Chapter 5

Chapter 5
Risk and Return

Learning Goal 1: Understand the meaning and fundamentals of risk,
return, and risk
preferences.
5.1.1) For the risk-seeking manager, no change in return would e re!uired for an
increase in risk.
"nswer: F"L#$
Topic: Fundamentals of Risk and Return
5.1.%) For the risk-a&erse manager, re!uired return would decrease for an increase in
risk.
"nswer: F"L#$
5.1.') For the risk-indi(erent manager, no change in return would e re!uired for an
increase in risk.
"nswer: )*U$
5.1.+) ,ost managers are risk-a&erse, since for a gi&en increase in risk there!uire
an increase in
return.
"nswer: )*U$
5.1.5) )he return on an asset is the change in its &alue plus an- cash distriution o&er
a gi&en period
of time, e.pressed as a percentage of its ending &alue.
"nswer: F"L#$
Topic: Measuring Single Asset Return
5.1./) For the risk-a&erse manager, the re!uired return decreases for an increase in
risk.
"nswer: F"L#$
5.1.0) 1n&estment " guarantees its holder 2133 return. 1n&estment 4 earns 23 or
2%33 with e!ual
chances 5i.e., an a&erage of 2133) o&er the same period. 4oth in&estments ha&e
e!ual risk.
"nswer: F"L#$
5.1.6) 4usiness risk is the chance that the 7rm will e unale to co&er its operating
costs and is
a(ected - a 7rms re&enue stailit- and the structure of its operating costs 57.ed &s.
&ariale).
"nswer: )*U$
5.1.8) Financial risk is the chance that the 7rm will e unale to co&er its operating
costs and is
a(ected - a 7rms re&enue stailit- and the structure of its operating costs 57.ed &s.
&ariale).
"nswer: F"L#$
9hapter 5 *isk and *eturn 1/'
5.1.13) 1nterest rate risk is the chance that changes in interest rates will ad&ersel-
a(ect the &alue of an
in&estment: most in&estments decline in &alue when the interest rates rise and
increase in &alue
when interest rates fall.
"nswer: )*U$
5.1.11) Li!uidit- risk is the chance that changes in interest rates will ad&ersel- a(ect
the &alue of an
in&estment: most in&estments decline in &alue when the interest rates rise and
increase in &alue
when interest rates fall.
"nswer: F"L#$
5.1.1%) ,arket risk is the chance that the &alue of an in&estment will decline ecause
of market factors
5such as economic, political, and social e&ents) that are independent of the
in&estment.
"nswer: )*U$
5.1.1') 1nterest rate risk is the chance that the &alue of an in&estment will decline
ecause of market
factors 5such as economic, political, and social e&ents) that are independent of the
in&estment.
"nswer: F"L#$
5.1.1+) $&ent risk is the chance that a totall- une.pected e&ent will ha&e a signi7cant
e(ect on the
&alue of the 7rm or a speci7c in&estment.
"nswer: )*U$
5.1.15) ,arket risk is the chance that a totall- une.pected e&ent will ha&e a
signi7cant e(ect on the
&alue of the 7rm or a speci7c in&estment.
"nswer: F"L#$
5.1.1/) ;urchasing-power risk is the chance that changes in interest rates will
ad&ersel- a(ect the
&alue of an in&estment: most in&estments decline in &alue when the interest rates
rise and
increase in &alue when interest rates fall.
"nswer: F"L#$
5.1.10) 1f a persons re!uired return does not change when risk increases, that person
is said to e
") risk-seeking.
4) risk-indi(erent.
9) risk-a&erse.
<) risk-aware.
"nswer: 4
1/+ Gitman = Principles of Managerial Finance, 1%e
5.1.16) 1f a persons re!uired return decreases for an increase in risk, that person is
said to e
") risk-seeking.
4) risk-indi(erent.
9) risk-a&erse.
<) risk-aware.
"nswer: "
5.1.18) >>>>>>>> is the chance of loss or the &ariailit- of returns associated with a
gi&en asset.
") *eturn
4) ?alue
9) *isk
<) ;roailit-
"nswer: 9
5.1.%3) )he >>>>>>>> of an asset is the change in &alue plus an- cash distriutions
e.pressed as a
percentage of the initial price or amount in&ested.
") return
4) &alue
9) risk
<) proailit-
"nswer: "
5.1.%1) *isk a&ersion is the eha&ior e.hiited - managers who re!uire a 5n)
>>>>>>>>.
") increase in return, for a gi&en decrease in risk
4) increase in return, for a gi&en increase in risk
9) decrease in return, for a gi&en increase in risk
<) decrease in return, for a gi&en decrease in risk
"nswer: 4
5.1.%%) 1f a person re!uires greater return when risk increases, that person is said to
e
") risk-seeking.
4) risk-indi(erent.
9) risk-a&erse.
<) risk-aware.
"nswer: 9
5.1.%') Last -ear ,ike ought 133 shares of <allas 9orporation common stock for
25' per share.
<uring the -ear he recei&ed di&idends of 21.+5 per share. )he stock is currentl-
selling for 2/3
per share. @hat rate of return did ,ike earn o&er the -earA
") 11.0 percent.
4) 1'.% percent.
9) 1+.1 percent.
<) 15.8 percent.
"nswer: <
Topic: Holding Period Return (Equation 5!"
9hapter 5 *isk and *eturn 1/5
5.1.%+) ;rime-grade commercial paper will most likel- ha&e a higher annual return
than
") a )reasur- ill.
4) a preferred stock.
9) a common stock.
<) an in&estment-grade ond.
"nswer: "
Topic: Risk and Return Fundamentals
5.1.%5) ;err- purchased 133 shares of Ferro, 1nc. common stock for 2%5 per share
one -ear ago. <uring
the -ear, Ferro, 1nc. paid cash di&idends of 2% per share. )he stock is currentl- selling
for 2'3
per share. 1f ;err- sells all of his shares of Ferro, 1nc. toda-, what rate of return would
he
realiBeA
"nswer: *ealiBed return C 2'3 - 2%5 D 2%
2%5
C %6E
5.1.%/) )im purchased a ounce house one -ear ago for 2/,533. <uring the -ear it
generated 2+,333 in
cash Fow. 1f )ime sells the ounce house toda-, he could recei&e 2/,133 for it. @hat
would e
his rate of return under these conditionsA
"nswer: *ealiBed return C 2/,133 - 2/,533 D 2+,333
2/,533
C 55E
5.1.%0) "sset " was purchased si. months ago for 2%5,333 and has generated 21,533
cash Fow during
that period. @hat is the assets rate of return if it can e sold for 2%/,053 toda-A
"nswer: *ealiBed return C 2%/,053 - 2%5,333 D 21,533
2%5,333
C 1'E
"nnual rate of return C 1'E G % C %/E
Learning Goal %: <escrie procedures for assessing and measuring the
risk of a single asset.
