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(Difficulty Levels:
Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
PART I – New and Revised Carryover Problems and Questions
Multiple Choice:
Problems
Expected returns
Answer: a
EASY
1
.
T. Martell Inc.'s stock has a 50% chance of producing a 30% return, a
35% chance of producing a 9% return, and a 15% chance of producing a
25% return.
What is Martell's expected return?
a. 14.4%
b. 15.2%
c. 16.0%
d. 16.8%
e. 17.6%
Portfolio beta
Answer: c
EASY
2
.
An investor has a 2stock portfolio with $50,000 invested in Palmer
Manufacturing and $50,000 in Nickles Corporation.
Palmer’s beta is
1.20 and Nickles’ beta is 1.00.
What is the portfolio's beta?
a. 0.94
b. 1.02
c. 1.10
d. 1.18
e. 1.26
Portfolio beta
Answer: e
EASY
3
.
Tom Skinner has $45,000 invested in a stock with a beta of 0.8 and
another $55,000 invested in a stock with a beta of 1.4.
These are the
only two investments in his portfolio.
What is his portfolio’s beta?
a. 0.93
b. 0.98
c. 1.03
d. 1.08
e. 1.13
Chapter 8:
Risk and Rates of Return
Page 157
CHAPTER
8
RISK
AND
RATES
OF
RETURN
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View Full Document CAPM Answer: b
EASY
4
.
Magee Company's stock has a beta of 1.20, the riskfree rate is 4.50%,
and the market risk premium is 5.00%.
What is Magee's required return?
a. 10.25%
b. 10.50%
c. 10.75%
d. 11.00%
e. 11.25%
Coefficient of variation
Answer: d
EASY
5
.
Miller Inc. is considering a capital budgeting project that has an
expected return of 10% and a standard deviation of 30%.
What is the
project's coefficient of variation?
a. 1.8
b. 2.2
c. 2.6
d. 3.0
e. 3.4
Calculating betas
Answer: a
MEDIUM
6
.
You are given the following returns on the Market and on Stock A.
Calculate Stock A's beta coefficient.
Year
Market
Stock J
2001
20%
40%
2002
5
10
2003
40
45
2004
25
40
2005
10
15
a. 1.47
b. 1.54
c. 1.61
d. 1.68
e. 1.75
CAPM Answer: c
MEDIUM
7
.
Niendorf Corporation's stock has a required return of 13.00%, the risk
free rate is 7.00%, and the market risk premium is 4.00%.
Now suppose
there is a shift in investor risk aversion, and the market risk premium
increases by 2.00%.
What is Niendorf's new required return?
a. 14.00%
b. 15.00%
c. 16.00%
d. 17.00%
e. 18.00%
Page 158
Chapter 8:
Risk and Rates of Return
CAPM Answer: e
MEDIUM
8
.
Kamath Manufacturing Company has a beta of 1.45, while Gehr Industries
has a beta of 0.85.
The required return on the stock market is 12.00%,
and the riskfree rate is 5.00%.
What is the difference between
Kamath's and Gehr's required rates of return?
(Hint: First, find the
market risk premium, then find required returns on the stocks.)
a. 3.60%
b. 3.75%
c. 3.90%
d. 4.05%
e. 4.20%
CAPM Answer: b
MEDIUM
9
.
Apex Roofing's stock has a beta of 1.50, its required return is 14.00%,
and the riskfree rate is 5.00%.
What is the required rate of return
on the stock market?
(Hint:
First find the market risk premium.)
a. 10.50%
b. 11.00%
c. 11.50%
d. 12.00%
e. 12.50%
CAPM Answer: d
MEDIUM
10
.
Parr Paper's stock has a beta of 1.40, and its required return is
13.00%.
Clover Dairy's stock has a beta of 0.80.
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This note was uploaded on 05/05/2010 for the course FIN 221 taught by Professor Dyer during the Fall '09 term at University of Illinois, Urbana Champaign.
 Fall '09
 DYER

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