Sample Midterm 2

# Sample Midterm 2 - FIN 350 Financial Management Sample...

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FIN 350 Financial Management Sample Midterm II Ch. 8 Risk and Returns 1. 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: b MEDIUM CAPM Answer: b MEDIUM Beta 1.50 Risk-free rate 5.00% Required return on stock 14.00% Market risk premium 6.00% Required return on market 11.00% 2. Assume that you are the portfolio manager of the Delaware Fund, a \$4 million mutual fund that contains the following stocks: Stock Amount Beta A \$400,000 1.50 B \$600,000 0.50 C \$1,000,000 1.25 D \$2,000,000 0.75 The required rate of return in the market is 14.00% and the risk-free rate is 6.00%. What rate of return should investors expect (and require) on their investment in this fund? a. 10.90% b. 11.50% c. 12.10% d. 12.70% e. 13.30% Portfolio beta and required return Answer: e

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Company Amount Port. weight Beta Weight x beta Stock A \$400,000 0.100 1.50 0.15 Stock B \$600,000 0.150 0.50 0.08 Stock C \$1,000,000 0.250 1.25 0.31 Stock D \$2,000,000 0.500 0.75 0.38 \$4,000,000 1.000 b Portfolio = 0.91 Required market return: 14.00% Risk free rate: 6.00% Market risk premium 8.00% Portfolio's required return: 13.30% 3. Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.) a. When held in isolation, Stock A has more risk than Stock B. b. Stock B would be a more desirable addition to a portfolio than Stock A. c. Stock A would be a more desirable addition to a portfolio than Stock B. d. In equilibrium, the expected return on Stock A will be greater than that on Stock B. e. In equilibrium, the expected return on Stock B will be greater than that on Stock A. Beta coefficient Answer: d MEDIUM 4. In the next year, the market risk premium, (r M - r RF ), is expected to fall, while the risk- free rate, r RF , is expected to remain the same. Given this forecast, which of the following statements is CORRECT? a. The required return for all stocks will fall by the same amount. b. The required return will fall for all stocks, but it will fall more for stocks with higher betas. c. The required return will fall for all stocks, but it will fall less for stocks with higher betas. d. The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0. e. The required return on all stocks will remain unchanged. Required return Answer: b MEDIUM
5. Which of the following statements is CORRECT? a. A two-stock portfolio will always have a lower standard deviation than a one- stock portfolio. b.

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## This note was uploaded on 11/11/2011 for the course FIN 350 taught by Professor Chen during the Spring '07 term at S.F. State.

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Sample Midterm 2 - FIN 350 Financial Management Sample...

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