5.%.1) )he real utilit- of the coeHcient of &ariation is in comparing assets that ha&e
e!ual e.pected
returns.
"nswer: F"L#$
Topic: #oe$cient of %ariation
5.%.%) Ine measure of t he risk of an asset ma- e found - sutracting the worst
outcome from the
est outcome.
"nswer: )*U$
Topic: Measuring Single Asset Risk
5.%.') )he larger the di(erence etween an assets worst outcome from its est
outcome, the higher
the risk of the asset.
"nswer: )*U$
1// Gitman = Principles of Managerial Finance, 1%e
5.%.+) )he risk of an asset can e measured - its &ariance, which is found -
sutracting the worst
outcome from the est outcome.
"nswer: F"L#$
Topic: %ariance and Standard &e'iation
5.%.5) 9oeHcient of &ariation is a measure of relati&e dispersion used in comparing
the e.pected
returns of assets with di(ering risks.
"nswer: F"L#$
5.%./) )he more certain the return from an asset, the less &ariailit- and therefore
the less risk.
"nswer: )*U$
5.%.0) "n approach for assessing risk that uses a numer of possile return estimates
to otain a sense
of the &ariailit- among outcomes is called sensiti&it- anal-sis.
"nswer: )*U$
5.%.6) In a&erage, during the past 05 -ears, the return on large-compan- stocks has
e.ceeded the
return on small-compan- stocks.
"nswer: F"L#$
Topic: Historical Returns
5.%.8) In a&erage, during the past 05 -ears, the return on small-compan- stocks has
e.ceeded the
return on large-compan- stocks.
"nswer: )*U$
5.%.13) In a&erage, during the past 05 -ears, the return on long-term go&ernment
onds has e.ceeded
the return on long-term corporate onds.
"nswer: F"L#$
5.%.11) In a&erage, during the past 05 -ears, the return on long-term corporate
onds has e.ceeded
the return on long-term go&ernment onds.
"nswer: )*U$
5.%.1%) In a&erage, during the past 05 -ears, the inFation rate has e.ceeded the
return on U.#.
)reasur- ills.
"nswer: F"L#$
5.%.1') In a&erage, during the past 05 -ears, the return on U.#. )reasur- ills has
e.ceeded the
inFation rate.
"nswer: )*U$
5.%.1+) In a&erage, during the past 05 -ears, the return on U.#. )reasur- ills has
e.ceeded the return
on long-term go&ernment onds.
"nswer: F"L#$
5.%.15) In a&erage, during the past 05 -ears, the return on large-compan- stocks
has e.ceeded the
return on long-term corporate onds.
"nswer: )*U$
5.%.1/) " normal proailit- distriution is a s-mmetrical distriution whose shape
resemles a
ell-shaped cur&e.
"nswer: )*U$
Topic: (ormal &istri)utions
5.%.10) "n anormal proailit- distriution is a s-mmetrical distriution whose
shape resemles a
ell-shaped cur&e.
"nswer: F"L#$
5.%.16) " normal proailit- distriution is an as-mmetrical distriution whose shape
resemles a
p-ramid.
"nswer: F"L#$
5.%.18) )he coeHcient of &ariation is a measure of relati&e dispersion that is useful in
comparing the
risks of assets with di(erent e.pected returns.
"nswer: )*U$
5.%.%3) )he higher the coeHcient of &ariation, the greater the risk and therefore the
higher the
e.pected return.
"nswer: )*U$
5.%.%1) )he lower the coeHcient of &ariation, the greater the risk and therefore the
higher the e.pected
return.
"nswer: F"L#$
5.%.%%) " common approach of estimating the &ariailit- of returns in&ol&ing
forecasting the
pessimistic, most likel-, and optimistic returns associated with the asset is called
") marginal anal-sis.
4) sensiti&it- anal-sis.
9) reak-e&en anal-sis.
<) 7nancial statement anal-sis.
"nswer: 4
1/6 Gitman = Principles of Managerial Finance, 1%e
5.%.%') )he >>>>>>>> is the e.tent of an assets risk. 1t is found - sutracting the
pessimistic outcome
from the optimistic outcome.
") return
4) standard de&iation
9) proailit- distriution
<) range
"nswer: <
5.%.%+) )he >>>>>>>> of an e&ent occurring is the percentage chance of a gi&en
outcome.
") dispersion
9) proailit-
<) reliailit-
"nswer: 9
5.%.%5) >>>>>>>> proailit- distriution shows all possile outcomes and associated
proailities for a
gi&en e&ent.
") " discrete
4) "n e.pected &alue
9) " ar chart
<) " continuous
"nswer: <
5.%.%/) )he >>>>>>>> measures the dispersion around the e.pected &alue.
") coeHcient of &ariation
4) chi s!uare
9) mean
<) standard de&iation
"nswer: <
Topic: Standard &e'iation
5.%.%0) )he >>>>>>>> is a measure of relati&e dispersion used in comparing the risk of
assets with
di(ering e.pected returns.
4) chi s!uare
9) mean
<) standard de&iation
"nswer: "
5.%.%6) #ince for a gi&en increase in risk, most managers re!uire an increase in
return, the- are
") risk-seeking.
4) risk-indi(erent.
9) risk-free.
<) risk-a&erse.
"nswer: <
Topic: Risk and Return Fundamentals
5.%.%8) @hich asset would the risk-a&erse 7nancial manager preferA 5#ee elow.)
Asset A B C D
1nitial in&estment 215,333 215,333 215,333 215,333
"nnual rate of return
;essimistic 6E 5E 'E 11E
,ost likel- 1%E 1%E 1%E 1%E
Iptimistic 1+E 1'E 15E 1+E
") "sset ".
4) "sset 4.
9) "sset 9.
<) "sset <.
"nswer: <
Topic: E*pected Return and Standard &e'iation (Equation 5+ and 5,"
5.%.'3) )he e.pected &alue and the standard de&iation of returns for asset " is 5#ee
elow.)
Asset A
Possible Outcomes Probability Returns (%)
;essimistic 3.%5 13
,ost likel- 3.+5 1%
Iptimistic 3.'3 1/
") 1% percent and + percent.
4) 1%.0 percent and %.' percent.
9) 1%.0 percent and + percent.
<) 1% percent and %.' percent.
"nswer: 4
5.%.'1) )he >>>>>>>> the coeHcient of &ariation, the >>>>>>>> the risk.
