Midterm Exam Contribution

Formulas

rs = rF + b(rM - rF).

1. Last year Mike bought 100 shares of Dallas Corporation common stock for $53 per share.
During the year he received dividends of $1.45 per share. The stock is currently selling for $60
per share. What rate of return did Mike earn over the year?
A) 11.7 percent
B) 13.2 percent
C) 14.1 percent
D) 15.9 percent
Answer: D

2. Nico bought 100 shares of Cisco Systems stock for $24.00 per share on January 1, 2002. He
received a dividend of $2.00 per share at the end of 2002 and $3.00 per share at the end of 2003.
At the end of 2004, Nico collected a dividend of $4.00 per share and sold his stock for $18.00
per share. What was Nico's realized holding period return? What was Nico's compound annual
rate of return?
A) -12.5%; -4.4%
B) +12.5%; +4.4%
C) -16.7%; -4.4%
D) +16.7%; +4.4%
Answer: B

3. Given the returns of two stocks J and K in the table below over the next 4 years. Find the
expected return and standard deviation of holding a portfolio of 40% of stock J and 60% in stock
K over the next 4 years:

Stock J Stock K
2010 10% 9%
2011 12% 8%
2012 13% 10%
2013 15% 11%

A) 10.6% and 1.34%

B) 10.6% and 1.79%
C) 10.6% and 1.16%
D) 14.3% and 2.02%

Answer: A

4. You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows:

Given the information in Table 8.2, what is the expected annual return of this portfolio?
A) 11.4%
B) 10.0%
C) 11.0%
D) 11.7%
Answer: C

5. What is the expected market return if the expected return on asset X is 20 percent, its beta is
1.5, and the risk free rate is 5 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 22.5%
Answer: C
6. AssetY has a beta of 1.2. The risk-free rate of return is 6 percent, while the return on the
market portfolio of assets is 12 percent. The asset's market risk premium is
A) 7.2 percent.
B) 6.0 percent.
C) 13.2 percent.
D) 10 percent.
Answer: B

7. AssetP has a beta of 0.9. The risk-free rate of return is 8 percent, while the return on the
market portfolio of assets is 14 percent. The asset's required rate of return is
A) 13.4 percent.
B) 6.0 percent.
C) 5.4 percent.
D) 10 percent.
Answer: A

8. What is the expected risk-free rate of return if asset X, with a beta of 1.5, has an expected
return of 20 percent, and the expected market return is 15 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 22.5%
Answer: A
Topic: Capital Asset Pricing Model (CAPM)

9.The expected value, standard deviation of returns, and coefficient of variation for asset A are
(See below.)

Asset A

A) 10 percent, 8 percent, and 1.25, respectively.

B) 9.33 percent, 8 percent, and 2.15, respectively.
C) 9.35 percent, 4.68 percent, and 2.00, respectively.
D) 9.35 percent, 2.76 percent, and 0.295, respectively.
Answer: D

10. The expected value and the standard deviation of returns for asset A is (See below.)

Asset A

A) 12 percent and 4 percent

B) 12.7 percent and 2.3 percent
C) 12.7 percent and 4 percent
D) 12 percent and 2.3 percent

Answer: B