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? Portfolio beta and required return
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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.) Beta coefficient 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? Required return
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