") lower: lower
4) higher: lower
9) lower: higher
<) more stale: higher
"nswer: "
103 Gitman = Principles of Managerial Finance, 1%e
5.%.'%) Gi&en the following e.pected returns and standard de&iations of assets 4, ,,
J, and <, which
asset should the prudent 7nancial manager selectA
Asset Epected Return !tandard De"iation
4 13E 5E
, 1/E 13E
J 1+E 8E
< 1%E 6E
") "sset 4
4) "sset ,
9) "sset J
<) "sset <
"nswer: "
Topic: E*pected Return and Standard &e'iation (Equation 5-"
5.%.'') )he e.pected &alue, standard de&iation of returns, and coeHcient of &ariation
for asset " are
5#ee elow.)
Asset A
Possible Outcomes Probability Returns (%)
;essimistic 3.%5 5
,ost likel- 3.55 13
Iptimistic 3.%3 1'
") 13 percent, 6 percent, and 1.%5, respecti&el-.
4) 8.'' percent, 6 percent, and %.15, respecti&el-.
9) 8.'5 percent, +./6 percent, and %.33, respecti&el-.
<) 8.'5 percent, %.0/ percent, and 3.%85, respecti&el-.
"nswer: <
Topic: E*pected Return and Standard &e'iation (Equation 5+. 5,. and 5-"
5.%.'+) @hat is the market risk premium if the risk free rate is 5 percent and the
e.pected market
return is gi&en as followsA
!tate o# $ature Probability Return
4oom %3E '3E
"&erage 03E 15E
*ecession 13E -5E
") 13.5E
4) 11.3E
9) 1/.3E
<) 1/.5E
"nswer: 4
Topic: E*pected Return and #APM (Equation 5+ and 5/"
9hapter 5 *isk and *eturn 101
5.%.'5) Kico ought 133 shares of 9isco #-stems stock for 2%+.33 per share on
Lanuar- 1, %33%. Me
recei&ed a di&idend of 2%.33 per share at the end of %33% and 2'.33 per share at the
end of %33'.
"t the end of %33+, Kico collected a di&idend of 2+.33 per share and sold his stock for
216.33
per share. @hat was Kicos realiBed holding period returnA
") -1%.5E
4) D1%.5E
9) -1/.0E
<) D1/.0E
"nswer: 4
Topic: Measuring Single Asset Return (Equation 5!"
5.%.'/) Kico ought 133 shares of 9isco #-stems stock for 2%+.33 per share on
Lanuar- 1, %33%. Me
end of %33'.
"t the end of %33+, Kico collected a di&idend of 2+.33 per share and sold his stock for
216.33
per share. @hat was Kicos realiBed holding period returnA @hat was Kicos
compound
annual rate of returnA
") -1%.5E: -+.+E
4) D1%.5E: D+.+E
9) -1/.0E: -+.+E
<) D1/.0E: D+.+E
"nswer: 4
5.%.'0) Gi&en the following information aout the two assets " and 4, determine
which asset is
preferred.
A B
1nitial 1n&estment 25,333 25,333
;essimistic 8E 0E
,ost Likel- 11 11
Iptimistic 1' 15
*ange + 6
"nswer: "sset " is preferred ecause it has a lower range for the same e.pected
return.
10% Gitman = Principles of Managerial Finance, 1%e
5.%.'6) "ssuming the following returns and corresponding proailities for asset ",
compute its
standard de&iation and coeHcient of &ariation.
Asset A
Rate o# Return Probability
13E '3E
15 +3
%3 '3
"nswer:
R R RP %(R % R)&' P
13E '3E '.3 513 - 15)N% 3.'3 C0.5
15 +3 /.3 515 - 15)N% 3.+3 C 3
%3 '3 /.3 5%3 - 15)N% 3.'3 C 0.5
15E 15.E
#< C '.60E
9? C #<O* C '.60O15 C 3.%/
Topic: E*pected Return. Standard &e'iation and #oe$cient of %ariation (Equation 5+. 5,. and
5-"
0uestion Status: Re'ised
9hapter 5 *isk and *eturn 10'
5.%.'8) 9hampion 4reweries must choose etween two asset purchases. )he annual
rate of return and
related proailities gi&en elow summariBe the 7rms anal-sis.
Asset A Asset B
Rate o# Return Probability Rate o# Return Probability
13E '3E 5E +3E
15 +3 15 %3
%3 '3 %5 +3
For each asset, compute
5a) the e.pected rate of return.
5) the standard de&iation of the e.pected return.
5c) the coeHcient of &ariation of the return.
5d) @hich asset should 9hampion selectA
"nswer: 5a)
Asset A Asset B
Return ( Pr Return ( Pr
13E G 3.'3 C 'E 5E G 3.+3 C %E
15 G 3.+3 C / 15 G 3.%3 C '
%3 G 3.'3 C / %5 G 3.+3 C 13
$.pected *eturn C 15E $.pected *eturn C 15E
5) "sset "
513E - 15E)N% G 3.'3 C 0.5E
515E - 15E)N% G 3.+3 C 3E
5%3E - 15E)N% G 3.'3 C 0.5E
15E
#tandard <e&iation of " C '.60E
"sset 4
5 5E - 15E)N% G 3.+3 C +3E
515E - 15E)N% G 3.%3 C 3E
5%5E - 15E)N% G 3.+3 C +3E
63E
#tandard <e&iation of 4 C 6.8+E
5c) 9?" C '.60O15 C 3.%/ 9?4 C 6.8+O15 C 3./3
5d) "sset ": for 15E rate of return and lesser risk.
5-"
10+ Gitman = Principles of Managerial Finance, 1%e
5.%.+3) )he 9ollege 9op- #hop is in process of purchasing a high-tech copier. 1n their
search, the-
ha&e gathered the following information aout two possile copiers " and 4.
A B
1nitial 1n&estment 213,333 213,333
Return Prob) Return Prob)
;essimistic 11E 3.'3 8E 3.'3
,ost Likel- 16 3.+5 16 3.+5
Iptimistic %% 3.%5 %5 3.%5
5a) 9ompute e.pected rate of return for each copier.
5) 9ompute &ariance and standard de&iation of rate of return for each copier.
5c) @hich copier should the- purchaseA
"nswer: a and .
COP*ER A COP*ER B
R P RP p(Ri%R)&' R P RP p(Ri%R)&'
11E 3.'3 '.'3E 13.++ 8E 3.'3 %.03E 18.++
16 3.+5 6.13 3.5+ 16 3.+5 6.13 3.+1
%% 3.%5 5.53 /.53 %5 3.%5 /.%5 15.63
1/.8E 10.+6 10.35E '5./5
$.pected &alue C 1/.8E $.pected &alue C 10.35E
?ariance " C 10.+8 ?ariance C '5./5
#< C +.16E #< C 5.80E
5c) 9? C #< O r
9opier ": 9? C +.16O1/.83 C 3.%5
9opier 4: 9? C 5.80O10.35 C 3.'5
)he 9ollege 9op- #hop should u- copier ".
