Exam 12: Systematic Risk and the Equity Risk Premium

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

Your retirement portfolio comprises 100 shares of the Standard & Poor's 500 fund (SPY)and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $118 and that of AGG is $97. If you expect the return on SPY to be 11% in the next year and the return on AGG to be 6%, what is the expected return for your retirement portfolio?

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 ________.

A portfolio comprises two stocks, A and B, with equal amounts of money invested in each. If stock A's stock price increases and that of stock B decreases, the weight of stock A in the portfolio will increase.

Your estimate of the market risk premium is 9%. The risk-free rate of return is 3.8% and General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

Suppose you invest in 110 shares of Merck (MRK)at $40 per share and 120 shares of Yahoo (YHOO)at $25 per share. If the price of Merck increases to $45 and the price of Yahoo decreases to $22 per share, what is the return on your portfolio?

Your retirement portfolio comprises 200 shares of the S&P 500 fund (SPY)and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $134 and that of AGG is $110. If you expect the return on SPY to be 10% in the next year and the return on AGG to be 8%, what is the expected return for your retirement portfolio?

Use the table for the question(s)below. Consider the following expected returns, volatilities, and correlations: -What is the lowest risk possible by selecting two stocks that are perfectly negatively correlated?

A portfolio has three stocks - 110 shares of Yahoo (YHOO), 210 Shares of General Motors (GM), and 70 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO is $20, the price of GM is $20, and the price of SPY is $130, calculate the portfolio weight of YHOO and GM.

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. Suppose over the next year Ball has a return of 12.3%, Lowes has a return of 23%, and Abbott Labs has a return of -10%. The value of your portfolio over the year is ________.

A stock market comprises 4600 shares of stock A and 2000 shares of stock B. Assume the share prices for stocks A and B are $25 and $35, respectively. What is the capitalization of the market portfolio?

You expect General Motors (GM)to have a beta of 1 over the next year and the beta of Exxon Mobil (XOM)to be 1.2 over the next year. Also, you expect the volatility of General Motors to be 30% and that of Exxon Mobil to be 40% over the next year. Which stock has more systematic risk? Which stock has more total risk?

The security market line is a graph of the expected return of a stock as a function of its beta with the market.

Which of the following equations is INCORRECT?

How does the S&P 500 index rank in terms of number and market capitalization of U.S. public firms?

Stocks tend to move together if they are affected by ________.

Which of the following statements is FALSE?

While we are using historic return to estimate a stock's beta, why can't we use historic data to forecast the expected return for the stock?

The volatility of Home Depot Share prices is 50% and that of General Motors shares is 50%. When I hold both stocks in my portfolio and the stocks returns have zero correlation, the overall volatility of returns of the portfolio is ________.

A linear regression was done to estimate the relation between Sprint's stock returns and the market's return. The intercept of the line was found to be 0.23 and the slope was 1.47. Which of the following statements is true regarding Sprint's stock?