Chapter 8 - BUS 361 Sample Test

1. The tendency of two variables to move together is called:

a. expected return
b. realized return
c. coefficient of variation
d. correlation

2. Stock A has the following probability distribution of expected returns. What is Stock A's expected rate of return?

Probability        Rate of Return

.10                    -15%

.20                    0%

.40                    5%

.20                    10%

.10                    25%

a. 8%

b. 9%

c. 5%

d. 6%

e. 7%

3. You are holding a stock that has a beta of 3.29 and is currently in equilibrium. The required return on the stock is 21.67%, and the return on the market portfolio is 10.20%. What would be the new required return on the stock if the return on the market increased to 13.00% while the risk-free rate and beta remained unchanged? (Hint: Solve for the risk-free rate)

a. 40.77%
b. 47.96%
c. 21.67%
d. 30.88%
e. 25.55%

4. The coefficient of variation:

a. is a stand-alone risk measure
b. provides an idea of how far above or below the expected value the actual value is likely to be
c. shows the risk per unit of return
d. a and c are correct

5. Empirical studies show that the CAPM is completely valid.

a. True
b. False

6. What is the expected return for the following portfolio? (Hint: First calculate the total amount invested in the portfolio, and then calcualte the percentage of the total invested in each of the four stocks)

STOCK    EXPECTED RETURNS     INVESTMENT

AAA                34%                           \$500,000

BBB                28%                        \$1,100,000

CCC                20%                        \$1,400,000

DDD                 9%                         \$1,500,000

a. 19.84%
b. 17.52%
c. 21.49%
d. 22.72%
e. 24.43%

7. If the risk-free rate is 5% and the return on the market is 11% and beta = 1.3 for Stock X, what is the required rate of return for Stock X?

a. 18.7%

b. 16.7%

c. 14.8%

d. 12.8%

e. 11.9%

8. Stock A has a beta of 1.0 and Stock B has a beta of 0.8. 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 greater 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. The expected return on Stock A will be greater than that on Stock B.
e. The expected return on Stock B will be greater than that on Stock A.

9. A stock has a required return of 12%.  The risk-free rate is 6% and the market risk premium is 5%.  What is the stock's beta coefficient?

a. .80

b. .95

c. 1.20

d. 1.50

e. 1.75

10. Stock A has an expected return of 8% and a beta coefficient of 0.72. Stock B has an expected return of 10% and a beta coefficient of 0.96.  The risk-free rate is 5.5% and the market risk premium is 4%.  What is the beta and what is the required return of a portfolio that has \$60,000 invested in Stock A and \$40,000 invested in Stock B?

a. 0.92 and 9.00%

b. 1.05 and 8.25%

c. 1.34 and 8.55%

d. 1.22 and 9.22%

e. 0.82 and 8.76%

11. What is the expected return for the following stock? (State your answer in percent with two decimal places.)

OUTCOMES     POSSIBLE RETURNS    PROBABILITY

Better                        30%                           11%

Same                        22%                           40%

Worse                       13%                           49%

a. 21.15%
b. 16.31%
c. 20.00%
d. 18.47%
e. 22.74%

12. The expected return on an asset is:

a. is generally not a weighted average of the possible returns with the weights equal to the probability that each possible return will occur.
b. a weighted average of the possible returns with the weights equal to the probability that each possible return will occur.
c. an average of the possible returns without regard to the probability that each possible return will occur.
d. neither of the above statements is correct

13. The CAPM says that the relevant risk of an individual asset is its:

a. stand-alone risk.
b. expected return
c. realized return
d. portfolio or market risk

14. A stock has a required return of 12%.  The risk-free rate is 6% and the market risk premium is 5%.  If the market risk premium increases to 8%, what will happen to the stock's required rate of return?  Assume that the risk-free rate and the stock's beta remain unchanged.

a. 11.75%

b. 12.80%

c. 13.10%

d. 14.25%

e. 15.60%

15. You are holding a stock that has a beta of 1.32 and is currently in equilibrium. The required return on the stock is 20.61% and the return on a risk-free asset is 4.0%. What would be the return on the stock if the stock's beta increased to 1.68 while the risk-free rate and market return remained unchanged?

a. 20.61%
b. 31.85%
c. 25.13%
d. 25.93%
e. 22.51%