0uestion Status: Pre'ious Edition
5.%.+1) Gi&en the following proailit- distriution for assets P and Q, compute the
e.pected rate of
return, &ariance, standard de&iation, and coeHcient of &ariation for the two assets.
@hich
asset is a etter in&estmentA
+ ,
Return Prob) Return Prob)
6E 3.13 13E 3.%5
8 3.%3 11 3.'5
11 3.'3 1% 3.+3
1% 3.+3
"nswer:
Asset + Asset ,
R P RP R&'P R P RP R&'P
6E 3.13 3.63E /.+3 13E 3.%5 %.5E %5.3
8 3.%3 1.63 1/.%3 11 3.'5 '.65 +%.'5
11 3.'3 '.'3 '/.'3 1% 3.+3 +.63 50./3
1% 3.+3 +.63 50./3
13.0E 11/.5 11.15E 1%+.85
$.pected &alue C 13.0E $.pected &alue C 11.15E
?ariance C 11/.5 - 13.0N% C %.31 ?ariance C 1%+.85 - 11.15N% C 3./'
#< C 1.+%E #< C 3.08E
9? C #<Or
"sset P: 9? C 1.+%O13.03 C 3.1'
"sset Q: 9? C 3.08O11.15 C 3.30
"sset Q is preferred.
5-"
5.%.+%) Kico ought 133 shares of 9isco #-stems stock for 2%+.33 per share on
Lanuar- 1, %33%. Me
end of
%33'. "t the end of %33+, Kico collected a di&idend of 2+.33 per share and sold his
stock for
216.33 per share. @hat was Kicos realiBed holding period returnA @hat was Kicos
compound annual rate of returnA $.plain the di(erenceA
"nswer: *ealiBed return C 2%+ - 216 D 28
2%+
C 1%.5E
9ompound *eturn:
2%+ C 2%O51 D *)1 D 2'O51 D *)% D 52+ D 16)O51 D *)'
#ol&e for * either with a calculator or through trial and error. )he calculator is
appro.imatel- +.+ percent.
)he reason the realiBed holding period return is so much larger than the compound
rate of return is that the realiBed return does not account for the time &alue of mone-.
10/ Gitman = Principles of Managerial Finance, 1%e
Learning Goal ': <iscuss the measurement of return and standard
de&iation for a portfolio
and the concept of correlation.
5.'.1) "n eHcient portfolio is a portfolio that ma.imiBes return for a gi&en le&el of risk
or minimiBes
risk for a gi&en le&el of return.
"nswer: )*U$
Topic: Portfolio Risk and Return
5.'.%) Kew in&estments must e considered in light of their impact on the risk and
return of the
portfolio of assets ecause the risk of an- single proposed asset in&estment is not
independent
of other assets.
"nswer: )*U$
5.'.') )he 7nancial managers goal for the 7rm is to create a portfolio that ma.imiBes
return in order
to ma.imiBe the &alue of the 7rm.
"nswer: F"L#$
5.'.+) )wo assets whose returns mo&e in the same direction and ha&e a correlation
coeHcient of D1
are each &er- risk- assets.
"nswer: F"L#$
5.'.5) )wo assets whose returns mo&e in the opposite directions and ha&e a
correlation coeHcient of
-1 are oth either risk-free assets or low-risk assets.
"nswer: F"L#$
Topic: #orrelation and Portfolio Risk
5.'./) )he standard de&iation of a portfolio is a function of the standard de&iations of
the indi&idual
securities in the portfolio, the proportion of the portfolio in&ested in those securities,
and the
correlation etween the returns of those securities.
"nswer: )*U$
5.'.0) )he standard de&iation of a portfolio is a function onl- of the standard
de&iations of the
indi&idual securities in the portfolio and the proportion of the portfolio in&ested in
those
securities.
"nswer: F"L#$
5.'.6) "5n) >>>>>>>> portfolio ma.imiBes return for a gi&en le&el of risk, or minimiBes
risk for a gi&en
le&el of return.
") eHcient
4) coeHcient
9) continuous
<) risk-indi(erent
"nswer: "
Topic: E$cient Portfolios
5.'.8) " collection of assets is called a5n)
") grouping.
4) portfolio.
9) in&estment.
<) di&ersit-.
"nswer: 4
5.'.13) "n eHcient portfolio is one that
") ma.imiBes risk for a gi&en le&el of return.
4) ma.imiBes return for a gi&en le&el of risk.
9) minimiBes return for a gi&en le&el of risk.
<) ma.imiBes return at all risk le&els.
"nswer: 4
5.'.11) )he >>>>>>>> is a statistical measure of the relationship etween series of
numers.
9) correlation
<) proailit-
"nswer: 9
5.'.1%) )he goal of an eHcient portfolio is to
") ma.imiBe risk for a gi&en le&el of return.
4) ma.imiBe risk in order to ma.imiBe pro7t.
9) minimiBe pro7t in order to minimiBe risk.
<) minimiBe risk for a gi&en le&el of return.
"nswer: <
5.'.1') ;erfectl- >>>>>>>> correlated series mo&e e.actl- together and ha&e a
correlation coeHcient of
>>>>>>>>, while perfectl- >>>>>>>> correlated series mo&e e.actl- in opposite directions
and
ha&e a correlation coeHcient of >>>>>>>>.
") negati&el-: -1: positi&el-: D1
4) negati&el-: D1: positi&el-: -1
9) positi&el-: -1: negati&el-: D1
<) positi&el-: D1: negati&el-: -1
"nswer: <
5.'.1+) 9omining negati&el- correlated assets ha&ing the same e.pected return
results in a portfolio
with >>>>>>>> le&el of e.pected return and >>>>>>>> le&el of risk.
") a higher: a lower
4) the same: a higher
9) the same: a lower
<) a lower: a higher
"nswer: 9
5.'.15) "n in&estment ad&isor has recommended a 253,333 portfolio containing
assets *, L, and R:
2%5,333 will e in&ested in asset *, with an e.pected annual return of 1% percent:
213,333 will
e in&ested in asset L, with an e.pected annual return of 16 percent: and 215,333 will
e
in&ested in asset R, with an e.pected annual return of 6 percent. )he e.pected
annual return of
this portfolio is
") 1%./0E.
4) 1%.33E.
9) 13.33E.
<) unale to e determined from the information pro&ided.
"nswer: 4
Topic: Portfolio Return (Equation 55"
-able 5).
