Final Flashcards
Suppose that in the coming year, you expect Exxon-Mobil to have a volatility of 42% and a beta of 0.9, and Merck’s stock to have a volatility of 24% and a beta of 1.1. The risk free interest rate is 4% and the market’s expected return is 12%.
- Which stock has the highest total risk?
C) Exxon-Mobil since it has a higher volatility
Suppose that in the coming year, you expect Exxon-Mobil to have a volatility of 42% and a beta of 0.9, and Merck’s stock to have a volatility of 24% and a beta of 1.1. The risk free interest rate is 4% and the market’s expected return is 12%.
2. Which stock has the highest systematic risk?
A) Merck since it has a higher Beta
You run a regression of monthly returns of Tapco Inc, an oil and gas producing firm, on the S&P 500 index and come up with the following output for the period 2011 to 2015. Risk free rate is 6% annually.
Return(Tapco) = 0.06% + 0.46 Return (S&P 500) R-squared = 45%
3. What proportion of Tapco’s risk is diversifiable?
D) 55%
You run a regression of monthly returns of Tapco Inc, an oil and gas producing firm, on the S&P 500 index and come up with the following output for the period 2011 to 2015. Risk free rate is 6% annually.
Return(Tapco) = 0.06% + 0.46 Return (S&P 500) R-squared = 45%
4. Based upon the intercept, between 2011 and 2015 you can conclude that the stock:
B) Underperformed CAPM expectations by 0.21%
You run a regression of monthly returns of Tapco Inc, an oil and gas producing firm, on the S&P 500 index and come up with the following output for the period 2011 to 2015. Risk free rate is 6% annually.
5. From your own analysis of Tapco, you think it will return 8.5% to its stockholders at the end of 2016. If the market risk premium is 4% and the risk free rate is 6%, would you:
A) Buy as it is underpriced
- Following is a table of the expected returns and standard deviation (volatility) of two firms. If the correlation between these two stocks is 0.6, what is the standard deviation of a portfolio which is a 50-50 combination of General Mills and Amazon?Expected
Return Standard Deviation
General Mills 0.12 14%
Amazon 0.15 24%
C) 17.1%
- Following is a table of the expected returns and standard deviation (volatility) of two firms. If the correlation between these two stocks is 0.6, what is the standard deviation of a portfolio which is a 50-50 combination of General Mills and Amazon?Expected
Return Standard Deviation
General Mills 0.12 14%
Amazon 0.15 24% - If the risk-free rate is 5% and the expected return of investing in Microsoft is 11.3% and its beta is 0.9, then the market return must be:
D) 12.0%
Which of the following statements is FALSE?
The risk premium of a security is equal to the market risk premium (the amount by which the market’s expected return exceeds the risk-free rate), divided by the amount of market risk present in the security’s returns as measured by its beta with the market.
. Which of the following statements is FALSE?
The volatility of a portfolio depends only on the volatility of the individual stocks.
Suppose that the market portfolio has an expected return of 14% and a volatility of 20%. Sisyphean Industries Inc. is expected to have a volatility of 40% and a 70% correlation with the market portfolio. The risk-free rate is 4%. The required return for Sisyphean Industries Inc. is closest to:
18%
