Exam 12: Systematic Risk and the Equity Risk Premium

Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT)at $55 per share, 200 shares of Lowes (LOW)at $35 per share, and 100 shares of Ball Corporation (BLL)at $45 per share. The weight of Lowes in your portfolio is ________.

Use the table for the question(s)below. Consider the following expected returns, volatilities, and correlations: -What diversification, if any, is achieved if two stocks in a portfolio are perfectly positively correlated?

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.

Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a(n)6% interest rate to invest in the stock market. You invest the entire $20,000 in an exchange-traded fund (ETF)with a 11% expected return and a 20% volatility. The expected return on your of your investment is closest to ________.

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

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The price of Microsoft is $30 per share and that of Apple is $58 per share. The price of Microsoft increases to $39 per share after one year and to $42 after two years. Also, shares of Apple increase to $66 after one year and to $71 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.

Which of the following statements is FALSE?

Your estimate of the market risk premium is 7%. The risk-free rate of return is 4%, and General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

Consider the following returns: The volatility on Lowes' returns is closest to ________.

The volatility of Home Depot share prices is 20% and that of General Motors shares is 20%. When I hold both stocks in my portfolio, the overall volatility of the portfolio is ________.

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

UPS, a delivery services company, has a beta of 1.4, and Wal-Mart has a beta of 0.9. The risk-free rate of interest is 4% and the market risk premium is 6%. What is the expected return on a portfolio with 50% of its money in UPS and the balance in Wal-Mart?

The Capital Asset Pricing Model asserts that the expected return ________.

A portfolio has three stocks - 240 shares of Yahoo (YHOO), 150 Shares of General Motors (GM), and 40 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 amount of a stock's risk that is diversified away ________.

Suppose you invest in 100 shares of Harley-Davidson (HOG)at $40 per share and 230 shares of Yahoo (YHOO)at $25 per share. If the price of Harley-Davidson increases to $50 and the price of Yahoo decreases to $20 per share, what is the return on your portfolio?

The market portfolio is the portfolio of all risky investments held ________.

Which of the following statements is FALSE?