finance - bonds and their valuation
Use the following information for Questions 1 and 2:
A stock has a required return on 11 percent. The risk-free is 7 percent, and the market risk premium is 4 percent.
What is the stock’s beta?
1.2
1.1
1.0*
0.9
If the market risk premium increases to 6 percent, what will happen to the stock’s required rate of return?
6.00%
7.00%
11.00%
13.00%*
Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average stock is 13 percent, and the risk-free rate of return is 7 percent. By how much does the required return on the riskier stock exceed the required return on the less risky stock?
2.5%
3.0%
3.5%
4.5%*
An investment has a 50% chance of producing a 20% return, a 25% chance of producing an 8% return, and a 25% chance of producing a -12% return. What is its expected return? (9%)
Stocks X & Y have the following probability distributions of expected future returns:
Probability X Y 0.1 (10%) (35%) 0.2 2 0 0.4 12 20 0.2 20 25 0.1 38 45
a. Calculate the expected rate of return, rY, for stock Y. (rX = 12%)
b. Calculate the standard deviation of expected returns, for Stock X. (Y = 20.35%)
Now calculate the coefficient of variation for Stock Y.
a. rY= 0.1(-35%) + 0.2(0%) + 0.4(20%) + 0.2(25%) + 0.1(45%)
= 14% versus 12% for X.
b. = (-10% – 12%)2(0.1) + (2% – 12%)2(0.2) + (12% – 12%)2(0.4)
+ (20% – 12%)2(0.2) + (38% – 12%)2(0.1) = 148.8%.
X = 12.20% versus 20.35% for Y.
CVX = X/ rX = 12.20%/12% = 1.02, while
CVY = 20.35%/14% = 1.45.
Suppose you are the money manager of a $4 million investment fund. The fund consists of 4 stocks with the following investments and betas:
Stock Investment Beta A $400,000 1.50 B 600,000 (.50) C 1,000,000 1.25 D 2,000,000 0.75
If the market’s required rate of return is 14% and the risk-free rate is 6%, what is the funds
A stock has a required return on 11 percent. The risk-free is 7 percent, and the market risk premium is 4 percent.
What is the stock’s beta?
1.2
1.1
1.0*
0.9
If the market risk premium increases to 6 percent, what will happen to the stock’s required rate of return?
6.00%
7.00%
11.00%
13.00%*
Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average stock is 13 percent, and the risk-free rate of return is 7 percent. By how much does the required return on the riskier stock exceed the required return on the less risky stock?
2.5%
3.0%
3.5%
4.5%*
An investment has a 50% chance of producing a 20% return, a 25% chance of producing an 8% return, and a 25% chance of producing a -12% return. What is its expected return? (9%)
Stocks X & Y have the following probability distributions of expected future returns:
Probability X Y 0.1 (10%) (35%) 0.2 2 0 0.4 12 20 0.2 20 25 0.1 38 45
a. Calculate the expected rate of return, rY, for stock Y. (rX = 12%)
b. Calculate the standard deviation of expected returns, for Stock X. (Y = 20.35%)
Now calculate the coefficient of variation for Stock Y.
a. rY= 0.1(-35%) + 0.2(0%) + 0.4(20%) + 0.2(25%) + 0.1(45%)
= 14% versus 12% for X.
b. = (-10% – 12%)2(0.1) + (2% – 12%)2(0.2) + (12% – 12%)2(0.4)
+ (20% – 12%)2(0.2) + (38% – 12%)2(0.1) = 148.8%.
X = 12.20% versus 20.35% for Y.
CVX = X/ rX = 12.20%/12% = 1.02, while
CVY = 20.35%/14% = 1.45.
Suppose you are the money manager of a $4 million investment fund. The fund consists of 4 stocks with the following investments and betas:
Stock Investment Beta A $400,000 1.50 B 600,000 (.50) C 1,000,000 1.25 D 2,000,000 0.75
If the market’s required rate of return is 14% and the risk-free rate is 6%, what is the funds