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Texas BUS 305350 BUSINESS FINANCE final exam-Compute the expected return given these three economic states...




Question;Question 1;Compute the expected return given these three economic;states, their likelihoods, and the potential returns. Fast growth state;probability is 0.1 and return is 50%. Slow growth state: probability is 0.6 and;return is 8%. Recession state: probability is 0.3 and return is -10%.;6.8%;12.8%;16.0%;22.7%;5.9 points;Question 2;The standard deviation of returns of: I.small capitalization;stocks is higher than that of large capitalization stocks. II. large;capitalization stocks is lower than that of corporate bonds.III.corporate bonds;is higher than that of Treasury bills.Which statement is true?;I and III;I, II, and III;I and II;I only;5.9 points;Question 3;Diversification is a process that;reduces idiosyncratic risk by holding a huge number of;stocks.;reduces stock returns by holding a huge number of stocks.;reduces idiosyncratic risk by holding stocks that do not;move together.;reduces stock returns by investing more on risk-free assets.;5.9 points;Question 4;Treasury bill returns are 5%, 4%, 3%, and 6% over four;years. The standard deviation of returns of Treasury bills is;1.51%;1.11%;1.00%;1.29%;5.9 points;Question 5;Common risk is also;diversifiable risk;systematic risk;unsystematic risk;independent risk;5.9 points;Question 6;Which of the following is NOT a diversifiable risk?;the risk that oil prices rise, increasing production costs;the risk that the CEO is killed in a plane crash;the risk of a key employee being hired away by a competitor;the risk of a product liability lawsuit;5.9 points;Question 7;Compute the expected return given these three economic;states, their likelihoods, and the potential returns: Fast Growth State has a;probability of 0.3 and 40% return. Slow Growth State has a probability of 0.4;and 15% return. Recession State has a probability of 0.3 and -15% return.;7.1%;13.50%;21.34%;38.95%;5.9 points;Question 8;A company has a beta of 3.75. If the market return is;expected to be 20 percent and the risk-free rate is 9.5 percent, what is the;company's required return?;33.25%;39.375%;48.875%;55.625%;5.9 points;Question 9;This is defined as the portion of total risk that is not;diversifiable.;firm specific risk;market risk;modern portfolio risk;total risk;5.9 points;Question 10;Which statement is incorrect about portfolios and single;stocks.;Usually portfolios have better risk return tradeoff than;single stocks.;Investors should hold portfolios instead of one single stock;in their retirement accounts.;Single stocks always provide better returns because they are;riskier.;Single stocks are not necessary to provide higher returns;than portfolios.;5.9 points;Question 11;If you hold a portfolio composed of Apple stocks and Costco;stocks and you have 100 shares of Apple and 200 shares of Costco. Apple stocks;are trading at $189 per share and Costco stocks are trading at $112 per share.;What are the weights of Apple and Costco?;45.8%, 54.2%;45.8%, 44.2%;61.3%, 38.7%;61.3%, 44.7%;5.9 points;Question 12;A portfolio of stocks can achieve diversification benefits;if the stocks that comprise the portfolio are;not perfectly correlated;perfectly correlated;susceptible to common risks only;both B and C;5.9 points;Question 13;A stock is bought for $22.00 and sold for $26.00 one year;later, immediately after it has paid a dividend of $1.50. What is the capital;gain rate for this transaction;0.27%;4.00%;15.00%;18.18%;5.9 points;Question 14;Stock A s beta is 1.4 with standard deviation 23%. Stock B s;beta is 0.9 with standard deviation 26%. Both stock A and stock B are fairly;priced and traded on the US market only. Which one of the following statement;is correct?;Stock A has more unsystematic risk.;Stock A has lower beta.;Stock B has more unsystematic risk.;Stock B has less total risk.;5.9 points;Question 15;Suppose you invest $20,000 by purchasing 200 shares of;Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share;and 100 shares of Ball Corporation (BLL) at $40 per share. The weight of Abbott;Labs in your portfolio is;50%;40%;30%;20%;5.9 points;Question 16;This is defined as the portion of total risk that is;attributable to firm or industry factors and can be reduced through;diversification.;firm specific risk;market risk;modern portfolio risk;total risk;5.9 points;Question 17;MedTech Corp stock was $50.95 per share at the end of last;year. Since then, it paid a $0.45 per share dividend. The stock price is;currently $62.50. If you owned 500 shares of MedTech, what was your percent;return?;7.20%;8.83%;22.67%;23.55%


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