Exam 10: Capital Markets and the Pricing of Risk

Use the information for the question(s)below. Suppose the market portfolio's excess return tends to increase by 30% when the economy is strong and decline by 20% when the economy is weak.A type S firm has excess returns that increase by 45% when the economy is strong and decrease by 30% when the economy is weak.A type I firm will also have excess returns of either 45% or -30%,but the type I firm's excess returns will depend only upon firm-specific events and will be completely independent of the state of the economy. -What is the Beta for a type S firm?

Use the information for the question(s)below. Consider an economy with two types of firms,S and I.S firms always move together,but I firms move independently of each other.For both types of firm there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return. -The standard deviation for the return on an individual firm is closest to:

Use the table for the question(s)below. Consider the following price and dividend data for General Electric Company: -Assume that you purchased General Electric Company stock at the closing price on December 31,2008 and sold it after the dividend had been paid at the closing price on January 26,2009.Your dividend yield for this period is closest to:

Which of the following statements is FALSE?

Use the information for the question(s)below. Suppose that in the coming year,you expect Exxon-Mobil stock to have a volatility of 42% and a beta of 0.9,and Merck's stock to have a volatility of 24% and a beta of 1.1.The risk-free interest rate is 4% and the market's expected return is 12%. -Which stock has the highest systematic risk?

Use the following information to answer the question(s)below. Suppose that the market portfolio is equally likely to increase by 24% or decrease by 8%.Security "X" goes up on average by 29% when the market goes up and goes down by 11% when the market goes down.Security "Y" goes down on average by 16% when the market goes up and goes up by 16% when the market goes down.Security "Z" goes up on average by 4% when the market goes up and goes up by 4% when the market goes down. -The beta for security "Y" is closest to:

Use the information for the question(s)below. Suppose that in the coming year,you expect Exxon-Mobil stock to have a volatility of 42% and a beta of 0.9,and Merck's stock to have a volatility of 24% and a beta of 1.1.The risk-free interest rate is 4% and the market's expected return is 12%. -Which stock has the highest total risk?

Use the following information to answer the question(s)below. Suppose that the market portfolio is equally likely to increase by 24% or decrease by 8%.Security "X" goes up on average by 29% when the market goes up and goes down by 11% when the market goes down.Security "Y" goes down on average by 16% when the market goes up and goes up by 16% when the market goes down.Security "Z" goes up on average by 4% when the market goes up and goes up by 4% when the market goes down. -The expected return on security with a beta of 0 is closest to:

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following realized annual returns: -The average annual return on the Index from 2000 to 2009 is closest to:

Which of the following types of risk doesn't belong?

Which of the following is consistent with the CAPM and efficient capital markets?

Use the information for the question(s)below. Big Cure and Little Cure are both pharmaceutical companies.Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA)waiting for approval.If approved,Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure.Little Cure has 10 separate less important drugs before the FDA waiting for approval.If approved,each of Little Cure's drugs would produce $100 million in net income for Little Cure.The probability of the FDA approving a drug is 50%. -What is the expected payoff for Little Cure's ten drugs?

Use the table for the question(s)below. Consider the following probability distribution of returns for Alpha Corporation: -Suppose an investment is equally likely to have a 35% return or a -20% return.The variance on the return for this investment is closest to:

Use the table for the question(s)below. Consider the following average annual returns: -What is the excess return for the portfolio of small stocks?

Which of the following investments had the largest fluctuations in overall return over the past ninety-two years?

Which of the following investments offered the lowest overall return over the past ninety-two years?

Use the table for the question(s)below. Consider the following realized annual returns: -Suppose that you want to use the 10-year historical average return on Stock A to forecast the expected future return on Stock A.The 95% confidence interval for your estimate of the expect return is closest to:

Use the information for the question(s)below. Big Cure and Little Cure are both pharmaceutical companies.Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA)waiting for approval.If approved,Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure.Little Cure has 10 separate less important drugs before the FDA waiting for approval.If approved,each of Little Cure's drugs would produce $100 million in net income for Little Cure.The probability of the FDA approving a drug is 50%. -What is the standard deviation of Big Cure's average net income for their new blockbuster drug?

Use the table for the question(s)below. Consider the following probability distribution of returns for Alpha Corporation: -The expected return for Alpha Corporation is closest to: