a.Stock B’s required rate of return is twice that of Stock A. b.If Stock A’s required return is 11 percent, the market risk premium is 5 percent.c.If the risk-free rate increases (but the market risk premium stays unchanged),Stock B’s required return will increase by more than Stock A’s.d.Statements b and c are correct.e.All of the statements above are correct.
CAPM and required returnAnswer: a Diff: M
9.Bradley Hotels has a beta of 1.3, while Douglas Farms has a betaof 0.7. The market return is 12 percent. The risk-free rate ofinterest is 7 percent. By how much does Bradley’s requiredreturn exceed Douglas’ required return?a.3.0%b.6.5%c.5.0%d.6.0%e.7.0%
Portfolio returnAnswer: a Diff: E
10.An investor is forming a portfolio by investing $50,000 in stock A that has a betaof 1.50, and $25,000 in stock B that has a beta of 0.90. The return on the market isequal to 6 percent and Treasury bonds have a yield of 4 percent. What is therequired rate of return on the investor’s portfolio?a.6.6% b.6.8%c.5.8%d.7.0%e.7.5%
Portfolio betaAnswer: e Diff: M
11.Walter Jasper currently manages a $500,000 portfolio. He is expecting to receive anadditional $250,000 from a new client. The existing portfolio has a required return of 10.75 percent. The risk-free rate is 4 percent and the return on the market is 9 percent. If Walter wants the required return on the new portfolio to be 11.5 percent,what should be the average beta for the new stocks added to the portfolio?a.1.50 b.2.00c.1.67d.1.35e.1.80
Required returnAnswer: c Diff: M
12.You are holding a stock that has a beta of 2.0 and is currently in equilibrium. Therequired return on the stock is 15 percent, and the market return is 10 percent.What would be the
percentage change in the return
on the stock, if the marketreturn increased by 30 percent while the risk-free rate remained unchanged?