EXAM 2 Topic 8 Quiz Flashcards
You are evaluating a stock return. You are expecting the stock return to change based on economy status. You are expecting that the probability of recession is 20%, normal is 30% and boom is 50%, and returns are -10%, 5%, and 13% respectively. What is the expected rate of return on this stock?
The rate of return on the common stock of Flowers by Flo is expected to be 14 percent in a boom economy, 8 percent in a normal economy, and only 2 percent in a recessionary economy. The probabilities of these economic states are 30 percent for a boom, 50 percent for a normal economy, and 20 percent for a recession. What is the standard deviation of returns for this investment?
What is the expected return of two-stock portfolio if you invest 30% of your investment into a stock with the expected return of 13% and 70% into a stock with the expected return of 8%?
Total value of portfolio = $50,000 + $200,000 + $100,000 + $150,000 = $500,000
Beta of portfolio = (Weight of stock A * Beta of stock A) + (Weight of stock B * Beta of stock B) + (Weight of stock C * Beta of stock C) + (Weight of stock D * Beta of stock D)
Beta of portfolio = [($50,000/$500,000) * 0.7] + [($200,000/$500,000) * 1.1] + [($100,000/$500,000) * 2.1] + [($150,000/$500,000) * 2.4]
Beta of portfolio = 1.65
Hoogle has the beta of 1.75 which you calculated by running a regression. The annual T-bill rate is currently at 2.5%. Your projection of the market risk premium is 7.0%. Hoogle just paid a dividend of $1.50. What is the required rate of return for this equity?
You are analyzing a common stock with a beta of 2.8. The risk-free rate of interest is 5 percent and the expected return on the market is 10 percent. What is the stock’s equilibrium required rate of return?
Kirtland Signature Inc. has the expected return of 20 percent. The stock has a beta of 1.4. The risk-free rate is 7% and the market return is 10%. Should you buy this stock?
