Exam 10: Estimating Risk and Return

Paccar's current stock price is $75.10 and it is likely to pay a $3.29 dividend next year.Since analysts estimate Paccar will have a 14.2 percent growth rate,what is its required return?

Under/Over-Valued Stock A manager believes his firm will earn a 12 percent return next year.His firm has a beta of 1.2,the expected return on the market is 8 percent,and the risk-free rate is 3 percent.Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.

Company Risk Premium A company has a beta of 2.91.If the market return is expected to be 16 percent and the risk-free rate is 4 percent,what is the company's risk premium?

Expected Return Compute the expected return given these three economic states,their likelihoods,and the potential returns:

List and describe the three basic levels of market efficiency.

Compute the expected return given these three economic states,their likelihoods,and the potential returns:

You hold the positions in the following table.What is the beta of your portfolio? If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent,what is the required return of the portfolio?

Which of the following statements is incorrect?

Stock A has a required return of 19 percent.Stock B has a required return of 11 percent.Assume a risk-free rate of 4.75 percent.By how much does Stock A's risk premium exceed the risk premium of Stock B?

Whenever a set of stock prices go unnaturally high and subsequently crash down,the market experiences what we call a(n):

You own $10,000 of Denny's Corp.stock that has a beta of 3.2.You also own $15,000 of Qwest Communications (beta = 1.9)and $15,000 of Southwest Airlines (beta = 0.4).Assume that the market return will be 13 percent and the risk-free rate is 5.5 percent.What is the risk premium of the portfolio?

Which of the following statements is incorrect regarding how beta is calculated?

IBM's stock price is $22,it is expected to pay a $2 dividend,and analysts expect the firm to grow at 10 percent per year for the next five years.TDI's stock price is $10,it is expected to pay a $1 dividend,and analysts expect the firm to grow at 12 percent per year for the next five years.What is the difference in the two firms' required rate of returns?

Which of the following statements is incorrect?

Which of the following statements is correct?

CAPM Required Return A company has a beta of 3.25.If the market return is expected to be 14 percent and the risk-free rate is 5.5 percent,what is the company's required return?

Stock A has a required return of 19 percent.Stock B has a required return of 11 percent.Assume a risk-free rate of 4.75 percent.Which of the following is a correct statement about the two stocks?

Investor enthusiasm causes an inflated bull market that drives prices too high,ending in a dramatic collapse in prices is known as:

Which of these is the line on a graph of return and risk (standard deviation)from the risk-free rate through the market portfolio?

How might a large market risk premium impact people's desire to buy stocks?