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Exam 8: Analysis of Risk and Return

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Question 41

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List types of events that influence systematic (non-diversifiable) risk.

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Events that are broad in scope and affec...

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Question 42

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Which of the following is not an example of a source of systematic risk?

A) interest rate changes
B) foreign competition with an industry's products
C) changes in the overall economic outlook
D) changes in the inflation rate

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Question 43

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If the return on U.S.Treasury bills is 7.02%, the risk premium is 2.32%, and the inflation rate is 4.16%, then the real rate of return is:

According to the , long-term interest rates are a function of expected short-term interest rates.

Determine the beta of a portfolio consisting of the following common stocks:

The is a relative measure of variability because it measures the risk per unit of expected return.

Kermit Industries current common stock dividend is $1.35 per share and the dividend is expected to grow at 6% per year into the foreseeable future.Currently the risk-free rate is 4.5% and the estimated market risk premium is 8.5%.Merrill Lynch has estimated KI's beta to be 1.10.Compute the expected price for KI's common stock.

Elephant Company common stock has a beta of 1.2.The risk-free rate is 6 percent and the expected market rate of return is 12 percent.Determine the required rate of return on the security.

The of a portfolio of two or more securities is equal to the weighted average of the of each of the individual securities in the portfolio.

Values of the can range from +1.0 to -1.0.

Christy is considering investing in the common stock of One Liberty and Heico.The following data are available for these two securities: $\begin{array} { l c c } \text { Fanected return } & \frac { \text { One liberty } } { 12 } & \frac { \text { Helca } } { .16 } \\\text { Standard Aeriation of return } & 08 & 20\end{array}$ If she invests 30% of her funds in Heico and 70% in One Liberty, and if the correlation of returns between these securities is +0.65, what is the portfolio's expected return and standard deviation?

The following yields on 20 year bonds prevailed in January for the three securities shown: Aa-rated corporate bond 9.98% Baa-rated corporate bond 10.34% B-rated corporate bond 11.12% The difference in yields is due primarily to

Investors can obtain high returns in their investments if:

Arbitrage pricing theory is a model that relates expected returns on securities to

Gates Industries current common stock dividend (year 0) is $2.50 per share and is expected to continue growing at a rate of 5% per year for the foreseeable future.Currently the risk-free rate is 7.5% and the estimated market risk premium (i.e., km - rf) is 8.3%.Value Line has estimated Gates Industries beta to be 1.10.Determine the expected price for Gates Industries common stock.

Phoenix Company common stock is currently selling for $20 per share.Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now: Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the standard deviation of possible rates of return on Phoenix stock (to the nearest tenth of a percent) .

The expected rate of return for 3COM is 18 percent, with a standard deviation of 10.98 percent.The expected rate of return for Just the Fax is 26 percent with a standard deviation of 15.86%.Which firm would be considered the riskier from a total risk perspective?

The yield to maturity on ACL bonds maturing in 2005 is 8.75 percent.The yield to maturity on a similar maturity U.S.Government Treasury bond in 7.06 percent and the yield on Treasury bills is 6.51 percent.What is the default risk premium on the ACL bond?

can be achieved by investing in a set of securities that have different risk-return characteristics.

Assume that the rate of return on Calengry common stock over the coming year is normally distributed with an expected value of 16% and a standard deviation of 20%.What is the probability of earning a negative rate of return? (Note: Table Vis required to work this problem.)