(ch 11) 1)What is the percentage return on a stock that was purchased for $50.00, paid a $3.00 dividend after one year and was then sold for $49.00? Formula = % return =capital gain + dividend / initial share price = (49000-50000)= (-1) + 3.00/ 50.00 = 4.00% 2) If a share of stock provided a 14.0% nominal rate of return over the previous year while the real rate of return was 6.0%, then the inflation rate was: looking for inflation rate = formula = 1+ real rate of return = 1+ nominal rate of return / 1 + inflation rate = 1+.06= 1.06 =has eaqual other side = 1.14/ 1 + x (x= inflation rate) 3) In a year in which common stocks offered an average return of 18%, Treasury bonds offered 10% and Treasury bills offered 7%, the risk premium for common stocks was:= 18-7=11 = tresury bond- treasury bills offered 4) What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks? Individual stock's standard deviation will be higher. 5)The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that: common stocks should offer a higher return than Treasury bills. 6) Risk factors that are expected to affect only a specific firm are referred to as: diversifiable risk 7) Which of the following risk types can be diversified by adding stocks to a portfolio? Unique risk 8) .Which of the following risks would be classified as a unique risk for an auto manufacturer? Steel prices 9) Which one of the following is the best example of a diversifiable risk? a firm's sales decrease 10) The primary purpose of portfolio diversification is to :eliminate firm-specific risk. 11) Which one of the following is least apt to reduce the unsystematic risk of a portfolio? reducing the number of stocks held in the portfolio 12) Which one of the following is an example of systematic risk? investors panic causing security prices around the globe to fall precipitously(ch12) 1) Systematic risk is measured by ? BETA 2)Proposed assets can be evaluated using the company cost of capital providing that the:? new assets have the same risk as existing assets. 3) The sensitivity of a stock's returns to the returns on a market portfolio is referred to as the ? stock's beta. 4) A proposed investment must earn at least as much as the ______ if it is to be deemed acceptable.? project cost of capital 5)If Treasury bills are yielding 10% at a time when the market risk premium is 6%, then the ? market portfolio should yield 16% = 10% + 6% 6) What is the beta of a three-stock portfolio including 25% of Stock A with a beta of .90, 40% Stock B with a beta of 1.05, and 35% Stock C with a beta of 1.7 = Portfolio Beta = (.25 x 0.9) + (.4 x 1.05) + (.35 x 1.73) = .225 + .42 + .606 = 1.25 7)If Treasury bills yield 6.0% and the market risk premium is 9.0%, then a portfolio with a beta of 1.5 would be expected to yield ? Expected return = 6.0% + 1.5(9.0%) = 19.5% 8) What rate of return should an investor expect for a stock that has a beta of 0.8 when the market is expected to yield 14% and Treasury bills offer 6%? r = rf + B(rm - rf) = 6% + .8(14% - 6%) = 6% + 6.4% = 12.4% watch out ( .8(14% - 6%) = 0.064 turn to decimal 6.4%) 9) Why do stock market Investors appear not to be concerned with unique risks when calculating Expected rates of return? Unique Risks are assumed to be diversified away 10)If A security plots below the security market line, it is ? offering Too little return to justify its risk. 11) The slope of the regression line that exhibits the past relationship between a Stock's return and the market's return is the ? stock's Beta. 12) Which of the Following statements is more likely to be correct concerning the statement, "Stock A has a higher expected return than Stock B"? Stock A has a higher beta 13) 13.The company cost of Capital may be an inappropriate discount rate for a capital budgeting proposal If ? the Proposal has a different degree of risk.