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FIN3400 Ch 10 SMARTBOOK Questions with
Detailed Verified Answers
A stock has a beta of 1.2, the market rate of return is 11.3 percent, and the risk-free
rate is 4.2 percent. How is the expected return on the stock computed?
Ans: E(R) = 0.042 + 1.2(0.113 - 0.042)
Which of the following will decrease the risk level of a firm? Select all that apply.
Ans: -Accepting a low-risk project
Rationale:
This will lower the firm's risk level.
-Acquiring a less risky firm
Rationale:
This will decrease the firm's risk level.
Which of these illustrates the definition of a probability distribution?
Ans: There is a 60 percent chance of rain and a 40 percent chance of pure sunshine.
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There is a 5 percent chance of a depression, 25 percent chance of a recession, and a
70 percent chance of a normal economy. A stock will return 45 percent in a
depression, 36 percent in a recession and 5 percent in a normal economy. What is the
expected return?
Ans: 14.75 percent
Rationale:
E(R) = (0.05 × 0.45) + (0.25 × 0.36) + (0.70 × 0.05) = 0.1475 = 14.75%
There is a 75 percent chance the economy will boom and 25 percent chance it will be
normal. If it booms, a stock will return 23 percent but if it is normal, the stock will lose
15 percent. Illustrate the expected return calculation.
Ans: E(R) = (0.75 × 0.23) + (0.25 × -0.15)
The risk-free rate is 3.2 percent while the market risk premium is 8.9 percent. How is
the expected return for a stock with a beta of 0.98 computed?
Ans: E(R) = 0.032 + 0.98(0.089)
Which of the following will increase the risk level of a firm? Select all that apply.
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Ans: -Selling the lowest-risk division
Rationale:
This will increase the firm's risk level as will accepting riskier projects or acquiring a
riskier firm.
-Accepting riskier projects
Rationale:
This will increase the firm's risk level as will selling the lowest risk-division or acquiring
a riskier firm.
-Acquiring a riskier firm
Rationale:
This will increase the firm's risk level.
Which one of these best illustrates a probability distribution at it relates to next year's
economy?
Ans: 40 percent chance of recession; 60 percent chance of a normal economy
Which one of these should be used to estimate future stock performance?
© Get it right 2025 Getaway - Stuvia US All rights reserved
FIN3400 Ch 10 SMARTBOOK Questions with
Detailed Verified Answers
A stock has a beta of 1.2, the market rate of return is 11.3 percent, and the risk-free
rate is 4.2 percent. How is the expected return on the stock computed?
Ans: E(R) = 0.042 + 1.2(0.113 - 0.042)
Which of the following will decrease the risk level of a firm? Select all that apply.
Ans: -Accepting a low-risk project
Rationale:
This will lower the firm's risk level.
-Acquiring a less risky firm
Rationale:
This will decrease the firm's risk level.
Which of these illustrates the definition of a probability distribution?
Ans: There is a 60 percent chance of rain and a 40 percent chance of pure sunshine.
© Get it right 2025 Getaway - Stuvia US All rights reserved
,Click here for more: Scholars nexus
There is a 5 percent chance of a depression, 25 percent chance of a recession, and a
70 percent chance of a normal economy. A stock will return 45 percent in a
depression, 36 percent in a recession and 5 percent in a normal economy. What is the
expected return?
Ans: 14.75 percent
Rationale:
E(R) = (0.05 × 0.45) + (0.25 × 0.36) + (0.70 × 0.05) = 0.1475 = 14.75%
There is a 75 percent chance the economy will boom and 25 percent chance it will be
normal. If it booms, a stock will return 23 percent but if it is normal, the stock will lose
15 percent. Illustrate the expected return calculation.
Ans: E(R) = (0.75 × 0.23) + (0.25 × -0.15)
The risk-free rate is 3.2 percent while the market risk premium is 8.9 percent. How is
the expected return for a stock with a beta of 0.98 computed?
Ans: E(R) = 0.032 + 0.98(0.089)
Which of the following will increase the risk level of a firm? Select all that apply.
© Get it right 2025 Getaway - Stuvia US All rights reserved
, Click here for more: Scholars nexus
Ans: -Selling the lowest-risk division
Rationale:
This will increase the firm's risk level as will accepting riskier projects or acquiring a
riskier firm.
-Accepting riskier projects
Rationale:
This will increase the firm's risk level as will selling the lowest risk-division or acquiring
a riskier firm.
-Acquiring a riskier firm
Rationale:
This will increase the firm's risk level.
Which one of these best illustrates a probability distribution at it relates to next year's
economy?
Ans: 40 percent chance of recession; 60 percent chance of a normal economy
Which one of these should be used to estimate future stock performance?
© Get it right 2025 Getaway - Stuvia US All rights reserved
