Fin 322 Homework

Student name: Amal Asseyr

Student id: 7346189

CHAPTER 11 (CHAPTER 10 OLD EDITION)

EXPECTED RETURN, VARIANCE, STANDARD DEVIATION, COVARIANCE, CORRELATION
54) You recently purchased a stock that is expected to earn 12.6 percent in a booming economy, 8.9 percent in a normal economy,
and lose 5.2 percent in a recessionary economy. Each economic state is equally likely to occur. What is your expected rate of
return on this stock?
A) 6.47 percent
B) 8.90 percent
C) 5.43 percent
D) 7.65 percent
E) 7.01 percent

57) Stock A is expected to return 12 percent in a normal economy and lose 7 percent in a recession. Stock B is expected to return
8 percent in a normal economy and 2 percent in a recession. The probability of the economy being normal is 80 percent and the
probability of a recession is 20 percent. What is the covariance of these two securities?
A) .004203
B) .004115
C) .003280
D) .003876
E) .003915

Professor I got .001824 as my answer however it’s not apart of the options.

59) Stock A has a variance of .1428 while Stock B's variance is .0910. The covariance of the returns for these two stocks is
−.0206. What is the correlation coefficient?
A) −.1505
B) −.1146
C) −.1480
D) −.1643
E) −.1807

60) You are comparing Stock A to Stock B. Stock A will return 9 percent in a boom and 4 percent in a recession. Stock B will
return 15 percent in a boom and lose 6 percent in a recession. The probability of a boom is 60 percent while the chance of a
recession is 40 percent. Given this information, which one of these two stocks should you prefer and why?
A) Stock A; because it has a higher expected return and appears to be more risky than Stock B
B) Stock A; because it has a higher expected return and appears to be less risky than Stock B
C) Stock A; because it has a slightly lower expected return but appears to be significantly less risky than Stock B
D) Stock B; because it has a higher expected return and appears to be just slightly more risky than Stock A
E) Stock B; because it has a higher expected return and appears to be less risky than Stock A

61) RTF stock is expected to return 10.6 percent if the economy booms and only 4.2 percent if the economy goes into a
recessionary period. The probability of a boom is 55 percent while the probability of a recession is 45 percent. What is the
standard deviation of the returns on RTF stock?
A) 4.03 percent
B) 2.97 percent
C) 3.18 percent
D) 3.69 percent
E) 5.27 percent

62) The rate of return on the common stock of Flowers by Flo is expected to be 14 percent in a boom economy, 8 percent in a
normal economy, and only 2 percent in a recessionary economy. The probabilities of these economic states are 20 percent for a
boom, 70 percent for a normal economy, and 10 percent for a recession. What is the variance of the returns?
A) .001044
B) .001280
C) .001863
D) .002001
E) .002471
PORTFOLIO RETURN, RISK AND BETA
67) A portfolio is entirely invested into BBB stock, which is expected to return 16.4 percent, and ZI bonds, which are expected to
return 8.6 percent. Stock BBB comprises 48 percent of the portfolio. What is the expected return on the portfolio?
A) 13.64 percent
B) 14.36 percent
C) 12.34 percent
D) 14.22 percent
E) 11.69 percent

68) A portfolio has 45 percent of its funds invested in Security One and 55 percent invested in Security Two. Security One has a
standard deviation of 6 percent. Security Two has a standard deviation of 12 percent. The securities have a coefficient of
correlation of .62. What is the portfolio variance?
A) .006946
B) .007295
C) .007157
D) .008104
E) .007506

69) A portfolio has 38 percent of its funds invested in Security C and 62 percent invested in Security D. Security C has an
expected return of 8.47 percent and a standard deviation of 7.12 percent. Security D has an expected return of 13.45 percent and a
standard deviation of 16.22 percent. The securities have a coefficient of correlation of .89. What are the portfolio rate of return
and variance values?
A) 11.09 percent ; .124031
B) 11.56 percent ; .127620
C) 11.56 percent ; .015688
D) 10.87 percent ; .014308
E) 10.87 percent; .127620

