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(6-2) Assume that the risk-free rate is 5% and th...

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(6-2) Assume that the risk-free rate is 5% and that the market risk premium is 6%. What is the required return on the market, on a stock with a beta of 1.0, and on a stock with a beta of 1.2? (6-6) Required Rate of Return Suppose rRF = 5%, rM = 10%, and rA = 12%. a. Calculate Stock A?s beta b. If Stock A?s beta were 2.0, then what would be A?s new required rate of return? (6-8) Portfolio Beta Suppose you hold a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio?s beta is 1.12. Now, suppose you sell one of the stocks with a beta of 1.0 for $7,500 and use the proceeds to buy another stock whose beta is 1.75. Calculate your portfolio?s new beta. (6-11) Stock R has a beta of 1.5, Stocks has a beta of 0.75, the expected rate of return on an average stock is 13%, and the risk-free rate is 7%. By how much does the required return on the riskier stock exceed that on the less risky stock? 1. Which of the following bonds would have the greatest percentage increase in value if all interest rates fell by 1%? (Points : 6) 10-year, zero coupon bond 20-year, 10% coupon bond 20-year, 5% coupon bond 1-year, 10% coupon bond 20-year, zero coupon bond 2. Which of the following statements is most correct? (Points : 6) Characteristic line is another name for the security market line. The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry. The slope of the characteristic line is the stock's standard deviation. The distance of the plot points from the characteristic line is a measure of the stock's market risk. The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk. 3. Which of the following statements is most correct? (Points : 6) A. Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time. B. Richard Roll has argued that it is not even possible to test the CAPM to see if it is correct. C. Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is less than that predicted by the CAPM. D. Statements A and B are correct. E. Statements A, B, and C are correct. 4. One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the _______ the time is to maturity, the _______ the change in price. (Points : 6) A. longer; smaller B. shorter; larger C. longer; greater D. shorter; smaller E. Answers C and D are correct. 5. Which of the following statements is most correct? (Points : 6) A. All else equal, long-term bonds have more interest rate risk than short-term bonds. B. All else equal, higher coupon bonds have more reinvestment risk than low coupon bonds. C. All else equal, short-term bonds have more reinvestment risk than long-term bonds. D. Statements A and C are correct. E. All of the statements above are correct.

 

Paper#2502 | Written in 18-Jul-2015

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