Epected Return (%)
,ear Asset A Asset B Asset C
1 / 6 /
% 0 0 0
' 6 / 6
5.'.1/) )he correlation of returns etween "sset " and "sset 4 can e characteriBed
as 5#ee )ale 5.1)
") perfectl- positi&el- correlated.
4) perfectl- negati&el- correlated.
9) uncorrelated.
<) cannot e determined.
"nswer: 4
5.'.10) 1f -ou were to create a portfolio designed to reduce risk - in&esting e!ual
proportions in each
of two di(erent assets, which portfolio would -ou recommendA 5#ee )ale 5.1)
") "ssets " and 4
4) "ssets " and 9
9) none of the a&ailale cominations
<) cannot e determined
"nswer: "
5.'.16) )he portfolio with a standard de&iation of Bero 5#ee )ale 5.1)
") is comprised of "ssets " and 4.
4) is comprised of "ssets " and 9.
9) is not possile.
"nswer: "
Topic: Portfolio Standard &e'iation (Equation 5,a"
5.'.18) "kai has a portfolio of three assets. Find the e.pected rate of return for the
portfolio assuming
he in&ests 53 percent of its mone- in asset " with 13 percent rate of return, '3
percent in asset 4
with a rate of return of %3 percent, and the rest in asset 9 with '3 percent rate of
return.
"nswer:
Asset Rate o# Return /ei0ht (/) 1 ( /
" 13E 3.53 5.33
4 %3 3.'3 /.33
9 '3 3.%3 /.33
10.33
$.pected rate of return C 10 percent.
Learning Goal +: Understand the risk and return characteristics of a
portfolio in terms of
correlation and di&ersi7cation, and the impact of international assets
on a
5.+.1) 9omining negati&el- correlated assets can reduce the o&erall &ariailit- of
returns.
"nswer: )*U$
5.+.%) $&en if assets are not negati&el- correlated, the lower the positi&e correlation
etween them,
the lower the resulting risk.
"nswer: )*U$
5.+.') 1n general, the lower the correlation etween asset returns, the greater the
potential
di&ersi7cation of risk.
"nswer: )*U$
5.+.+) " portfolio of two negati&el- correlated assets has less risk than either of the
indi&idual assets.
"nswer: )*U$
5.+.5) 1n no case will creating portfolios of assets result in greater risk than that of the
riskiest asset
included in the portfolio.
"nswer: )*U$
5.+./) " portfolio that comines two assets ha&ing perfectl- positi&el- correlated
returns can not
reduce the portfolios o&erall risk elow the risk of the least risk- asset.
"nswer: )*U$
5.+.0) " portfolio comining two assets with less than perfectl- positi&e correlation
can reduce total
risk to a le&el elow that of either of the components.
"nswer: )*U$
5.+.6) Foreign e.change risk is the risk that arises from the danger that a host
go&ernment might take
actions that are harmful to foreign in&estors or from the possiilit- that political
turmoil in a
countr- might endanger in&estment made in that countr- - foreign nationals.
"nswer: F"L#$
Topic: Foreign E*c1ange Risk
5.+.8) I&er long periods, returns from internationall- di&ersi7ed portfolios tend to e
superior to
those -ielded - purel- domestic ones. I&er an- single short or intermediate period,
howe&er,
international di&ersi7cation can -ield su par returnsparticularl- during periods
when the
dollar is appreciating in &alue relati&e to other currencies.
"nswer: )*U$
Topic: 2nternational &i'ersi3cation
5.+.13) 9omining uncorrelated assets can reduce risknot as e(ecti&el- as
comining negati&el-
correlated assets, ut more e(ecti&el- than comining positi&el- correlated assets.
"nswer: )*U$
5.+.11) "ssume -our 7rm produces a good which has high sales when the econom- is
e.panding and
low sales during a recession. )his 7rms o&erall risk will e higher if it in&ests in
another
product which is counter c-clical.
"nswer: F"L#$
5.+.1%) " portfolio comining two assets whose returns are less than perfectl-
positi&e correlated can
increase total risk to a le&el ao&e that of either of the components.
"nswer: F"L#$
5.+.1') )he inclusion of assets from countries that are less sensiti&e to the U.#.
usiness c-cle reduces
the portfolios responsi&eness to market mo&ement and to foreign currenc-
Fuctuation.
"nswer: )*U$
5.+.1+) @hen the U.#. currenc- gains in &alue, the dollar &alue of a foreign-currenc--
denominated
portfolio of assets decline.
"nswer: )*U$
Topic: Foreign E*c1ange Risk
5.+.15) )he creation of a portfolio - comining two assets ha&ing perfectl- positi&el-
correlated
returns cannot reduce the portfolios o&erall risk elow the risk of the least risk-
asset. In the
other hand, a portfolio comining two assets with less than perfectl- positi&e
correlation can
reduce total risk to a le&el elow that of either of the components.
"nswer: )*U$
5.+.1/) )he risk of a portfolio containing international stocks generall- contains less
nondi&ersi7ale
risk than one that contains onl- "merican stocks.
"nswer: )*U$
5.+.10) )he risk of a portfolio containing international stocks generall- does not
contain less
nondi&ersi7ale risk than one that contains onl- "merican stocks.
"nswer: F"L#$
5.+.16) )otal securit- risk is the sum of a securit-s nondi&ersi7ale and di&ersi7ale
risk.
"nswer: )*U$
Topic: &i'ersi3a)le and (ondi'ersi3a)le Risk
5.+.18) )otal securit- risk is the sum of a securit-s nondi&ersi7ale, di&ersi7ale,
s-stematic, and
uns-stematic risk.
"nswer: F"L#$
5.+.%3) 9omining two negati&el- correlated assets to reduce risk is known as
") di&ersi7cation.
4) &aluation.
9) li!uidation.
<) risk a&ersion.
"nswer: "
5.+.%1) 1n general, the lower 5less positi&e and more negati&e) the correlation
etween asset returns,
") the less the potential di&ersi7cation of risk.
4) the greater the potential di&ersi7cation of risk.
9) the lower the potential pro7t.
<) the less the assets ha&e to e monitored.
"nswer: 4
5.+.%%) 9omining two assets ha&ing perfectl- negati&el- correlated returns will
result in the creation
of a portfolio with an o&erall risk that
") remains unchanged.
4) decreases to a le&el elow that of either asset.
9) increases to a le&el ao&e that of either asset.
<) stailiBes to a le&el etween the asset with the higher risk and the asset with the
lower
risk.
"nswer: 4
5.+.%') 9omining two assets ha&ing perfectl- positi&el- correlated returns will result
in the creation
of a portfolio with an o&erall risk that
") remains unchanged.
