Exam 11: Risk and Rates of Return

Hard Hat Construction's stock is currently selling at an equilibrium price of $30 per share.The firm has been experiencing a 6 percent annual growth rate.Last year's earnings per share, E₀, were $4.00, and the dividend payout ratio is 40 percent.The risk-free rate is 8 percent, and the market risk premium is 5 percent.If systematic risk (beta) increases by 50 percent, and all other factors remain constant, by how much will the stock price change? (Hint: Use four decimal places in your calculations.)

Inflation, recession, and high interest rates are economic events which are characterized as

Businesses earn returns for security holders by purchasing and operating physical assets.The relevant risk of any physical asset must be measured in terms of its effect on the risk of the firm's securities.

The distributions of rates of return for Companies AA and BB are given below: We can conclude from the above information that any rational risk-averse investor will add Security AA to a well-diversified portfolio over Security BB.

You are given the following data: Now assume the following changes occur: What will be the change in price per share, assuming the stock was in equilibrium before the changes?

Which of the following statements is most correct?

The beta of any portfolio can be computed as the

Because the market return represents the return on an average stock, that return carries risk with it.As a result, there exists a market risk premium which is the amount over and above the risk-free rate that is required to compensate an investor for assuming an average amount of risk.

The ____ the probability distribution, the ____ variability there is and the ____ likely it is that the actual outcome will approach the expected value.

You are managing a portfolio of 10 stocks which are held in equal amounts.The current beta of the portfolio is 1.64, and the beta of Stock A is 2.0.If Stock A is sold, what would the beta of the replacement stock have to be to produce a new portfolio beta of 1.55?

Suppose that two firms, A and B, have identical expected returns but Firm A has the possibility of a much higher return than Firm B.We can conclude from this that Firm A will have a higher coefficient of variation than Firm B.

If the risk-free rate is 7 percent, the expected return on the market is 10 percent, and the expected return on Security J is 13 percent, what is the beta of Security J?

Portfolio A contains only one security, while Portfolio B contains 100 securities.Because of diversification effects, we would expect Portfolio B to have the lower relevant risk, but it is possible for Portfolio A to be less risky.

Philadelphia Corporation's stock recently paid a dividend of $2.00 per share (D₀ = $2), and the stock is in equilibrium.The company has a constant growth rate of 5 percent and a beta equal to 1.5.The required rate of return on the market is 15 percent, and the risk-free rate is 7 percent.Philadelphia is considering a change in policy which will increase its beta coefficient to 1.75.If market conditions remain unchanged, what new constant growth rate will cause the common stock price of Philadelphia to remain unchanged?

Calculate the standard deviation of the expected dollar returns for Ditto Copier Center, given the following distribution of returns:

Which of the following statements is most correct?

You have developed data which give (1) the average annual returns on the market for the past five years, and (2) similar information on Stocks A and B.If these data are as follows, which of the possible answers best describes the historical betas for A and B?

HR Corporation has a beta of 2.0, while LR Corporation's beta is 0.5.The risk-free rate is 10%, and the required rate of return on an average stock is 15%.Now the expected rate of inflation built into r_RF falls by 3 percentage points, the real risk-free rate remains constant, the required return on the market falls to 11%, and the betas remain constant.When all of these changes are made, what will be the difference in required returns on HR's and LR's stocks?

Which of the following statements is most correct?

In a portfolio of three different stocks, which of the following could not be true?