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 ________.

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 amount of a stock's risk that is diversified away ________.

Which of the following statements is FALSE?

Consider the following returns: The covariance between Lowes' and Home Depot's returns is closest to ________.

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?

Which of the following equations is INCORRECT?

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.

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

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?

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

We can reduce volatility by investing in less than perfectly positively correlated assets through diversification because the expected return of a portfolio is the weighted average of the expected returns of its stocks, but the volatility of a portfolio ________.

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 ________.

If you build a large enough portfolio, you can diversify away all ________ risk, but you will be left with ________ risk.

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.

Consider the following returns: The volatility on Home Depot's returns is closest to ________.

Your retirement portfolio comprises 300 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $136 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 10%, 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 ________.

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 ________.

The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta times the market risk premium.