4) decreases to a le&el elow that of either asset.
9) increases to a le&el ao&e that of either asset.
<) lies etween the asset with the higher risk and the asset with the lower risk.
"nswer: <
Learning Goal 5: *e&iew the two t-pes of risk and the deri&ation and
role of eta in
measuring the rele&ant risk of oth a securit- and a portfolio.
5.5.1) 4eta coeHcient is an inde. of the degree of mo&ement of an assets return in
response to a
change in the risk-free asset.
"nswer: F"L#$
Topic: 4eta and S5stematic Risk
5.5.%) 4ecause an- in&estor can create a portfolio of assets that will eliminate all, or
&irtuall- all,
nondi&ersi7ale risk, the onl- rele&ant risk is di&ersi7ale risk.
"nswer: F"L#$
5.5.') <i&ersi7ale risk is the rele&ant portion of risk attriutale to market factors
that a(ect all
7rms.
"nswer: F"L#$
5.5.+) <i&ersi7ed in&estors should e concerned solel- with nondi&ersi7ale risk
ecause it can
create a portfolio of assets that will eliminate all, or &irtuall- all, di&ersi7ale risk.
"nswer: )*U$
5.5.5) Kondi&ersi7ale risk reFects the contriution of an asset to the risk, or
standard de&iation, of
the portfolio.
"nswer: )*U$
5.5./) #-stematic risk is that portion of an assets risk that is attriutale to 7rm-
speci7c, random
causes.
"nswer: F"L#$
Topic: S5stematic and 6ns5stematic Risk
5.5.0) Uns-stematic risk can e eliminated through di&ersi7cation.
"nswer: )*U$
5.5.6) Uns-stematic risk is the rele&ant portion of an assets risk attriutale to
market factors that
a(ect all 7rms.
"nswer: F"L#$
5.5.8) )he re!uired return on an asset is an increasing function of its nondi&ersi7ale
risk.
"nswer: )*U$
5.5.13) )he empirical measurement of eta can e approached - using least-
s!uares regression
anal-sis to 7nd the regression coeHcient 5S) in the e!uation for the slope of the
characteristic
line.
"nswer: )*U$
5.5.11) 1n&estors should recogniBe that etas are calculated using historical data and
that past
performance relati&e to the market a&erage ma- not accuratel- predict future
performance.
"nswer: )*U$
5.5.1%) )he eta of a portfolio is a function of the standard de&iations of the
indi&idual securities in the
portfolio, the proportion of the portfolio in&ested in those securities, and the
correlation
etween the returns of those securities.
"nswer: F"L#$
Topic: Portfolio 4etas
5.5.1') #-stematic risk is also referred to as
") di&ersi7ale risk.
4) economic risk.
9) nondi&ersi7ale risk.
<) not rele&ant.
"nswer: 9
5.5.1+) )he purpose of adding an asset with a negati&e or low positi&e eta is to
") reduce pro7t.
4) reduce risk.
9) increase pro7t.
<) increase risk.
"nswer: 4
5.5.15) )he eta of the market
") is greater than 1.
4) is less than 1.
9) is 1.
"nswer: 9
5.5.1/) *isk that a(ects all 7rms is called
") total risk.
4) management risk.
<) di&ersi7ale risk.
"nswer: 9
5.5.10) )he portion of an assets risk that is attriutale to 7rm-speci7c, random
causes is called
") uns-stematic risk.
9) s-stematic risk.
<) none of the ao&e.
"nswer: "
5.5.16) )he rele&ant portion of an assets risk attriutale to market factors that
a(ect all 7rms is called
") uns-stematic risk.
4) di&ersi7ale risk.
9) s-stematic risk.
"nswer: 9
5.5.18) >>>>>>>> risk represents the portion of an assets risk that can e eliminated
- comining
assets with less than perfect positi&e correlation.
") <i&ersi7ale
4) Kondi&ersi7ale
9) #-stematic
<) )otal
"nswer: "
5.5.%3) Uns-stematic risk is not rele&ant, ecause
") it does not change.
4) it can e eliminated through di&ersi7cation.
9) it cannot e estimated.
<) it cannot e eliminated through di&ersi7cation.
"nswer: 4
5.5.%1) #trikes, lawsuits, regulator- actions, and increased competition are all
e.amples of
9) economic risk.
<) s-stematic.
"nswer: "
5.5.%%) @ar, inFation, and the condition of the foreign markets are all e.amples of
9) economic risk.
<) uns-stematic.
"nswer: 4
5.5.%') " eta coeHcient of D1 represents an asset that
") is more responsi&e than the market portfolio.
4) has the same response as the market portfolio.
9) is less responsi&e than the market portfolio.
<) is una(ected - market mo&ement.
"nswer: 4
5.5.%+) " eta coeHcient of -1 represents an asset that
4) has the same response as the market portfolio ut in opposite direction
<) is una(ected - market mo&ement.
"nswer: 4
5.5.%5) " eta coeHcient of 3 represents an asset that
4) has the same response as the market portfolio.
<) is unrelated to the market portfolio.
"nswer: <
5.5.%/) "n in&estment anker has recommended a 2133,333 portfolio containing
assets 4, <, and F.
2%3,333 will e in&ested in asset 4, with a eta of 1.5: 253,333 will e in&ested in
asset <, with a
eta of %.3: and 2'3,333 will e in&ested in asset F, with a eta of 3.5. )he eta of
the portfolio is
") 1.%5.
4) 1.''.
9) 1.+5.
<) unale to e determined from the information pro&ided.
"nswer: 9
Topic: Portfolio 4eta (Equation 57"
5.5.%0) )he higher an assets eta,
") the more responsi&e it is to changing market returns.
4) the less responsi&e it is to changing market returns.
9) the higher the e.pected return will e in a down market.
<) the lower the e.pected return will e in an up market.
"nswer: "
16/ Gitman = Principles of Managerial Finance, 1%e
5.5.%6) "n increase in nondi&ersi7ale risk
") would cause an increase in the eta and would lower the re!uired return.
4) would ha&e no e(ect on the eta and would, therefore, cause no change in the
re!uired
return.
9) would cause an increase in the eta and would increase the re!uired return.
<) would cause a decrease in the eta and would, therefore, lower the re!uired rate
of
return.
"nswer: 9
5.5.%8) "n increase in the )reasur- 4ill rate >>>>>>>> the re!uired rate of return of a
common stock.
") has no e(ect on
4) increases
9) decreases
<) cannot e determined -
"nswer: 4
Topic: #apital Asset Pricing Model (#APM"
5.5.'3) "n e.ample of an e.ternal factor that a(ects a corporations risk or eta, and
hence re!uired
rate of return would e >>>>>>>> - the compan-.
