MT140 Quiz_Unit6

MT140 Quiz_Unit6 - Unit 6: 1. Question:Magee Company's...

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1. Question: 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? Your Answer: 10.25% 10.50% CORRECT 10.75% 11.00% 11.25% Instructor Explanation: R Magee = R RF + (R M – R RF ) R Magee = 4.50% + 1.20(5.00%) = 10.50% Points Received: 4 of 4 2. Question: 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.) Your Answer: 8.55% 8.71% 8.99% 9.14% CORRECT 9.33% Instructor Explanation: First, you need to calculate the market risk premium. You can do this using Parr Paper information: R Parr = R RF + (R M – R RF ) 13.00% = 4.00% + 1.40(R M – R RF ) 6.43% = (R M – R RF ) Using this information, we can now calculate the require return for Clover: R Clover = R RF + (R M – R RF ) R Clover = 4.00% + .80(6.43%) = 9.14% Points Received: 4 of 4 3. Question: Suppose you hold a diversified portfolio consisting of $10,000 invested equally in each of 10 different common stocks. The portfolio’s beta is 1.120. Now suppose you decided to sell one of your stocks that has a beta of 1.000 and to use the proceeds to buy a replacement stock with a beta of 1.750. What would the portfolio’s new beta be? Your Answer:
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MT140 Quiz_Unit6 - Unit 6: 1. Question:Magee Company's...

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