Exam 10: Capital Markets and the Pricing of 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 1 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?

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 capital gains rate (yield)for this period is closest to:

Use the table for the question(s)below. Consider the following probability distribution of returns for Alpha Corporation: -Which of the following statements is FALSE?

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%. -Consider a portfolio that consists of an equal investment in 20 firms.For each of these firms,there is a 70% probability that the firms will have a 16% return and a 30% that they will have a -8% return.Each of these firms' returns is independent of all others.The standard deviation of this portfolio is closest to:

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. -Which of the following statements is FALSE?

Which of the following statements is FALSE?

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 table for the question(s)below. Consider the following realized annual returns: -The variance of the returns on Stock A from 2000 to 2009 is closest to:

Suppose that KAN's beta is 1.5.If the market risk premium is 8% and the risk-free interest rate is 4%,then then expected return for KAN stock is?

Use the table for the question(s)below. Consider the following probability distribution of returns for Alpha Corporation: -Which of the following statements is FALSE?

What is the market portfolio?

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:

Use the following information to answer the problem(s)below. Consider two banks.Bank A has 1000 loans outstanding each for $100,000,that it expects to be fully repaid today.Each of Bank A's loans have a 6% probability of default,in which case the bank will receive $0 for each of the defaulting loans.Bank B has 100 loans of $1 million outstanding,which it also expects to be fully repaid today.Each of Bank B's loans have a 5% probability of default,in which case the bank will receive $0 for each of the defaulting loans.The chance of default is independent across all the loans. -The expected overall payoff to Bank B is:

Use the table for the question(s)below. Consider the following probability distribution of returns for Alpha Corporation: -The standard deviation of the return on Alpha Corporation 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:

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%. -Which of the following is NOT a diversifiable 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. -Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following average annual returns: -What is the excess return for corporate bonds?

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?