Exam 11: Systematic Risk and the Equity Risk Premium

Use the table for the question(s) below. Consider the following expected returns, volatilities, and correlations: -The expected return of a portfolio that consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

(Multiple Choice)

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Question 21

If two stocks are perfectly negatively correlated,a portfolio with equal weighting in each stock will always have a volatility (standard deviation)of 0.

(True/False)

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Question 22

The market or equity risk premium can be estimated by computing the historical average excess return of the market portfolio.

(True/False)

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Question 23

Diversification reduces the risk of a portfolio because ________ and some of the risks are averaged out of the portfolio.

(Multiple Choice)

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Question 24

We can reduce volatility by investing in less than perfectly correlated assets through diversification because the expected return of a portfolio is the weighted average of the expected returns of its stocks,but the volatility of a portfolio

(Multiple Choice)

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Question 25

What diversification,if any,is achieved if two stocks in a portfolio are perfectly positively correlated?

(Essay)

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Question 26

You observe the following scatterplot of Ford's weekly returns against the S&P 500.Which of the following statements is true about Ford's beta against the S&P 500?

(Multiple Choice)

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Question 27

A portfolio has three stocks - 200 shares of Yahoo (YHOO),100 Shares of General Motors (GM),and 50 shares of Standard and Poor's Index Fund (SPY).If the price of YHOO is $30,the price of GM is $30,and the price of SPY is $130,calculate the portfolio weight of YHOO and GM.

(Multiple Choice)

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Question 28

The volatility of Home Depot share prices is 30% and that of General Motors shares is 30%.When I hold both stocks in my portfolio with an equal amount in each,and the stocks' returns have a correlation of minus 1,the overall volatility of returns of the portfolio is

(Multiple Choice)

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Question 29

Why should an investor invest in a negative-beta stock knowing that it will have an expected return lower than the risk-free rate?

(Essay)

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Question 30

Use the information for the question(s) below. 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 Lowes in your portfolio is:

(Multiple Choice)

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Question 31

Your portfolio has 25% of its value invested in Bombardier and the remainder invested in Lululemon.Bombardier stock has a volatility of 30%,while Lululemon stock has a volatility of 18%.If the correlation between Bombardier and Lululemon is 0.2,what is the standard deviation of your portfolio?

(Multiple Choice)

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Question 32

Air Canada stock has a standard deviation of 25%,while the market index standard deviation is 12%.If the correlation between Air Canada and the market index is 0.33,what is the beta of Air Canada stock?

(Multiple Choice)

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Question 33

When we combine stocks in a portfolio,the amount of risk that is eliminated depends on the degree to which the stocks face common risks and move together.

(True/False)

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Question 34

Historically,the average excess return of the S&P/TSX Composite Index over the return of Government of Canada bonds has been ________ and is a proxy for the market risk premium.

(Multiple Choice)

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Question 35

Suppose you buy 100 shares of RBC at $85 per share,and 80 shares of TD at $75 per share.If RBC's stock goes up to $88.50 per share and TD's stock goes up to $77 per share,what is your portfolio return?

(Multiple Choice)

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Question 36

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The value of your portfolio over the year is:

(Multiple Choice)

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Question 37

Use the table for the question(s) below. Consider the following expected returns, volatilities, and correlations: -The expected return of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to:

(Multiple Choice)

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(79)

Question 38

Your investment portfolio contains 100 shares of RBC,75 shares of TD,and 200 shares of WestJet.The price of RBC is currently $75 per share,the price of TD is $55 and the price of WestJet is currently $21 per share.If you expect the return on RBC to be 5% in the next year,the return on TD to be 6.5%,and the return on WestJet to be 10%,what is the expected return for your portfolio?

(Multiple Choice)

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Question 39

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.What is the capitalization of the market portfolio?

(Multiple Choice)

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Question 40

Showing 21 - 40 of 102

Exam 11: Systematic Risk and the Equity Risk Premium

Use the table for the question(s) below. Consider the following expected returns, volatilities, and correlations: -The expected return of a portfolio that consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

If two stocks are perfectly negatively correlated,a portfolio with equal weighting in each stock will always have a volatility (standard deviation)of 0.

The market or equity risk premium can be estimated by computing the historical average excess return of the market portfolio.

Diversification reduces the risk of a portfolio because ________ and some of the risks are averaged out of the portfolio.

We can reduce volatility by investing in less than perfectly correlated assets through diversification because the expected return of a portfolio is the weighted average of the expected returns of its stocks,but the volatility of a portfolio

What diversification,if any,is achieved if two stocks in a portfolio are perfectly positively correlated?

You observe the following scatterplot of Ford's weekly returns against the S&P 500.Which of the following statements is true about Ford's beta against the S&P 500?

A portfolio has three stocks - 200 shares of Yahoo (YHOO),100 Shares of General Motors (GM),and 50 shares of Standard and Poor's Index Fund (SPY).If the price of YHOO is $30,the price of GM is $30,and the price of SPY is $130,calculate the portfolio weight of YHOO and GM.

The volatility of Home Depot share prices is 30% and that of General Motors shares is 30%.When I hold both stocks in my portfolio with an equal amount in each,and the stocks' returns have a correlation of minus 1,the overall volatility of returns of the portfolio is

Why should an investor invest in a negative-beta stock knowing that it will have an expected return lower than the risk-free rate?

Use the information for the question(s) below. 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 Lowes in your portfolio is:

Your portfolio has 25% of its value invested in Bombardier and the remainder invested in Lululemon.Bombardier stock has a volatility of 30%,while Lululemon stock has a volatility of 18%.If the correlation between Bombardier and Lululemon is 0.2,what is the standard deviation of your portfolio?

Air Canada stock has a standard deviation of 25%,while the market index standard deviation is 12%.If the correlation between Air Canada and the market index is 0.33,what is the beta of Air Canada stock?

When we combine stocks in a portfolio,the amount of risk that is eliminated depends on the degree to which the stocks face common risks and move together.

Historically,the average excess return of the S&P/TSX Composite Index over the return of Government of Canada bonds has been ________ and is a proxy for the market risk premium.

Suppose you buy 100 shares of RBC at $85 per share,and 80 shares of TD at $75 per share.If RBC's stock goes up to $88.50 per share and TD's stock goes up to $77 per share,what is your portfolio return?

Suppose over the next year Ball has a return of 12.5%,Lowes has a return of 20%,and Abbott Labs has a return of -10%.The value of your portfolio over the year is:

Use the table for the question(s) below. Consider the following expected returns, volatilities, and correlations: -The expected return of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to:

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.What is the capitalization of the market portfolio?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

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