Present Value

Question 1

Sort the following industries from the lowest to highest beta:

a. Information Technology
b. Automobile
c. Brewery

Answer 1

C
A
B

Question 2

A stock has a beta of 2, risk-free returns are 2%. If this year the market returns 10% more than the risk-free return, how much do you expect the stock to return?

Answer 2

22%.

The stock EXCESS return amplifies the market EXCESS return

Question 3

A stock has a beta of 2, risk-free returns are 2%, and the market risk premium is 5%. How much do you expect the stock to return in the long run?

Answer 3

12

Question 4

A stock has a positive factor beta with respect to the Fama-French SMB factor. This implies:

• That the stock reacts more like a large stock
• That the stock reacts more like a small stock
• That the stock reacts more like a stock with high Market to Book ratio
• That the stock reacts more like a stock with low Market to Book ratio

Answer 4

THAT THE STOCK REACTS MORE LIKE A SMALL STOCK

Question 5

Everything else equal according to Fama French results cash flows produced by firms with high Book to Market ratios:

• Should be discounted at a higher discount factor
• Should be discounted at a lower discount factor

Answer 5

SHOULD BE DISCOUNTED AT A HIGHER DISCOUNT FACTOR