Exam 10: Capital Markets and the Pricing of Risk

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 pharmaceutical company faces less risk?

If the risk-free rate is 5% and the expected return of investing in Merck is 11.3%,then the expected return on the market must be:

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 statements is FALSE?

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 "Y" is closest to:

Use the following information to answer the question(s)below. -If the market risk premium is 6% and the risk-free rate is 4%,then the expected return of investing in Merck 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 A is:

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 a portfolio of 20 type S firms is closest to:

Use the table for the question(s)below. Consider the following three individuals portfolios consisting of investments in four stocks: -Which of the following investments offered the highest overall return over the past eighty years?

Use the table for the question(s)below. Consider the following realized annual returns: -The excess return is the difference between the average return on a security and the average return for:

Use the table for the question(s)below. Consider the following three individuals portfolios consisting of investments in four stocks: -Which of the following statements is TRUE?

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 systematic risk?

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%. -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%. -What is the expected payoff for Little Cure's ten drugs?

Use the table for the question(s)below. Consider the following realized annual returns: -Using the data provided in the table,calculate the average annual return,the variance of the annual returns,and the standard deviation of the average returns for the market from 2000 to 2009.

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 1.2 is closest to:

If the expected return on the market is 11% and the expected return of investing in Merck is 10.35%,then the risk-free rate must be:

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

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 the Market to forecast the expected future return on the Market.Calculate the 95% confidence interval for your estimate of the expect return.

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 risk-free rate is closest to: