Investments 3.4 March 2010 with answers

A4667 b5000 c5600 d6250 enoneoftheabove

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Unformatted text preview: ystematic variance of the stock i If you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g2 to be A. 0 B. 1 C. equal to the risk‐free rate of return D. equal to the average difference between the monthly return on the market portfolio and the monthly risk‐free rate E. none of the above If the CAPM is valid, the excess return on the stock is predicted by the systematic risk of the stock and the excess return on the market, not by the nonsystematic risk of the stock. 9. Low Fly Airline is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk‐free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of low Fly Airline has a beta of 3.00. The intrinsic value of the stock is ______. A. $46.67 B. $50.00 C. $56.00 D. $62.50 E. none of the above 6% + 3(14% ‐ 6%) = 30%; P = 7 / (.30 ‐ .15) = $46.67. 10. Suppose two portfolios have the same average return, the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A __________. A. is better than the performance of portfolio B 4 B. is the same as the performance of portfolio B C. is poorer than the performance of portfolio B D. cannot be measured as there is no data on the alpha of the portfolio E. none of the above is true. The Sharpe index is a measure of average portfolio returns (in excess of the risk free return) per unit of total risk (as measured by standard deviation). 11. What is the relationship between the price of a straight bond and the price of a callable bond? A. The straight bond's price will be higher than the callable bond's price for low interest rates. B. The straight bond's price will be lower than the callable bond's price for low interest rates. C. The straight bond's price will change as interest rates change, but the callable bond's price will stay the same. D. The straight bond and the callable bond will have the same price. E. There is no consistent relationship between the two types of bonds. For low interest rates, the price difference is due to the value of the firm's option to call the bond at...
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