Exam 12: Systematic Risk and the Equity Risk Premium

A linear regression to estimate the relation between General Motors' stock returns and the market's return gives the best fitting line that represents the relation between the stock and the market. The slope of this line is our estimate of ________.

Which of the following statements is FALSE?

Which of the following equations is INCORRECT?

Which of the following statements is FALSE?

The price of Microsoft is $25 per share and that of Apple is $50 per share. The price of Microsoft increases to $36 per share after one year and to $41 after two years. Also, shares of Apple increase to $56 after one year and to $66 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return over year 1 and year 2? Assume no dividends are paid.

What role does the standard deviations of two assets play in computation of the expected return of the two asset portfolio?

Which of the following statements is FALSE?

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 stock market comprises 4700 shares of stock A and 2300 shares of stock B. Assume the share prices for stocks A and B are $25 and $30, respectively. What proportion of the market portfolio is comprised of stock A?

A stock market comprises 4600 shares of stock A and 1600 shares of stock B. Assume the share prices for stocks A and B are $15 and $30, respectively. If you have $15,000 to invest and you want to hold the market portfolio, how much of your money will you invest in Stock A?

The expected return is usually ________ the baseline risk-free rate of return that we demand to compensate for inflation and the time value of money.

Consider the following expected returns, volatilities, and correlations: The volatility of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to ________.

The systematic risk (beta)of a portfolio is ________ by holding more stocks, even if they each had the same systematic risk.

You expect General Motors (GM)to have a beta of 1.3 over the next year and the beta of Exxon Mobil (XOM)to be 0.9 over the next year. Also, you expect the volatility of General Motors to be 40% and that of Exxon Mobil to be 30% over the next year. Which stock has more systematic risk? Which stock has more total risk?

Suppose you invest $15,000 by purchasing 200 shares of Abbott Labs (ABT)at $40 per share, 200 shares of Lowes (LOW)at $20 per share, and 100 shares of Ball Corporation (BLL)at $30 per share. The weight of Ball Corporation in your portfolio is ________.

You observe that AT&T stock and the S&P 500 have the following weekly returns: Week AT&T return S&P 500 return 1 0.005 0.001 2 0.010 0.005 3 -0.003 -0.005 4 -0.005 -0.001 If this pattern of stock returns is typical of AT&T stock, and you calculated a beta against the S&P 500, which of the following is true?

UPS, a delivery services company, has a beta of 1.1, and Wal-Mart has a beta of 0.7. The risk-free rate of interest is 4% and the market risk premium is 7%. What is the expected return on a portfolio with 30% of its money in UPS and the balance in Wal-Mart?

If you build a large enough portfolio, you can diversify away all the risks of a portfolio.

In a two asset portfolio, what happens to the portfolio weight of the better performing asset?

Which of the following statements is FALSE?