Exam 11: Systematic Risk and the Equity Risk Premium

You have invested $5,000 in RBC stock,$12,000 in TD stock,and $18,000 in WestJet stock.If you expect the return on RBC to be 4% in the next year,the return on TD to be 5%,and the return on WestJet to be 6%,what is the expected return for your 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 linear regression to estimate the relation between Research in Motion's 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:

For each 1% change in the market portfolio's excess return,the investment's excess return is expected to change by ________ percent due to risks that it has in common with the market.

The S&P 500 index traditionally is a ________ portfolio of the 500 largest U.S.stocks.

WestJet stock has a beta of 1.5.If the risk-free rate is 2.4%,and the expected market return is 10%,what is the expected return of WestJet stock,according to the CAPM?

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

You have invested $10,000 in RBC stock and $21,000 in TD stock.If you expect the return on RBC to be 5% in the next year,and the return on TD to be 6.5%,what is the expected return for your portfolio?

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

Potash Corp stock has a beta of 1.2,while Tim Horton's stock has a beta of 1.7.If the risk-free rate is 2.2%,and the market risk premium is 7%,what is the expected return on a portfolio with 40% weight in Potash and the remainder in Tim Horton's?

Your portfolio has 20% of its value invested in Bombardier and the remainder invested in Lululemon.Bombardier stock has a volatility of 15%,while Lululemon stock has a volatility of 12%.If the correlation between Bombardier and Lululemon is 0,what is the standard deviation of your portfolio?

A stock market comprises 5000 shares of stock A and 2000 shares of stock B.Assume the share prices for stocks A and B are $20 and $35,respectively.What proportion of the market portfolio is comprised of stock A?

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?

Historically,the average excess return of the S&P/TSX Composite Index over the return of Government of Canada bonds has been ________ and is a proxy for the market risk premium.

Air Canada stock has a standard deviation of 10%,while the market index standard deviation is 7%.If the correlation between Air Canada and the market index is 0.85,what is the beta of Air Canada stock?

The weight of Lowes in your portfolio is:

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

Suppose you have $10,000 in cash to invest.You decide to sell short $5000 worth of Kinston stock and invest the proceeds from your short sale plus your $10,000 into one-year Treasury bills earning 5%.At the end of the year,you decide to liquidate your portfolio.Kinston Industries has the following realized returns: The return on your portfolio is closest to:

A portfolio has three stocks - 300 shares of Yahoo (YHOO),300 Shares of General Motors (GM),and 100 shares of Standard and Poor's Index Fund (SPY).If the price of YHOO is $20,the price of GM is $30,and the price of SPY is $150,calculate the portfolio weight of YHOO and GM.

Correlation is the degree to which the returns of two stocks share common risks.