70) A portfolio consists of Stocks A and B and has an expected return of 11.6 percent. Stock A has an expected return of 17.8
percent while Stock B is expected to return 8.4 percent. What is the portfolio weight of Stock A?
A) 29.87 percent
B) 61.98 percent
C) 32.58 percent
D) 34.04 percent
E) 67.42 percent

74) Stock K is expected to return 12.4 percent while the return on Stock L is expected to be 8.6 percent. You have $10,000 to
invest in these two stocks. How much should you invest in Stock L if you desire a combined return from the two stocks of 11
percent?
A) $3,511
B) $4,209
C) $3,684
D) $2,907
E) $3,415

81) Stu has decided to invest $6,800 in a risky asset that has an expected return of 11.3 percent and a standard deviation of 21.2
percent. He will also invest $3,200 in a risk-free asset with an expected return of 4.2 percent. The market risk premium is 7.1
percent. What is the standard deviation of his portfolio?
A) 3.30 percent
B) 11.94 percent
C) 6.87 percent
D) 9.25 percent
E) 14.42 percent

82) You would like to combine a risky stock with a beta of 1.87 with U.S. Treasury bills in such a way that the risk level of the
portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in the risky
stock?
A) 54.15 percent
B) 53.48 percent
C) 55.09 percent
D) 52.91 percent
E) 54.67 percent
83) Stock A has an expected return of 12 percent and a variance of .0203. The market has an expected return of 11 percent and a
variance of .0093. What is the beta of Stock A if the covariance of Stock A with the market is .0137?
A) .68
B) .76
C) 1.55
D) 1.47
E) 1.32

84) Stock A has a beta of 1.2, Stock B's beta is 1.46, and Stock C's beta is .72. If you invest $2,000 in Stock A, $3,000 in Stock B,
and $5,000 in Stock C, what will be the beta of your portfolio?
A) 1.008
B) 1.014
C) 1.038
D) 1.067
E) 1.127

87) You would like to combine a highly risky stock with a beta of 2.6 with U.S. Treasury bills in such a way that the risk level of
the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury
bills?
A) 57.91 percent
B) 61.54 percent
C) 50.00 percent
D) 38.46 percent
E) 42.09 percent

101) You desire a portfolio beta of 1.1. Currently, your portfolio consists of $100 invested in Stock A with a beta of 1.4 and $300
in Stock B with a beta of .6. You have another $400 to invest and want to divide it between Stock C with a beta of 1.6 and a risk-
free asset. How much should you invest in the risk-free asset to obtain your desired beta?
A) $50
B) $100
C) $125
D) $350
E) $300

CAPM

88) The market has an expected rate of return of 9.8 percent. The long-term government bond is expected to yield 4.5 percent and
the U.S. Treasury bill is expected to yield 3.4 percent. The inflation rate is 3.1 percent. What is the market risk premium?
A) 2.2 percent
B) 3.3 percent
C) 5.3 percent
D) 6.4 percent
E) 6.7 percent

89) The risk-free rate of return is 3.68 percent and the market risk premium is 7.84 percent. What is the expected rate of return on
a stock with a beta of 1.32?
A) 9.17 percent
B) 9.24 percent
C) 13.12 percent
D) 14.03 percent
E) 14.36 percent

90) The common stock of CTI has an expected return of 14.48 percent. The return on the market is 11.6 percent and the risk-free
rate of return is 3.42 percent. What is the beta of this stock?
A) .95
B) 1.49
C) 1.31
D) 1.42
E) 1.35

91) The stock of Big Joe's has a beta of 1.38 and an expected return of 16.26 percent. The risk-free rate of return is 3.42 percent.
What is the expected return on the market?
A) 7.60 percent
B) 8.04 percent
C) 9.30 percent
D) 12.72 percent
E) 12.16 percent

