Exam 11: Risk and Rates of Return

As financial manager of Material Supplies Inc., you have recently participated in an executive committee decision to enter into the plastics business.Much to your surprise, the price of the firm's common stock subsequently declined from $40 per share to $30 per share.While there have been several changes in financial markets during this period, you are anxious to determine how the market perceives the relevant risk of your firm.Assume that the market is in equilibrium.From the following data you find that the beta value associated with your firm has changed from an old beta of ____ to a new beta of ____.

Which of the following statements concerning measures of risk is correct?

Which of the following statements is false?

Consider the following information, and then calculate the required rate of return for the Scientific Investment Fund.The total investment in the fund is $2 million.The market required rate of return is 15 percent, and the risk-free rate is 7 percent.

Which of the following statements is correct?

You have developed the following data on three stocks: If you are a risk minimizer, you should choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

The correlation coefficient is a measure of the degree of relationship between two variables.

When a firm makes bad managerial judgments or has unforeseen negative events happen to it that affect its returns, these random events are unpredictable and therefore cannot be diversified away by the investor.

Assume Stock A has a standard deviation of 0.21 while Stock B has a standard deviation of 0.10.If both Stock A and Stock B must be held in isolation, and if investors are risk averse, we can conclude that Stock A will have a greater required return.However, if the assets could be held in portfolios, it is conceivable that the required return could be higher on the low standard deviation stock.

Given the following information, calculate the expected capital gains yield for Chicago Bears Inc.: beta = 0.6; r_M = 15%; r_RF = 8%; = $2.00; P₀ = $25.00.Assume the stock is in equilibrium and exhibits constant growth.

If we develop a weighted average of the possible return outcomes, multiplying each outcome or "state" by its respective probability of occurrence for a particular stock, we can construct a payoff matrix of expected returns.

The coefficient of variation gives you a measure risk per unit of return.All else equal investors would prefer a higher coefficient of variation.

____ is the appropriate measure for stand-alone risk and ____ is the appropriate measure of risk when adding an asset to a diversified portfolio.

Given the following probability distribution, what is the expected return and the standard deviation of returns for Security J?

Which of the following statements is most correct?

Motor Homes Inc.(MHI) is presently in a stage of abnormally high growth because of a surge in the demand for motor homes.The company expects earnings and dividends to grow at a rate of 20 percent for the next 4 years, after which time there will be no growth (g = 0) in earnings and dividends.The company's last dividend was $1.50.MHI has a beta of 1.6, the return on the market is currently 12.75 percent, and the risk-free rate is 4 percent.What should be the current price per share of common stock?

Risk is the chance that the actual outcome is different from the expected outcome.

Which of the following statements is false?

Because of differences in the expected returns of different securities, the standard deviation is not always an adequate measure of risk.However, the coefficient of variation always will allow an investor to properly compare the relative risks of any two securities.

Which of the following statements is correct?