Question Which one of the following statements related to unexpected returns is correct?
Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term.
Unexpected returns are relatively predictable in the short-term.
Unexpected returns over time have a negative effect on the total return of a firm.
Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.
All announcements by a firm affect that firm's unexpected returns.
Question 2. You have developed data which give (1) the average annual returns on the market for the past five years, and (2) similar information on Stocks A and B. In year 1, the Market Portfolio returned .13, Stock A returned .16 and Stock B returned .04. In year 2, the Market Portfolio returned -.15, Stock A returned -.20 and Stock B returned .04. In year 3, the Market Portfolio returned .11, Stock A returned .18 and Stock B returned .04. In year 4, the Market Portfolio returned -.10, Stock A returned -.15 and Stock B returned .04. In year 5, the Market Portfolio returned .06, Stock A returned .14 and Stock B returned .04. If these data are as follows, which of the possible answers best describes the historical betas for A (b A)and B (b B)?
b A > 0; b B = 1
b A > +1; b B = 0
b A = 0; b B = -1
b A < 0; b B = 0
b A < -1; b B = 1
Question 3. You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?
historical return
expected return
geometric return
required return
arithmetic return
Question 4 Which one of the following is the best example of a diversifiable risk?
core inflation increases
energy costs increase
a firm's sales decrease
interest rates increase
taxes decrease
Question 5 Freedman Flowers' stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a ?28% return. What is the firm's expected rate of return?
9.41%
9.65%
9.90%
10.15%
Question 6. You have developed data which give (1) the average annual returns on the market for the past five years, and (2) similar information on Stocks A and B. In year 1, the Market Portfolio returned .03, Stock A returned .16 and Stock B returned .05. In year 2, the Market Portfolio returned -.05, Stock A returned -.20 and Stock B returned .05. In year 3, the Market Portfolio returned .01, Stock A returned .18 and Stock B returned .05. In year 4, the Market Portfolio returned -.10, Stock A returned -.25 and Stock B returned .05. In year 5, the Market Portfolio returned .06, Stock A returned .14 and Stock B returned .05. If these data are as follows, which of the possible answers best describes the historical betas for A (b A)and B (b B)?
b A > 0; b B = 1
b A > +1; b B = 0
b A = 0; b B = -1
b A < 0; b B = 0
b A < -1; b B = 1
Question 7 When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.
True
False
Question 8 Calculate the return and standard deviation for the following stock, in an economy with five possible states. If a Boom (Probability=15%) economy occurs, then the expected return is 40%. If a Good (Probability=25%) economy occurs, then the expected return is 20%. If a Normal (Probability=30%) economy occurs, then the expected return is 12%. If a Bad (Probability=20%) economy occurs, then the expected return is 0%. If a Recession (Probability=10%) economy occurs, then the expected return is -15%. Show your work for partial credit.
Question 9 If the market index increased by 9.0 % during a period, a stock with a beta of 1.1 would be expected to (increase or decrease) _____________% during this same period? Ignore the risk free rate in calculating your answer (i.e. assume rf=0) Calculate the expected change in return to the nearest .1%. If the change is a decrease be sure to use a - sign. If the change is an increase, enter the number without a + sign.
Question 10 Consider the following information and then calculate the required rate of return for the Universal Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:
9.58%
10.09%
11.18%
11.77%
Question 11 If the economy is normal, Charleston Freight stock is expected to return 16.5 percent. If the economy falls into a recession, the stock's return is projected at a negative 11.6 percent. The probability of a normal economy is 80 percent while the probability of a recession is 20 percent. What is the variance of the returns on this stock?
0.013420
0.012634
0.010346
0.013927
0.014315
Question 12 You have the following information about your stock portfolio. You own 5 ,000 shares of Stock A which sells for $ 9 with an expected return of 3 %. You own 2,000 shares of Stock B which sells for $10 with an expected return of 6%. You own 4,000 shares of Stock C which sells for $12 with an expected return of 9%. You own 6 ,000 shares of Stock D which sells for $ 9 with an expected return of 15 %. What is the expected return on your portfolio? Show your answer to the nearest .01%.
Question 13 Megan RMegan Ross holds the following portfolio:
Stock Investment Beta
A $150,000 1.40
B 50,000 0.80
C 100,000 1.00
D 75,000 1.20
Total $375,000
What is the portfolio's beta?
1.06
1.17
1.29
1.42