92) The expected return on HiLo stock is 14.08 percent while the expected return on the market is 11.5 percent. The beta of HiLo
is 1.26. What is the risk-free rate of return?
A) .41 percent
B) 2.01 percent
C) .69 percent
D) 1.58 percent
E) 1.62 percent

93) The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6 percent and the market risk premium is 9
percent. What is the expected rate of return?
A) 11.32 percent
B) 14.17 percent
C) 16.47 percent
D) 17.48 percent
E) 18.03 percent

94) Stock A has a beta of .68 and an expected return of 8.1 percent. Stock B has a beta of 1.42 and an expected return of 13.9
percent. Stock C has beta of 1.23 and an expected return of 12.4 percent. Stock D has a beta of 1.31 and an expected return of 12.6
percent. Stock E has a beta of .94 and an expected return of 9.8 percent. Which one of these stocks is the most accurately priced if
the risk-free rate of return is 2.5 percent and the market risk premium is 8 percent?
A) Stock A
B) Stock B
C) Stock C
D) Stock D
E) Stock E

CHAPTER 12 (CHAPTER 11 OLD EDITION)

RETURN CALCULATION

39) Alpha stock has an expected return of 8.2 percent and betas of: βGNP = 1.23; βI = .97; and βEx = 1.08. This expectation is
based on a three-factor model with expected values of: GNP growth of −1 percent; inflation of 2.4 percent; and export growth of
3.5 percent. However, actual growth in these factors turns out to be .55 percent, 1.8 percent, and 2.6 percent, respectively.
Assuming there was no unexpected news related specifically to the stock, what was the stock's total rate of return?
A) 8.04 percent
B) 8.55 percent
C) 8.47 percent
D) 7.85 percent
E) 8.85 percent

40) Overton Markets stock has an expected return of 7.8 percent and betas of: βGNP = 1.06; βI = 1.01; and βEx = .52. This
expectation is based on a three-factor model with expected values of: GNP growth of 2.6 percent; inflation of 3.1 percent; and
export growth of 1.4 percent. However, actual growth in these factors turns out to be 3.1 percent, 2.6 percent, and .2 percent,
respectively. Calculate the stock's total return if the company unexpectedly announces that an important patent filing has been
granted sooner than expected and will earn the company 5 percent more in return, (i.e. from 10 percent up to 15 percent).
A) 16.02 percent
B) 12.20 percent
C) 11.55 percent
D) 10.90 percent
E) 11.02 percent

ONE FACTOR APT

46) Assume a one-factor model where the factor is associated with the overall market. Suppose JSC's common stock has a factor
beta of .8, the risk-free rate is 3.2 percent, and the expected market rate of return is 11.2 percent. What is the expected return for
JSC stock?
A) 10.25 percent
B) 6.40 percent
C) 7.20 percent
D) 9.60 percent
E) 12.16 percent
47) Suppose ABC's common stock has a return of 12.87 percent, the risk-free rate is 2.65 percent, the market return is 13.46
percent, and there is currently no unsystematic influence affecting ABC's return. Given a one-factor APT model, what is the factor
beta?
A) .896
B) .945
C) 1.003
D) .962
E) .979

TWO-FACTOR APT

48) Suppose a sizeable, fully diversified portfolio has an F1 beta of .9, an F2 beta of 1.4, and an expected return of 11.6 percent. If
F1 turns out to be 1.1 percent and F2 is −.8 percent, what will be the actual rate of return based on a two-factor arbitrage pricing
model?
A) 12.05 percent
B) 11.47 percent
C) 11.72 percent
D) 12.32 percent
E) 12.58 percent

49) Suppose Binder Corporation's common stock has an actual return of 12.34 percent compared to its expected return of 12.6
percent. The risk-free rate was expected to be 4.3 percent, which it was. The beta of Fi is .9 and the beta of FGNP is 1.1. If
inflation unexpectedly increased by 1.4 percent, what was the unexpected change in GNP?
A) 2.02 percent
B) 1.38 percent
C) −.82 percent
D) −1.38 percent
E) −2.02 percent