Multiple Choice- Financial Markets

Multiple Choice Questions:

1. XYZ Inc.'s stock has a 50% chance of producing a 30% return, a 25% chance of producing a 9% return, and a 25% chance of producing a -25% return. What is XYZ's expected return?

A. 14.4%
B. 15.2%
C. 16.0%
D. 16.8%
E. 17.6%

2. An investor has a 2-stock portfolio with $50,000 invested in Stock A and $50,000 in Stock B. Stock A's beta is 1.20 and Stock B's beta is 1.00. What is the portfolio's beta?

A. 0.94
B. 1.02
C. 1.10
D. 1.18
E. 1.26

3. Everyday Company's stock has a beta of 1.20, the risk-free rate is 4.50%, and the market risk premium is 5.00%. What is Everyday's required return?

A. 10.25%
B. 10.50%
C. 10.75%
D. 11.00%
E. 11.25%

4. ABC's stock has a beta of 1.50, its required return is 14.00%, and the risk-free rate is 5.00%. What is the required rate of return on the stock market?

A. 10.50%
B. 11.00%
C. 11.50%
D. 12.00%
E. 12.50%

5. Parryware's stock has a beta of 1.40, and its required return is 13.00%. Vantec's stock has a beta of 0.80. If the risk-free rate is 4.00%, what is the required rate of return on Vantec's stock?

A. 8.55%
B. 8.71%
C. 8.99%
D. 9.14%
E. 9.33%

6. Suppose you hold a diversified portfolio consisting of $10,000 invested equally in each of 10 different common stocks. The portfolio's beta is 1.120. Now suppose you decided to sell one of your stocks that has a beta of 1.000 and to use the proceeds to buy a replacement stock with a beta of 1.750. What would the portfolio's new beta be?

A. 0.982
B. 1.017
C. 1.195
D. 1.246
E. 1.519

7. Assume that you are the portfolio manager of the Growth-Fund, a $4 million mutual fund that contains the following stocks:

Stock Amount Beta

A $ 400,000 1.50

B $ 600,000 0.50

C $1,000,000 1.25

D $2,000,000 0.75

The required rate of return in the market is 14.00% and the risk-free rate is 6.00%. What rate of return should investors expect on their investment in this fund?

A. 10.90%
B. 11.50%
C. 12.10%
D. 12.70%
E. 13.30%

8. Returns for the D Company over the last 5 years are shown below. What's the standard deviation of D's returns?

Year Return

2005 25%

2004 -10

2003 30

A. 20.10%
B. 21.79%
C. 23.87%
D. 25.18%
E. 27.54%

9. An analyst believes that economic conditions during the next year will be either Strong, Normal, or Weak, and he thinks that the D Company's returns will have the following probability distribution. What's the standard deviation of D's returns as estimated by this analyst?

Conditions Probability Return

Strong 30% 30%

Normal 40 15

Weak 30 -10

A. 12.34%
B. 13.41%
C. 14.87%
D. 15.68%
E. 16.94%

10. Bob's father holds just one stock, XYZ, which he thinks is a very low risk security. Bob agrees that the stock is relatively safe, but he wants to demonstrate to his father that he could still reduce his risk by diversifying. He obtained the return shown below on XYZ and ABC. Both have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would historical risk have been reduced if XYZ and ABC were held in a portfolio consisting of 50% in XYZ and the rest of the money in ABC?

Year XYZ ABC

2001 40% 40%

2002 -10 15

2003 35 -5

2004 -5 -10

2005 15 35

Avg return 15.00% 15.00%

Std dev 20.56% 20.56%

A. 6.35%
B. 7.70%
C. 8.86%
D. 9.90%
E. 10.05%