CHAPTER 8 RISK AND RATES OF RETURN 1, T. Martell Inc.'s stock has a 50% chance of producing a 30% return, a 25% chance of producing a 9% return, and a 25% chance of producing a -25% return. What is Martell's expected return? a. b. c. d. e.
14.4% 15.2% 16.0% 16.8% 17.6%
3, Tom Skinner has $45,000 invested in a stock with a beta of 0.8 and another $55,000 invested in a stock with a beta of 1.4. These are the only two investments in his portfolio. What is his portfolio’s beta? a. b. c. d. e.
0.93 0.98 1.03 1.08 1.13
4, Magee Company's stock has a beta of 1.20, the risk-free rate is 4.50%, and the market risk premium is 5.00%. What is Magee's required return? a. b. c. d. e.
10.25% 10.50% 10.75% 11.00% 11.25%
5, Miller Inc. is considering a capital budgeting project that has an expected return of 10% and a standard deviation of 30%. What is the project's coefficient of variation? a. b. c. d. e.
1.8 2.2 2.6 3.0 3.4
6, You are given the following returns on the Market and on Stock A. Calculate Stock A's beta coefficient. Year 2001 2002 2003 2004 2005
Market -20% -5 40 25 10
Stock J -40% -10 45 40 15
a. b. c. d. e.
1.47 1.54 1.61 1.68 1.75
7, Niendorf Corporation's stock has a required return of 13.00%, the risk-free rate is 7.00%, and the market risk premium is 4.00%. Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2.00%. What is Niendorf's new required return? a. b. c. d. e.
14.00% 15.00% 16.00% 17.00% 18.00%
9, Apex Roofing's stock has a beta of 1.50, its required return is 14.00%, and the risk-free rate is 5.00%. What is the required rate of return on the stock market? (Hint: First find the market risk premium.) a. b. c. d. e.
10.50% 11.00% 11.50% 12.00% 12.50%
13, Assume that you are the portfolio manager of the Delaware Fund, a $4 million mutual fund that contains the following stocks: Stock A B C D
Amount $400,000 $600,000 $1,000,000 $2,000,000
Beta 1.50 0.50 1.25 0.75
The required rate of return in the market is 14.00% and the riskfree rate is 6.00%. What rate of return should investors expect (and require) on their investment in this fund? a. b. c. d. e.
10.90% 11.50% 12.10% 12.70% 13.30%
14, Returns for the Corrigan Company over the last 5 years are shown below. What's the standard deviation of Corrigan's returns? (Hint: this is a sample, not a complete population, so the sample standard deviation formula should be used.)
Year 2005 2004 2003 a. b. c. d. e.
Return 25% -10 30
20.10% 21.79% 23.87% 25.18% 27.54%
15, An analyst believes that economic conditions during the next year will be either Strong, Normal, or Weak, and she thinks that the Corrigan Company's returns will have the following probability distribution. What's the standard deviation of Corrigan's returns as estimated by this analyst? Conditions Strong Normal Weak a. b. c. d. e.
Probability 30% 40 30
Return 30% 15 -10
12.34% 13.41% 14.87% 15.68% 16.94%
81, A stock has a required return of 12.25%. The beta of the stock is 1.15 and the risk-free rate is 5%. What is the market risk premium? a. 1.30% b. 6.50% c. 15.00% d. 6.30% e. 7.25%
