital budgeting project that has an expected return of 20% and a standard deviation of 25%. What is the project's coefficient of variation? a. 1.25 b. 1.31 c. 1.38 d. 1.45 e. 1.52 ____ 8. Other things held constant, if the expected inflation rate decreases the Security Market Line would a. become less steeply sloped b. shift up c. become more steeply sloped d. shift down ____ 9. Other things held constant, if investors become more risk averse the Security Market Line would a. shift down b. become less steeply sloped c. shift up d. become more steeply sloped ____ 10. Other things held constant, if the risk free rate increases the Security Market Line would a. shift down b. become less steeply sloped c. become more steeply sloped d. shift up 3 ____ 11. Other things held constant, if the expected inflation rate decreases and investors also become more risk averse, the Security Market Line would shift in this manner: a. Down and have a steeper slope....
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This note was uploaded on 03/24/2010 for the course FINANCE fin taught by Professor Bradley during the Spring '08 term at Clemson.
 Spring '08
 bradley

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