") a change in the 7nancing mi. used
4) to.ic spills.
9) a change in the asset mi.
<) a change in top management.
"nswer: 4
5.5.'1) )he eta of a portfolio is
") the sum of the etas of all assets in the portfolio.
4) irrele&ant, onl- the etas of the indi&idual assets are important.
9) does not change o&er time.
<) is the weighted a&erage of the etas of the indi&idual assets in the portfolio.
"nswer: <
Topic: Portfolio 4etas
-able 5)'
Qou are going to in&est 2%3,333 in a portfolio consisting of assets P, Q, and T, as
follows:
Annual
Asset Return Probability Beta Proportion
P 13E 3.53 1.% 3.'''
Q 6E 3.%5 1./ 3.'''
T 1/E 3.%5 %.3 3.'''
5.5.'%) Gi&en the information in )ale 5.%, what is the e.pected annual return of this
portfolioA
") 11.+E
4) 13.3E
9) 11.3E
<) 11.0E
"nswer: 9
5.5.'') )he eta of the portfolio in )ale 5.%, containing assets P, Q, and T, is
") 1.5.
4) %.+.
9) 1./.
<) %.3.
"nswer: 9
5.5.'+) )he eta of the portfolio in )ale 5.% indicates this portfolio
") has more risk than the market.
4) has less risk than the market.
9) has an undetermined amount of risk compared to the market.
<) has the same risk as the market.
"nswer: "
5.5.'5) "s randoml- selected securities are comined to create a portfolio, the
>>>>>>>> risk of the
portfolio decreases until 13 to %3 securities are included. )he portion of the risk
eliminated is
>>>>>>>> risk, while that remaining is >>>>>>>> risk.
") di&ersi7ale: nondi&ersi7ale: total
4) rele&ant: irrele&ant: total
9) total: di&ersi7ale: nondi&ersi7ale
<) total: nondi&ersi7ale: di&ersi7ale
"nswer: 9
5.5.'/) Kicole holds three stocks in her portfolio: ", 4, and 9. )he portfolio eta is
1.+3. #tock "
comprises 15 percent of the dollar &alue of her holdings and has a eta of 1.3. 1f
Kicole sells all
of her in&estment in " and in&ests the proceeds in the risk-free asset, her new
portfolio eta
will e:
") 3./3.
4) 3.66.
9) 1.33.
<) 1.%5.
"nswer: <
5.5.'0) Kico owns 133 shares of stock P which has a price of 21% per share and %33
shares of stock Q
which has a price of 2' per share. @hat is the proportion of Kicos portfolio in&ested
in stock
PA
") 00E
4) /0E
9) 53E
<) ''E
"nswer: 4
Topic: Portfolio 8eig1ts (Equation 55"
5.5.'6) Kico wants to in&est all of his mone- in Sust two assets: the risk free asset and
the market
portfolio. @hat is Kicos portfolio eta if he in&ests a !uarter of his mone- in the
market
portfolio and the rest in the risk free assetA
") 3.33
4) 3.%5
9) 3.05
<) 1.33
"nswer: 4
Topic: Portfolio 8eig1ts (Equation 55"
5.5.'8) @hat is the e.pected market return if the e.pected return on asset P is %3
percent, its eta is 1.5,
and the risk free rate is 5 percentA
") 5.3E
4) 0.5E
9) 15.3E
<) %%.5E
"nswer: 9
Topic: #apital Asset Pricing Model (#APM" (Equation 5/"
5.5.+3) @hat is Kicos portfolio eta if he in&ests an e!ual amount in asset P with a
eta of 3./3, asset Q
with a eta of 1./3, the risk-free asset, and the market portfolioA
") 1.%3
4) 1.33
9) 3.63
<) 3./3
"nswer: 9
-able 5)2
9onsider the following two securities P and Q.
!ecurity Return !tandard De"iation Beta
P %3.3E %3.3E 1.53
Q 13.3E '3.3E 1.3
*isk-free asset 5.3E
5.5.+1) @hich asset 5P or Q) in )ale 5.' has the least total riskA @hich has the least
s-stematic riskA
") P: P.
4) P: Q.
9) Q: P.
<) Q: Q.
"nswer: 4
5.5.+%) Using the data from )ale 5.', what is the s-stematic risk for a portfolio with
two -thirds of the
funds in&ested in P and one-third in&ested in QA
") 3.66
4) 1.10
9) 1.''
<) 1./0
"nswer: 9
5.5.+') Using the data from )ale 5.', what is the portfolio e.pected return and the
portfolio eta if
-ou in&est '5 percent in P, +5 percent in Q, and %3 percent in the risk -free assetA
") 1%.5E, 3.805
4) 1%.5E, 1.805
9) 15.3E, 3.805
<) 15.3E, 1.805
"nswer: "
Topic: Portfolio Return and Portfolio 4eta (Equation 55 and 57"
5.5.++) Using the data from )ale 5.', what is the portfolio e.pected return if -ou
in&est 133 percent of
-our mone- in P, orrow an amount e!ual to half of -our own in&estment at the risk
free rate
and in&est -our orrowings in asset PA
") 15.3E
4) %%.5E
9) %5.3E
<) %0.5E
"nswer: <
Learning Goal /: $.plain the capital asset pricing model 59";,), its
relationship to the
securit- market line 5#,L), and the maSor forces causing shifts in the
#,L.
5./.1) )he eta coeHcient is an inde. that measures the degree of mo&ement of an
assets return in
response to a change in the market return.
"nswer: )*U$
5./.%) )he di(erence etween the return on the market portfolio of assets and the
risk-free rate of
return represents the premium the in&estor must recei&e for taking the a&erage
amount of risk
associated with holding the market portfolio of assets.
"nswer: )*U$
Topic: Market Risk Premium
5./.') )he securit- market line 5#,L) reFects the re!uired return in the marketplace
for each le&el of
nondi&ersi7ale risk 5eta).
"nswer: )*U$
Topic: Securit5 Market 9ine (SM9"
5./.+) )he capital asset pricing model 59";,) links together uns-stematic risk and
return for all
assets.
"nswer: F"L#$
5./.5) )he eta coeHcient is an inde. of the degree of mo&ement of an assets return
in response to a
change in the risk-free asset return.
"nswer: F"L#$
5././) )he securit- market line is not stale o&er time and shifts in it can result in a
change in
re!uired return.
"nswer: )*U$
5./.0) )he steeper the slope of the securit- market line, the greater the degree of risk
a&ersion.
"nswer: )*U$
5./.6) )he &alue of Bero for eta coeHcient of the risk-free asset reFects not onl- its
asence of risk
ut also the fact that the assets return is una(ected - mo&ements in the market
return.
