Rate of Return and Stock
Ashley King
Fin 534
Chapter 6 Hwrk
Feb 2nd, 2014
1. You are considering investing in one of the these three stocks:
Answer: B, B;A
2. Your friend is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. She is highly risk averse and has asked for your advice. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?
Answer: B, Stock B Since she has a portfolio the number is held as one of the numbers of assets in a portfolio. It would would not matter since she has other stocks in the portfolio. The others can still hold weight while the others being successful as well.
3. Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?
Answer: B The beta of an "average stock," or "the market," can change over time, sometimes drastically. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
4. Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true about these securities? (Assume market equilibrium.)
Answer: C The expected return on Stock A should be greater than that on B. Market equilibrium can be expressed two different ways, expected return= required return and Market prices=Intrinsic value. Stock A is higher so therefore it will probably have a higher return rate.
5. Which of the following statements is CORRECT?
Answer: B The beta coefficient of a stock is normally found by regressing past returns on a stock against past market
Fin 534
Chapter 6 Hwrk
Feb 2nd, 2014
1. You are considering investing in one of the these three stocks:
Answer: B, B;A
2. Your friend is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. She is highly risk averse and has asked for your advice. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?
Answer: B, Stock B Since she has a portfolio the number is held as one of the numbers of assets in a portfolio. It would would not matter since she has other stocks in the portfolio. The others can still hold weight while the others being successful as well.
3. Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?
Answer: B The beta of an "average stock," or "the market," can change over time, sometimes drastically. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
4. Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true about these securities? (Assume market equilibrium.)
Answer: C The expected return on Stock A should be greater than that on B. Market equilibrium can be expressed two different ways, expected return= required return and Market prices=Intrinsic value. Stock A is higher so therefore it will probably have a higher return rate.
5. Which of the following statements is CORRECT?
Answer: B The beta coefficient of a stock is normally found by regressing past returns on a stock against past market