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# Chapter 8 - CHAPTER 8 RISK AND RATES OF RETURN(Difficulty...

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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 2-stock 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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CAPM Answer: b EASY 4 . Magee Company's stock has a beta of 1.20, the risk-free 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 risk-free 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 risk-free 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. If the risk-free rate is 4.00%, what is the required rate of return on Clover's stock? (Hint: First find the market risk premium.) a. 8.55% b. 8.71% c. 8.99% d. 9.14% e. 9.33% CAPM Answer: a MEDIUM 11 . The real risk-free rate is 2.50%, investors expect a 3.50% future inflation rate, the market risk premium is 5.50%, and Krogh Enterprises has a beta of 1.40. What is the required rate of return on Krogh's stock?

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