FIN 4305 (Investments) Test HW 4 with Answers (100 out of 100 points)

FIN 4305 (Investments) – Test HW 4 with Answers – June 2022 (100 out of 100 points) Questions 1. Which of the following well-diversified portfolios would all rational investors prefer? Portfolio E(r) σ A .22 .26 B .15 .17 2. A friend has some reliable information that a certain stock is going to rise from $60 to $65 per share over the next year. The return on the S&P 500 is expected to be 10% and the 90-day T-bill rate is 2%. If the stock's beta is .9, should you purchase the stock? (Assume the CAPM is valid) 3. Any portfolio is mean-variance efficient it has the lowest risk for a given level of return among the attainable set of portfolios. 4. Calculate the required return for ABC industries which has a beta of 1.75 when the risk free rate is 0.03 and the market return is 0.11. 5. The expected return for XYZ stock calculated using the CAPM is 13% and its beta is 1.5. The return on the market portfolio is 10%. Calculate the risk free rate. Round intermediate steps and your final answer to four decimals. Enter your answer in decimal format (EX: .XXXX) . 6. The expected return for PQU stock calculated using the CAPM is 12%. The risk free rate is 5% and the beta of the stock is 1. Calculate the market risk premium. Round intermediate steps and your final answer to four decimals. Enter your answer in decimal format (EX:.XXXX). 7. As the correlation coefficient between two stocks increases, the benefits of diversification received by combining them into a portfolio also increase. 8. The risk return profiles of four stocks are shown in the following table. Stock Expected Return Standard Deviation W 0.09 0.21 X 0.05 0.07 Y 0.15 0.36 Z 0.12 0.11 Assuming that someone wishes place all their investment dollars in one of these stocks, which of the following statements is true? 9. Suppose two stocks are perfectly positively correlated. If you create a two stock portfolio by purchasing both of them, the standard deviation of that portfolio will be the weighted average of the standard deviations of each asset. 10. Suppose a stock has an expected return of 12%, while the risk free rate and market risk premium are 3% and 10%, respectively. Find the stock's beta. Round intermediate steps and your final answer to four decimals. 11. A portfolio is comprised of three stocks. Stock A comprises 35 percent of the portfolio and has a beta of 1.5. Stock B represents 15% of the portfolio and has a beta of 1.60. Stock C has a beta of -.2. Find the required rate of return for the portfolio if the return on the market is 22% and the risk-free rate is 5%. 12. Suppose a portfolio has a beta and standard deviation of zero. If the market is in equilibrium, the return for such a portfolio must be zero. 13. The CAPM assumes that the only risk relevant to an asset's expected return are non-diversifiable risk factors. 14. Use the following information to answers the next four questions. Assume that you invested $30,000 in stock X and $30,000 in stock Y Year Stock X Return Stock Y Return Jan. 2013 -5% 8% Jan. 2012 15% 8% Jan. 2011 20% 20% Find the rate of return you earned on your portfolio. Round intermediate steps and your final answer to four decimals. Enter your answer in decimal format (EX: .XXXX) 15. Find the standard deviation of stock X's returns. Round intermediate steps to four decimals. 16. Find the standard deviation of stock Y's returns. Round intermediate steps to four decimals. 17. Find the standard deviation of your portfolio. Assume the correlation coefficient between stocks X and Y is .655. Round intermediate steps and your final answer to four decimals. Enter your answer in decimal format (EX: .XXXX). 18. Correlation coefficient measures the degree to which two variables move together over time. 19. Which one of the following announcements is most apt to cause the price of a firm's stock to change? 20. Which one of the following is the best example of unsystematic risk?