Risk and Return

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ANALYZING A PORTFOLIO
a58.You want your portfolio beta to be 1.20. 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 an asset with a beta of 1.6 and a
risk-free asset. How much should you invest in the risk-free asset?
a.$0
b.$140
c.$200
d.$320
e.$400

ANALYZING A PORTFOLIO
d59.You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset.
$400 is invested in stock A. Stock A has a beta of 1.3 and stock B has a beta of .7.
How much needs to be invested in stock B if you want a portfolio beta of .90?
a.$0
b.$268
c.$482
d.$543
e.$600

EXPECTED RETURN
c60.You recently purchased a stock that is expected to earn 12 percent in a booming economy, 8 percent in a normal economy and lose 5 percent in a recessionary economy. There is a 15 percent probability of a boom, a 75 percent chance of a normal economy, and a 10 percent chance of a recession. What is your expected rate of return on this stock? a.5.00 percent

b.6.45 percent
c.7.30 percent
d.7.65 percent
e.8.30 percent

EXPECTED RETURN
a61.The Inferior Goods Co. stock is expected to earn 14 percent in a recession, 6 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 20 percent while the probability of a normal economy is 55 percent and the chance of a recession is 25 percent. What is the expected rate of return on this stock? a.6.00 percent

b.6.72 percent
c.6.80 percent
d.7.60 percent
e.11.33 percent

EXPECTED RETURN
b62.You are comparing stock A to stock B. Given the following information, which one of these two stocks should you prefer and why? Rate of Return if
State ofProbability of State Occurs
EconomyState of EconomyStock A Stock B
Boom 60% 9% 15%
Recession 40% 4% -6%
a.Stock A; because it has an expected return of 7 percent and appears to be more risky. 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.

RISK PREMIUM
d63.Zelo, Inc. stock has a beta of 1.23. The risk-free rate of return is 4.5 percent and the market rate of return is 10 percent. What is the amount of the risk premium on Zelo stock? a.4.47 percent

b.5.50 percent
c.5.54 percent
d.6.77 percent
e.12.30 percent

VARIANCE
c64.If the economy booms, RTF, Inc. stock is expected to return 10 percent. If the economy goes into a recessionary period, then RTF is expected to only return 4 percent. The probability of a boom is 60 percent while the probability of a recession is 40 percent. What is the variance of the returns on RTF, Inc. stock? a..000200

b..000760
c..000864
d..001594
e..029394

VARIANCE
a65.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 on the common stock of Flowers by Flo? a..001044

b..001280
c..001863
d..002001
e..002471

STANDARD DEVIATION
c66....
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