"nswer: )*U$
5./.8) " change in inFationar- e.pectations resulting from e&ents such as
international trade
emargoes or maSor changes in Federal *eser&e polic- will result in a shift in the #,L.
"nswer: )*U$
5./.13) Greater risk a&ersion results in lower re!uired returns for each le&el of risk,
whereas a
reduction in risk a&ersion would cause the re!uired return for each le&el of risk to
increase.
"nswer: F"L#$
5./.11) " gi&en change in inFationar- e.pectations will e full- reFected in a
corresponding change in
the returns of all assets and will e reFected graphicall- in a parallel shift of the #,L.
"nswer: )*U$
5./.1%) )he slope of the #,L reFects the degree of risk a&ersion: the steeper its
slope, the greater the
degree of risk a&ersion.
"nswer: )*U$
5./.1') )he 9";, is ased on an assumed eHcient market in which there are man-
small in&estors,
each ha&ing the same information and e.pectations with respect to securities: there
are no
restrictions on in&estment, no ta.es, and no transactions costs: and all in&estors are
rational,
&iew securities similarl-, and are risk-a&erse, preferring higher returns and lower risk.
"nswer: )*U$
5./.1+) 9hanges in risk a&ersion, and therefore shifts in the #,L, result from
changing tastes and
preferences of in&estors, which generall- result from &arious economic, political, and
social
e&ents.
"nswer: )*U$
5./.15) 1n general, widel- accepted e.pectations of hard times ahead tend to cause
in&estors to ecome
less risk-a&erse.
"nswer: F"L#$
5./.1/) )he >>>>>>>> descries the relationship etween nondi&ersi7ale risk and
return for all assets.
") $41)-$;# approach to capital structure
4) suppl--demand function for assets
9) capital asset pricing model
<) Gordon model
"nswer: 9
5./.10) $.amples of e&ents that increase risk a&ersion include
") a stock market crash.
4) assassination of a ke- political leader.
9) the outreak of war.
<) all of the ao&e.
"nswer: <
5./.16) 1n the capital asset pricing model, the eta coeHcient is a measure of
>>>>>>>> risk and an
inde. of the degree of mo&ement of an assets return in response to a change in
>>>>>>>>.
") di&ersi7ale: the prime rate
4) nondi&ersi7ale: the )reasur- ill rate
9) di&ersi7ale: the ond inde. rate
<) nondi&ersi7ale: the market return
"nswer: <
5./.18) "sset Q has a eta of 1.%. )he risk-free rate of return is / percent, while the
return on the
market portfolio of assets is 1% percent. )he assets market risk premium is
") 0.% percent.
4) /.3 percent.
9) 1'.% percent.
<) 13 percent.
"nswer: 4
5./.%3) 1n the capital asset pricing model, the eta coeHcient is a measure of
") economic risk.
4) di&ersi7ale risk.
<) uns-stematic risk.
"nswer: 9
5./.%1) "sset ; has a eta of 3.8. )he risk-free rate of return is 6 percent, while the
return on the
market portfolio of assets is 1+ percent. )he assets re!uired rate of return is
") 1'.+ percent.
4) /.3 percent.
9) 5.+ percent.
<) 13 percent.
"nswer: "
5./.%%) "s risk a&ersion increases
") a 7rms eta will increase.
4) in&estors re!uired rate of return will increase.
9) a 7rms eta will decrease.
<) in&estors re!uired rate of return will decrease.
"nswer: 4
5./.%') 1n the capital asset pricing model, an increase in inFationar- e.pectations will
e reFected -
a5n)
") increase in the slope of the securit- market line.
4) decrease in the slope of the securit- market line.
9) parallel shift downward in the securit- market line.
<) parallel shift upward in the securit- market line.
"nswer: <
5./.%+) 1n the capital asset pricing model, the general risk preferences of in&estors in
the marketplace
are reFected -
") the risk-free rate.
4) the le&el of the securit- market line.
9) the slope of the securit- market line.
<) the di(erence etween the securit- market line and the risk-free rate.
"nswer: 9
5./.%5) "n increase in the eta of a corporation indicates >>>>>>>>, and, all else eing
the same, results
in >>>>>>>>.
") a decrease in risk: a higher re!uired rate of return and hence a lower share price
4) an increase in risk: a higher re!uired rate of return and hence a lower share price
9) a decrease in risk: a lower re!uired rate of return and hence a higher share price
<) an increase in risk: a lower re!uired rate of return and hence a higher share price
"nswer: 4
5./.%/) " change in the risk-free rate would not e due to
") an international trade emargo.
4) a change in Federal *eser&e polic-.
9) foreign competition in the 7rms product market area.
"nswer: 9
5./.%0) @hat is the e.pected risk-free rate of return if asset P, with a eta of 1.5, has
an e.pected
return of %3 percent, and the e.pected market return is 15 percentA
") 5.3E
4) 0.5E
9) 15.3E
<) %%.5E
"nswer: "
5./.%6) @hat is the e.pected return for asset P if it has a eta of 1.5, the e.pected
market return is 15
percent, and the e.pected risk-free rate is 5 percentA
") 5.3E
4) 0.5E
9) 15.3E
<) %3.3E
"nswer: <
5./.%8) "dam wants to determine the re!uired return on a stock portfolio with a eta
coeHcient of
3.5. "ssuming the risk-free rate of / percent and the market return of 1% percent,
compute
the re!uired rate of return.
"nswer: * C *F D 5*m - *F)
C 3.3/ D 3.553.1% - 3.3/) C 3.38 C 8E
)he compan- should e.pect at least 8 percent return on the stock portfolio.
5./.'3) "ssuming a risk-free rate of 6 percent and a market return of 1% percent,
would a wise
in&estor ac!uire a securit- with a 4eta of 1.5 and a rate of return of 1+ percent gi&en
the facts
ao&eA
"nswer: * C *F D 5*m - *F)
C 3.36 D 1.553.1% - 3.36) C 3.1+ C 1+E
Qes, a securit- with a eta of 1.5 should -ield 1+ percent rate of return.
5./.'1) <r. <an is considering in&estment in a proSect with eta coeHcient of 1.05.
@hat would -ou
recommend him to do if this in&estment has an 11.5 percent rate of return, risk-free
rate is 5.5
percent, and the rate of return on the market portfolio of assets is 6.5 percentA
"nswer: * C *F D 5*m - *F)
C 3.355 D 1.0553.365 - 3.355) C 3.136 C 13.6E
<r. <an should in&est in the proSect ecause the proSects actual rate of return 511.5
percent) is greater than the proSects re!uired rate of return 513.6 percent).

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